Ushio Inc. (6925) Earnings Call Transcript & Summary

I would like to explain Ushio's new growth strategy, Revive Vision 2030 starting from fiscal year 2024. Today, I would mainly like to share the 4 topics listed on the slide. First, I would like to explain the overview of the new growth strategy. We formulated the second medium-term management plan starting from fiscal year 2023. However, subsequently, due to significant changes in the semiconductor market and the emergence of other companies' light sources for EUV mask inspection, the environment of our main business, the industrial process changed forcing us to review the plan. In light of the current business environment changes and newly visible growth potential, we have reviewed the plan and decided to revise our strategy and develop the new growth strategy Revive Vision 2030 with 2030 as the final fiscal year. We used the word Revive to express our determination to realize our goals through a great transformation. In Revive Vision 2030, we aim to grow together with our customers by making the industrial processes a promising area, a major pillar of our business and providing society with innovations utilizing light. In Revive Vision 2030, we set fiscal year 2024 to fiscal year 2026 as Phase 1 and fiscal year 2027 to fiscal year 2030 as Phase 2, aiming to achieve an ROE of 8% or more by fiscal year 2026 and to swiftly attain PBR of over 1 as soon as possible. Furthermore, in Phase 2, we aim to achieve an ROE of 12% or more by fiscal year 2030. To steadily progress towards our goals, we will place even greater importance on management efficiency than before. We will implement the strategy with the policy of concentrating investments and resources on the industrial processes, a promising area pursuing profit margins rather than scale and balancing growth investments with capital efficiency. In aiming to achieve Revive Vision 2030, we have formulated more effective business strategies and financial strategies. The overview is as described, but details will be explained later in Part 3. First, I would like to explain the review of the previous medium-term management plan. As mentioned earlier, the previous medium-term management plan released in fiscal year 2023 is expected to fall short of both net sales and operating margin in fiscal year 2025, the final year, due to significant changes in the business environment. Furthermore, the previous medium-term management plan aimed to generate profits in the industrial processes and the visual imaging to cover strategic investments, but it is now expected that they will not be sufficiently covered due to the changes in the business environment of the industrial processes. Upon analyzing the factors, necessitating outlook revision, we recognize the following factors: the external factor, semiconductor manufacturing equipment market trends and rapid slowdown in PC package substrate market and the internal factors, reliance on key customer segments in growing businesses, changing EUV competitive environment and impact of unprofitable business areas. Details of these factor analyses are listed in the appendix, so please check them later. On the other hand, as a positive factor, strategic partnership with Applied Materials announced last December can be mentioned. I will explain details for this later. Based on those factors, we have recognized the 5 key issues listed and formulated the framework of a new growth strategy. In the new growth strategy, we have constructed a corporate value enhancement scenario with higher feasibility by promoting transformation of the business portfolio and close monitoring of the plan in order to strengthen strategic focus areas identified through the review. Next, I would like to explain the specific measures for new growth strategy, Revive Vision 2030. In Revive Vision 2030, we will focus on management efficiency and pursue profit margins. In Phase 1, which sets fiscal year 2026 as its final year, we will achieve an ROE of 8% or more and aim for early realization of PBR of over 1 by implementing portfolio transformation through the redefinition of strategic areas. In Phase 2, which sets fiscal year 2030 as its final year, we will optimize the results of Phase 1 as much as possible and deliver steady growth of the business. Then I would like to explain the specific strategies in Phase 1. In Phase 1, we will redefine strategic areas and emphasize the selection and concentration of businesses. In business strategies, first, by concentrating management resources on priority areas and assessing unprofitable businesses, we will realize the transformation of the business portfolio. We will focus on expanding the industrial processes, a promising area, especially accelerating growth in the Advanced Packaging market. For development investments, while focusing on the promising industrial process areas, we will also invest in cultivation of new businesses by assessing the growth potential and selectively judging projects. In financial strategies, we will review capital policies, including capital efficiency and balance sheet. In fiscal year 2030, the final year of Phase II, we aim to achieve an ROE of 12% or more. As a reference, I would like to explain the coefficients by segment. By fiscal year 2030, we aim to achieve an operating margin of 12% or more for the consolidated total. Industrial Processes will be expanded as a pillar of the business portfolio, aiming for a business with an operating margin of 18% to 20% in fiscal year 2030. For Visual Imaging and the Photonic Solutions, we will assess businesses and improve profitability, aiming for an operating margin of 12% or more to make those businesses that stably generate cash. Life Sciences, which includes new and cultivating businesses, is currently a loss-making business, but we will pursue certain growth by selectively judging which project to invest in. Next, I would like to explain the details of the business and financial strategies. Regarding the approach of business portfolio transformation in business strategies, we will first optimize the allocation of management capital and actively invest in priority businesses while assessing unprofitable businesses based on future prospects. Subsequently, we will undertake clear business assessments based on hurdle rates such as weighted average cost of capital, review investment plans and allocate resources to areas where we can exploit Ushio's strength. By executing such portfolio transformation, we aim to achieve an operating margin of 12% or more in fiscal year 2030. Then I would like to explain the business portfolio transformation. The image of the business portfolio transformation for each segment is as described. In the following pages, I will explain the portfolio image and detailed measures for each segment. But in all businesses, investments will be focused on priority areas, and we will assess unprofitable businesses and selectively judge projects and businesses. Industrial Processes is positioned as a priority area, aiming for continuous growth expansion through concentration of development and growth investments and allocation of resources. As one of the areas aiming for growth through investment expansion, we first aim to grow in the Advanced Packaging market by creating a full product lineup for the lithography equipment business. The others are Industrial Processes businesses such as optical processes aiming for business expansion through product competitiveness enhancement and the EUV business aiming to enter the High-NA area. These 3 are priority areas. However, for the EUV business, we will assess business feasibility simultaneously. For the UV and OA Lamps businesses, we will invest to boost competitiveness and maintain them as businesses that generate stable cash flows. As a promising business that could become a future growth driver, we are simultaneously pursuing new potential in the market for inspection and analysis equipment, where Ushio's unique light source technologies can be leveraged. We will report at the appropriate time if there are any developments in the future. Visual Imaging is positioned as a profit improvement business aiming for making it a stable cash-generating business by improving profitability without pursuing business scale. The area aiming for growth through investment expansion is the Nationwide 360 Audio Visual Services, which is a high value-added business. The areas aiming for controlling investments and generating stable earnings are the other areas of general imaging and the imaging equipment business for cinema. Since market growth for these is limited, we will focus on improving and enhancing profitability through selection and concentration without pursuing business scale. For the projector lamps business, as the market will shrink due to the impact of shifting to solid-state light sources, we will aim to optimize earnings by prioritizing cost reductions while maintaining and expanding market share. Life Sciences is positioned as a cultivating business, and we will cultivate sub-businesses through selectively judging projects more than ever. In the area of cultivating new business, we will first control investments and selectively judge projects and invest in those deemed to have a high certainty of business growth and cultivating them as promising product groups. For the medical devices and health care business included in Life Sciences, as it generates stable earnings, we will secure stable earnings by continuing to refresh the product lineup. Photonics Solutions is positioned as a growth and review business, and we will make it a stable cash-generating business by selectively judging areas to invest in and to be reviewed. Some businesses that are not expected to improve profitability after considering competitiveness and growth potential will be selectively judged based on assessment. Next, I would like to explain the details of growth expansion in Industrial Processes, a promising area. The environment surrounding Industrial Processes is challenging due to the worsening market conditions for servers and PCs. On the other hand, with the progress in utilization of AI and Internet of Things, the need for advanced packages is increasing and certain growth is expected in the medium to long term. Therefore, we set the policy to strengthen efforts to expand our presence in the Advanced Packaging market, a growth field and to focus on semiconductor centered businesses enhancing resources and investments to aim for further profitability improvement. Specifically, we will enhance the product lineup strategically and sales and after-sales systems. Next, I would like to explain accelerate growth in Advanced Packaging market. In the business of lithography equipment for Advanced Packaging, we aim to become a leading company in the market by building a full product lineup and expanding customer coverage. In the market, although we already have a strong product lineup, we will build a full lineup by adding the digital lithography system, the new lithography equipment through the strategic partnership with Applied Materials announced last December, in order to cater to the evolution of high-end package substrates. This will not only provide a range of products that meet the needs of Advanced Packaging, but also enable us to offer turnkey solutions for all customer needs as the Ushio Group. By expanding our customer base through this initiative, we will also make progress in reducing our reliance on key customer segments and issue we have faced and by building a stable sales pace, we will expand the presence of the Ushio Group in the market. For expanding our presence in the Advanced Packaging market, it is necessary to commercialize and to grow the digital lithography system through a strategic partnership with Applied Materials. The target market will steadily expand towards 2030, and we aim to increase our share in the market from 20% to 50% or more by 2030. As a result, although the net sales of related lithography equipment, including the system, should temporarily decrease in fiscal year 2024, it is expected to grow at an annual rate of over 15% towards fiscal year 2030. Development investment will be conducted with a view to achieving earnings contributions in Phase 2. Focusing on the industrial processes, a promising area, we plan to invest a total of JPY 47.5 billion by fiscal year 2026. By closely monitoring the investment period and timing of profit contribution and reviewing the investment strategy annually, we will achieve more certain investment and growth. Next, I would like to explain the financial strategies. One of our challenges is improving the PBR. In Revive Vision 2030, we will improve ROE through enhancing operating margin by executing the strategies we have set and optimizing capital by expanding shareholder returns. Furthermore, by enhancing the effectiveness through close monitoring to steadily deploy the plan and achieve results, we aim to increase the PER and swiftly attain PBR of more than 1. As measures to improve ROE, we aim to improve the net profit margin through business strategies and improve the balance sheet, aiming to achieve ROE of 8% or more by fiscal year 2026 and 12% or more by fiscal year 2030. Regarding the balance sheet, while expanding growth investments, we will maintain financial discipline and improve asset efficiency. Primarily, we will keep shareholders equity below JPY 200 billion. Also through the sale of securities, we will accelerate the shift of funds from financial assets to business assets and shareholder returns. Furthermore, although we plan to expand working capital through business expansion, we will conduct balance sheet management, so to strengthening the monitoring of each asset turnover rate. Next, I would like to explain cash allocation and growth investment. In Phase 1, in order to achieve an ROE of 8% or more, while balancing growth investment and shareholder returns, we will utilize interest-bearing debt in addition to divesting securities. For growth investments, we plan to allocate over JPY 40 billion in total over 3 years, focusing on the industrial processes. In Phase 2, we will allocate cash primarily for growth investments from the free cash flow generated during the period, aiming for an ROE of 12% or more. As for the sale of securities, including policy shareholdings, we plan to divest about JPY 35 billion in Phase 1 and more than JPY 15 billion in Phase 2. Next, I would like to explain our shareholder return policies. During Phase 1, we will set a minimum dividend of JPY 70 per share. In addition, as with fiscal year 2023, we will repurchase JPY 30 billion of shares in fiscal year 2024 and plan for a total of JPY 50 billion to JPY 60 billion over the 3 fiscal years from 2024 to 2026. Through these initiatives, we aim for an ROE of 8% or more by fiscal year 2026. Finally, I would like to explain the ESG initiatives. In Revive Vision 2030, we will continue to actively promote initiatives aimed at achieving our nonfinancial key performance indicator goals set in fiscal year 2023 through undertaking business growth and ESG efforts. As for the status of efforts to improve engagement, the goal set in fiscal year 2023 were largely achieved both internally and externally. We will continue to promote steady activities in fiscal year 2024 aiming to contribute to performance improvement. We especially believe it is important to enhance engagement, both internally and externally and we will strengthen our efforts at doing so. Regarding human capital strategies, we'll expand the industrial processes, which is our priority area. We will conduct necessary human capital investments and re-skilling within the company. At the same time, we will control labor costs across the group in line with the direction of the business, aiming for an optimal personnel composition. This conclude my presentation. Due to time constraints today, I was unable to explain the review of the previous medium-term management plan and the strategy for each business segment based on the transformation of the business portfolio. These are included in the appendix, so please look at them later. [Statements in English on this transcript were spoken by an interpreter present on the live call.]