Nikon Corporation (OTCPK:NINOY) Q2 2024 Earnings Conference Call November 11, 2023 1:00 PM ET
Company Participants
Toshikazu Umatate – President, CEO, CTO
Muneaki Tokunari – CFO
Conference Call Participants
Toshikazu Umatate
I am Umatate, Representative Director and the President of Nikon. Thank you very much for taking time out of your busy schedule to join us today for our earnings call. I will discuss the current business situation and the specific progress of our growth strategy.
In April last year, we set out our vision 2030 as a key technology company in a global society, where humans and machines co-create seamlessly. In the first half of the major term management plan, which runs through fiscal 2025, we aim to grow our business and increase our corporate value by becoming a company that provides products and services optimized to meet our customer needs.
This year, in the second year of the medium term management plan, the external environment is becoming more challenging as the FPD business is at the bottom and the semiconductor market remains sluggish for a prolonged period. We have revised downward our operating profit forecast to JPY34 billion from the OP number we shared in August.
On the other hand, we made upward revision of our revenue forecast to JPY690 billion, partly due to a weaker yen. Although not shown on this slide, we have increased our first half dividend JPY5 year-on-year to JPY25 and maintained our full year dividend forecast of JPY50, which is no change from our original forecast. Our CFO, Mr. Tokunari, will explain the details of the numbers later.
Although earnings are stagnant this fiscal year, we are making steady progress with our strategic development in line with our plan. This slide shows a very brief summary of our progress in the first half, the two businesses in quality of life and three businesses in industry.
Both imaging products business and healthcare business in the quality of life segment are progressing well. In the Imaging Products business, we expect to achieve better earnings than last year by rolling out mirrorless cameras with cutting-edge features such as the Z8 and the ZF, and continue to expand the lineup of interchangeable lenses, including super-telephoto lenses and other high-value added products.
In the Healthcare business, we are making steady progress in expanding our lineup of digital microscopes that support life science research and medical practices, as well as services related to drug discovery support services for pharmaceutical companies and bio ventures.
Next, in the industry, the precision equipment and the component businesses are facing more difficult environment than previously expected, due to the sluggish semiconductor market.
The precision equipment business created with FPD lithography business unit and semiconductor lithography business unit combined in April this year. We will respond to changes in the business environment by horizontally integrating each function and revitalizing the organization. The component business has been affected by the current semiconductor market conditions, but we are making steady progress in developing new customers and our long-term growth story remains unchanged.
In the digital manufacturing business, we established the advanced manufacturing business and established the division’s headquarters in the United States. A first headquarter in the United States for Nikon to promote the full expansion of the materials processing business. In September, we made SLM Solutions of Germany, a wholly owned subsidiary, laying the groundwork for business development in Japan, the U.S. and Europe.
As you can see at the bottom of this page, we recognize the post-acquisition integration of overseas subsidiaries is an important management focus, and we will continue to improve and strengthen our management and control system. As I mentioned earlier, in the second year of the medium-term management plan, we expect a decline in profit year-on-year. While the overall performance is within assumptions of the mid-term management plan, there are some variations by segment. The imaging product business significantly exceeds the plan, but the semiconductor related businesses are progressing slower than expected.
We are currently reviewing our plans for each segment and will present new numerical targets for the second half of the mid-term management plan in the spring of this year. Nikon is committed to generating diverse revenues from common core of optical and precision technology and to responding to risks in order to achieve sustainable growth. We look forward to your continued understanding and support.
Now, our CFO, Mr. Tokunari, will now explain the first half financial results and outlook for the full year. Thank you very much for your attention.
Muneaki Tokunari
Good afternoon, everyone. I am Tokunari, CFO. Nice to meet you all. I would like to discuss the first half results and the outlook for the full year.
Firstly, the highlights of the first half results. Revenue was JPY331.2 billion. Operating profit was JPY13.6 billion and profit attributable to owners of parent was JPY9.8 billion. Revenue increased by JPY42.9 billion compared to the same period previous year.
Revenue grew on the strong business of the digital cameras and ArF lithography systems for semiconductors with additional revenue of newly consolidated subsidiary metal 3D printer manufacturer SLM Solutions.
On the other hand, OP and profit attributable to owners of parent decreased due to the lower revenue in the highly profitable FPD lithography systems and the components businesses, with high expenses resulting from the SLM acquisition. Compared with the forecast announced in August, revenue increased by JPY6.2 billion, partly due to the cheaper yen, but OP and products attributable to owners of parent decreased, partly due to provisions in the Healthcare business and expenses related to the structural reform of Morf3D in the digital manufacturing business.
Slide nine shows the consolidated financial highlights for the first half of this year compared to the same period last year, and the previous forecast we made in August.
Please take a look at slide 10. It shows the segment results for the first half. In the yellow line box for each segment, the upper row is revenue and the bottom row is operating profit. Compared to last year, revenue and profit increased in the imaging products business, while our profits decreased in other four businesses.
Slide 11 shows the consolidated revenue and profit and loss for the three months from July to September. If you look at just the three months, both revenue and profit increased compared to the same period previous year. This was due to the increased revenue and profit in the imaging products business and the precision equipment business.
I will now explain the first half results of each segment, starting with the imaging products business.
Imaging products business revenue increased by JPY23.1 billion year-on-year to JPY137.6 billion, and operating profit increased by JPY3 billion to JPY25.2 billion. Revenue of our mirrorless cameras and lenses for mirrorless cameras was strong, led by Z8 launched in May of this year.
The average selling price of both bodies and lenses were up due to a focus on mid to high-end models and the weaker yen also contributed to a 20% year-on-year increase in revenue. In addition, the operating profit margin exceeded 18%.
Slide 13 shows the precision equipment business. Revenue increased by JPY12.7 billion year-on-year to JPY96 billion, yet operating profit decreased JPY3 billion to JPY3.2 billion. Revenue of new equipment totaled 11 units, out of which 9 were ArF lithography systems, a significant increase from the 2 units last year. This shows we are making steady progress in expanding our customer base.
On the other hand, service revenue decreased due to lower utilization rates of semiconductor device customers. In addition, revenue of FPD lithography systems decreased significantly to 4 units from 13 units in the previous year, as this fiscal year makes the bottom of the business cycle for FPDs, such as LCD panels.
In the precision equipment business as a whole, the revenue increase of ArF lithography systems could not offset the decline in the highly profitable services business and FPDs, resulting in a year-on-year decline in the profit despite an increase in revenue.
Slide 14 shows the Healthcare business. Revenue increased by JPY4.6 billion to JPY51.2 billion due to strong revenue of life science solutions, including biological microscopes in North America and China. However, operating profit decreased by JPY0.9 billion to JPY2.7 billion due to provisions of JPY1.4 billion related to transactions of some customers and other reasons.
Slide 15 is the components business. The components business had been growing rapidly until the previous year, due to expansion of revenues from EUV and other semiconductor related business. But in the first half of this year, revenue as well as the profit declined due to the impact of sluggish semiconductor market.
Revenue declined in the first half, partly due to the delayed shipment of EUV related components and optical components as a result of production adjustment by semiconductor related customers. Demand for some consumables such as optical parts also declined due to lower capacity utilization rate at semiconductor equipment manufacturers.
Slide 16 shows digital manufacturing business. This segment consists of the Industrial Metrology Business and the newly established advanced manufacturing business or ADM business. Revenue was up year-on-year contributed by the newly consolidated German SLM solutions in the ADM business.
On the other hand, operating loss increased due to SLM’s operating loss and amortization of intangible assets of SLM restructuring expenses as more 3D business strategy reviewed as well as upfront investments were made in the Industrial Metrology Business.
Next, let me go to the full year outlook. As for the full year forecast, we have raised our revenue forecast by JPY20 billion to JPY690 billion, partially due to the FX rate as the revenue increased in imaging products and the healthcare business is expected to outweigh the decline in other businesses.
The imaging products of OP forecast was revised upward by JPY2 billion and the corporate expenses, etc., was increased by JPY3.5 billion, while downward revision of JPY4 billion in the Precision Equipment, JPY1.5 billion for Healthcare, JPY5 billion for the Components Business and JPY4 billion for the Digital Manufacturing businesses were made, this making total OP revised downward by JPY9 billion to JPY34 billion.
The forecast for profit attributable to owners of parent was revised downward by JPY 8 billion to JPY27 billion, but shareholders’ returns, the interim dividend is increased by JPY5 from previous year to JPY25, and annual dividend forecast is unchanged to be JPY50. The FX assumption for the second half is JPY140 to a dollar and JPY150 for euro.
Please see slide 19. You can see a list of full year forecast highlights compared to the previous year and the previous forecast. I already covered the outline. So I will go to slide 20. It shows full year forecast by segment, with year-on-year comparisons and the previous forecast. The details for each segment will be explained later.
First the Imaging Products business. We revised our August forecast based on the assumption that the digital camera market will continue to expand in the second half of this fiscal year. As indicated in the lower left, we revised our full year market size forecast for interchangeable lens cameras to 6.3 million units up 500,000 units from the previous forecast, and for the interchangeable lenses to 10 million units up 600,000 units.
Our sales volume is also revised up to 800,000 units, up 14% or 50,000 units from last year and interchangeable lenses 1.25 million, up 8% or 50,000 units from last year based on the strong sales. Due to the upward revision in sales volume and the change in the currency assumptions, the revenue forecast is raised by JPY25 billion from the previous forecast to JPY275 billion yen.
On a year-on-year basis, the revenue is expected to increase 21% due to an increase in the average sales price per unit, in addition to an increase in sales volume. OP forecast is also revised upward by JPY2 billion from the previous forecast. The second half of the forecast reflects the higher purchasing prices of components and the selling expenses for the year-end sales campaign.
Slide 22 shows the forecast for the Precision Equipment business. Please refer to the lower left. Since the installation of some ArF lithography systems were postponed into next year, upon customer request, the sales volume of new semiconductor lithography systems is expected to decrease by 3 units to 30 units. On the other hand, sales of FPD lithography systems are expected to increase by 1 unit to 13 units.
Considering sales volume changes and others, we revised down revenue forecast by JPY5 billion from the August forecast to JPY200 billion. The operating profit forecast was lowered by JPY4 billion from the previous forecast in August to JPY8 billion due to the lower sales and an increase in R&D expenses to strengthen product competitiveness, including the development of next generation platforms.
Please see slide 23 next. I will now explain Healthcare business. Based on the strong performance in the first half, we raised our revenue forecast by JPY8 billion to JPY103 billion. We revised the OP forecast down by JPY1.5 billion to JPY9.5 billion, reflecting JPY1.4 billion provision in the first half related to certain customers’ transactions and others, as well as higher purchasing prices of components, even though we expect a revenue increase.
Slide 24 shows component business. Future investment trends by semiconductor device manufacturers remain uncertain due to the sluggish semiconductor market. EUV related business, which is expected to grow in the medium to long term is also stagnant at present, and the timing of recovery is yet to be determined. Production adjustments by semiconductor related customers are expected to continue for some time, and deliveries of some EUV related components and optical components are expected to be postponed to the next fiscal year.
Consumable business, such as optical components, is affected by lower capacity utilization rates of semiconductor device makers and expected to be lower than previous forecasts. As a result, we revised our revenue forecast down by JPY6 billion to JPY47 billion, and our OP forecast is down by JPY5 billion to JPY15 billion.
Slide 25 is the digital manufacturing business. Revenue is expected to be JPY62 billion down by JPY2 billion from the previous forecast, mainly because the SLM solutions acquired into the ADM business has been affected negatively by customers’ changes in their investment plans.
Operating profit is expected to be a loss of JPY13 billion down by JPY4 billion from the previous forecast in August, mainly due to lower revenue in the ADM business, the negative impact effects, restructuring expenses at Morf3D, and changes in the production mix in the industrial metrology business.
That’s all from myself. In the summary of the first half, revenue was up partially due to the weaker yen, but operating profit fell short of the plan, due in part to one-time expenses, including provisions in Healthcare and restructuring-related expenses in Digital Manufacturing.
For the full year, we revised our OP forecast downward by JPY9 billion from the previous forecast to JPY34 billion. Weak semiconductor market conditions pushed down operating profit by JPY9 billion for the Precision Equipment and Components Business combined.
For the next fiscal year, although we still cannot foresee a recovery in demand for semiconductor-related products, we will continue to make efforts to minimize the impact of the market downturns by making timely and appropriate resources investment through close communication with our customers, to make sure that we do not miss the timing of market recovery.
During the first half of this fiscal year, we made SLM a wholly-owned subsidiary. Although the ADM business will start the current fiscal year with loss due to the one-time cost of the acquisition, we aim to double revenue to more than JPY40 billion in FY 2025 and to return the EBITDA positive.
Furthermore, in FY 2026 we plan to return to profitability in operating profit, even with the amortization of intangible assets included. There are many risk factors in the second half and into the next fiscal year, with longer than expected sluggish semiconductor market, geopolitical risks, and rising interest rates, but we will do our best to act with agility to accommodate to those changes.
We appreciate your continued support of our customers and shareholders and investors. Thank you very much for your attention.
Question-and-Answer Session
Q –
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