Q2 2020 Konica Minolta Inc Earnings Presentation
Tokyo Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Konica Minolta Inc earnings conference call or presentation Friday, November 1, 2019 at 9:00:00am GMT
TEXT version of Transcript
* Shoei Yamana
Konica Minolta, Inc. - President, CEO, Representative Executive Officer & Director
Shoei Yamana, Konica Minolta, Inc. - President, CEO, Representative Executive Officer & Director 
As is indicated here, first half revenue is JPY 497.5 billion. It says, without the effect of foreign exchange, foreign exchange effect was negative 1%. If you exclude the foreign exchange effect from second quarter, it is plus 2%, although it's a small amount, the positive sales growth. But if you look at the operating profit for this reporting period was a big decline. I'd like to explain in detail about these results. If you compare with the former quarter, CRE of the sales restock we did not have in the second quarter. And of course, there is effect from the foreign exchange. But in addition to that, we had a delay in the cost reduction effort, so that the gross operating margin was about 1% reduction in this period. And naturally, we try to limit the expenses, but we have former investments for the next quarter, so we could not contain the increase in expenses. If you look at the business segments, we compare here the segments, the first half and the second quarter comparison. We use the graphs to explain the increase and decrease. But here, we see in this segment that the operating profit growth in the second quarter, only the industrials was 8% plus growth.
Next page, we show the first half operating profit for the 6 months. Well, here, we exclude foreign exchange and exclude CRE. And as a result from the Office and Professional Print, we see that it was in negative compared to that of last year. And from here, I'm going to detailed explanation of each of the office, production print. First, regarding Office Business. On top of the slide, we showed the 6-month summary.
In our case, we have the strengthening of the yen against the euro. And in the second quarter -- well, from the first quarter, we had the issues of the decline in business climate of the China and Europe. So the cycle for the business was prolonged and the economic situation deteriorated. And also the MFP products in the United States market, the market itself declined, which was not in the provisions that we had. And the A3 color segment 4, this is the medium speed and high-speed products. And in the first half, we don't have new products. And on new products, we have the segment 2 and 3. But in the North America, we were centered on the segment 4, but the competitivity had declined. And if you look at the graph and the lower right half, the blue shows the segment 4, the units compared to the year before. In the second quarter, we had a negative and that was a big effect. And in the first quarter, the segment 2 and segment 3, we had put in the new products. But in the second quarter, the proportion of the new products increased, but I will go into detailed explanation later about the manufacturing we had in Malaysia. But because of the issues of the tariffs between United States and China, we had the mass production start in Malaysia. And the robustness of the new product development had some issues so that we prioritized on the quality so that we had repeatedly changed the design and that in turn led to the suppliers change. And as a result, we could not realize the cost reduction and also the burden of the changes of the suppliers had weighed on the second quarter. That is what happened in reality. And on top of that, another factor, the non-hard revenue. As for the non-hard, please take a look at the right-hand side, we have the graphs, the blue dotted graph. In the second quarter, it was 2% revenue decline. And this -- what we had assumed in the first quarter was limited. As to our forecast and the shift [left], we try to make our efforts not to decrease our gross profit margin.
Next, we go into the Professional Print. As it is indicated here, the yen appreciation and the business climate decline, no change in environment to the office, but the segment of the production print compared to the right, we have the MPP, that is our strong products in terms of market share and what we had been putting much emphasis on. The MPP compared to LPP, we had a strong effect from the business decline, so that the market itself declined. And we could not counter the market decline. So the MPP resulted in the unit decline. This is indicated in blue -- dark blue, so that we have the unit decline in MPP. And this is due to the market reduction and also our business reduction.
On the other hand, LPP segment, we had high share in the market. But in the first half, the other competitors had a price competition, very severe competition, and the effect of the price competitivity, LP also could not be increased as much as we wanted. And the reduction in cost is very important, but we shifted to Malaysia and then the production printing is made in China, but the fixed cost burden is shifted from office to PP. So the second quarter, the reduction of the cost, we could not materialize. And that was one reason for decline in profitability. And the bar chart shows the non-hard, and this is negative in the second quarter. So non-hard, I see as very, very important indicator, and I really see this in earnest. But as for the reasons for the decline is the China and Europe, those 2 regions. The other regions, we were maintaining our competitivity. But in China and Europe, non-hard in the second quarter was especially severe and the print volume was not increased per unit. And that had weighed upon our profitability. And in the second half, viewed naturally, as I said, the competitivity, we have the new products. And the development cost is in the second quarter so that the burden -- but the good story is that in the ASEAN, the 6 countries, we have the 30% increase in the number of unit sales and the security have the competitivity in the industrial printing business. We are strengthening [that enables] in the commercial printing ink and we have the top share in this.
Next, we would go into the measurements -- measuring instruments. And here, as you can see, in first quarter and the second quarter, it was expected that we will feel the impact from the sluggishness in smartphone and influenced by the restrained investments. But the second quarter for the measuring -- measurement instruments were within our expectations.
On the other hand, in the second quarter, acceleration for the start of visual inspection business targeting automobiles, we completed the acquisition of a Spanish company. This is going to have a positive effect going forward. In performance materials, investing also in the supply chain is on the rise in the business environment. We do have business [chance] for the increase in size of TV. In view of the larger size of the TV, we did have new resin for VA of TV. And we had the effect from that in the second quarter. And compared with the prior year, we had more profit increase than the revenue increase. And the new resin for the larger TV, we had a severe situation few years back, but we have increased positioning here. And we are also putting into the small and medium and the TV and the new developments in the touch panels, and this had good effect in the second quarter.
As for the business segment, new business, we had the delay in recovering from the investment burden for the first half, discontinued in the second quarter. But in bio-healthcare, we have as KPI, Ambry Genetics testing. This is going according to our plans, especially we have the RNA testing, has been rated highly by the market and by scientific societies for improved diagnostic accuracy. The number of samples contracted for testing is growing by the month. We say health checkup, but this is a care program for the healthy people as well, and this also contributed to their increase.
And the RNA testing is rated quite highly. And this helped maintain the price. In Invicro, in the first quarter, the central nervous system contracts continue to be weak, but orders in the cancer clinical trial field are growing strongly. Low profit businesses also contracted further and strengthening of the revenue base progressed. The low profit business would be decreased so that we continue to strengthen the profit base.
In the Workplace Hub, as we see here, the subscription of that in the digital area -- age, we have the business model that is quite effective. And the average customer unit prices are also meeting or exceeding plan. But seeing from the pipeline to the successful business, the length it took, we cannot see it as the same as the office business, but we would need to have innovation of the business model dealing with DX on a monthly subscription fee model. And in the United States, we are having good progress. But frankly speaking, this transformation is going to take more time, but we are accelerating our efforts for capacity building and building customer value. That is how we progressed in the first half.
Now I would like to go into the second half forecast. As we can see in these graphs, the left-hand side says JPY 27.8 billion and that was the actual number for the last fiscal year. And in order to compare it in real terms to this fiscal year, we had taken out the effect from the foreign exchange by putting it to this year foreign exchange and have taken out the effect from the CRE strategy for the third quarter, then we can say that was JPY 18.5 billion adjusted figure. And for the second half, first of all, we see the effect of JPY 4.9 billion for the U.S.-China trade friction customs duty for the ForEx. And also, according to the 15% that is put into place from September 1, that is pertaining to the export from China to the United States, we would need to have the countermeasures. But here in the second half as well, it is going to take considerable amount of time. That is how we came to this number.
Then the office, production print and other businesses, I'd like to explain here. But the office, production print in the first half compared to the first half, the comp -- just have declined compared with the previous year. Well, it's still going to be very severe. And we had been quite conservative in making our estimates.
On the other hand, the health care businesses, we are going to have the profitability increase. And as for that, we would go into explaining in detail.
Now I'll go by segment. And the first, on Office Business. I have just explained the market conditions and in the tariffs. As for the new products in the segment 2 and segment 3, and as I mentioned for the first half, in light of the new sales, customers do appreciate i-series features. So we should sell [these] Products as [clear] as possible for the 6 months in the second half of the year. I have actually personally confirmed sales forecast from the regions.
As for the delays that we had in the production cost reduction, we will surely execute the countermeasures. But and I have to report to you that, we will get the result not in the third quarter, but in the fourth quarter, because of the heavy load we are having in Malaysia.
As for the segment 4, we are having a tough time, particularly in the United States. We will launch new product, i-series, in the fourth quarter. So it will not have an impact in the third quarter, but the company has confidence in the addition of i-series for the fourth quarter.
We have on those large and new project installations, as mentioned here. We have those opportunities in the U.S. and Europe on top of the deals we had in the second quarter. So we will expand, MIF, Machines In the Field and maintain non-hard levels.
Next, Professional Print Business. No particular comments as to the first and the second bullet. The third on MPP, I have already talked about the slow economy and the market reduction. Though we had a tough time with the current version, but we have IQ-501, which has a very strong differentiation factors appreciated among our customers. We extended its features for the second half of the year version. And with this, we will expand MPP sales in the second half. We could not reduce the fixed cost in China in the first half due to the relocation into Malaysia. But we will do so in the second half.
On top of this, development and the production of the United will further reduce in costs. That said though, we believe in its impact on the profit and loss and it will come in the fourth quarter. Good business going on in Asia. And as for India, although we had financial and other concerns, we have a top share in India. And we do believe India will recover in the second half. Konica Minolta's first HPP model, which we announced in the U.S., will be launched in the fourth quarter, and it will make its contribution onto our numbers.
In the industrial printing field, we continue our efforts here. We will have a new MGI product in the fourth quarter as well as a new digital decoration printing products are to be launched in the second half. Though we had a tough time in LPP, but these new products are expected to make up for the loss.
Next, Industrial Business. First, measuring instruments. Though we had a tough time in the first half, but in the second half, we are already receiving smartphone 2020 models, related orders, in advance. We will have a peak in the fourth quarter, and moving forward in the first half FY '20, we expect that we have a higher peak, above the fourth quarter. It is very important for us into -- looking into these possibilities. With this point in mind, we are now having detailed dialogues with our customers as for 2020 models.
Automotive and the visual inspection business will accelerate in the second half. Performance Materials, we are carefully looking at panel inventory adjustment. But as I mentioned earlier, we are now making a shift to a higher value-added resin films. With this in the background, we believe we should be able to increase both profit and sales in the second half year-on-year basis.
New business. Though we are still underwater, but we will grow dramatically from now on. The major drivers for this is our series of efforts to push up bio-healthcare opportunities. To be more specifically, RNA samples are growing in number, which will lead to more health care and pharmaceutical opportunities. We will accelerate in those activities more so over the first half.
Konica Minolta is now having a united effort to reduce cost for Ambry Genetics globally. Besides the top line, we are now trying to improve its gross margin. We are trying to improve R&D spend more efficiently from a global perspective.
At Invicro side, we decided to return into the origin of development and for central nervous systems. We are now making a plan for FY '20. This portion is not reflected in the current fiscal year plan, so this is going to be our business opportunities. We will strengthen our central nervous and cancer activities in the second half.
Workplace Hub, we are now shifting from cloud-only into Edge. So it will be a hybrid with Edge. We are convinced that this is the right direction for us to go to benefit our customers. One of the reasons why we missed our target in the first half is that products we offered did not necessarily meet with the customers' needs. We are upgrading our versions in parallel. And in the second half, we will meet our customers' needs more stably at a certain level.
And from now on, our support for our customers would become more critical. And for that, we can leverage an American IT company we acquired. With its back office system, we can go for a global scale business opportunities. We have already built the system in question. So all left is our execution on this transformation, together with our MFP sales force, will address how to reinforce our engagement with our customers.
They are the factors that we have for our outlook in our sales for the second half. Not fully in forecast, this shows some changes from last year. The left shows an actual operating profit for FY '19 being JPY 62.4 billion. Then reflecting ups and downs, the number became JPY 37.9 billion last year. And this year, based upon all these points that I have explained, it will become JPY 27.5 billion, but taking into an account effects in tariffs and others, the number became JPY 36.8 billion in terms of comparison to the last year. We'd like to minimize the drop in our profit on a full year basis to the extent possible. We had already a big loss in profit in the first half. So with all these initiatives and I have just explained to be executed in the second half, we will reach this number for the full year basis. Yes, we have to make sure we go for it as surely as possible. That will give us a good win to 2020. But you may ask, why we are having such a gap between what we had announced and the latest outlook? And this slide explains this question.
At the first quarter end, we announced an operating profit becoming JPY 60 billion. Then 3 months have passed, and among the external and the special factors is the FX, the Japanese yen becoming stronger, and another factor is tariffs. But between JPY 50.1 billion and JPY 27.5 billion, we had those factors on business on internal side. There are so many downward corrections. And so the operating profit became JPY 27.5 billion. But this time, we are announcing our operating profit for the full year is not JPY 27.5 billion, rather it is going to be JPY 20 billion. The difference of JPY 7.5 billion comes from the additional SRE or structural reform expense, which we had not originally considered. This additional SRE is the cost behind our forecast and to carry out the planned structural reform initiatives.
As you see here, we have 4 areas, 1 through 4. First is on service efficiency by promoting a shift left strategy. Second is the production aiming to improve production efficiency. And the third and the fourth, to improve on admin and indirect cost by reorganizing organizations and the functions or better utilizing the outsourcing operational improvement by leveraging additional technologies as much as possible, including RPA. By responding to digital operation, we expected to reduce fixed cost as much as possible. So they account for the JPY 7.5 billion. Konica Minolta is now looking ahead as our key words indicate such as value up, transform or direct sales for new business opportunities.
So this time, we do not intend to reduce those direct sales and headcounts. And if necessary, we are willing to get resources from outside so that we can achieve the target for 2020. Though we are behind by 1 year, but we stick to our plan while making further efforts. We stated factors that I have just explained. Revenue is now in our forecast at JPY 1.045 trillion, down 1% in substance year-on-year. Operating profit came JPY 20 billion, way down from JPY 60 billion from the first quarter. Net profit became JPY 7.5 billion. As for the ForEx, the U.S. dollar is JPY 105, no change. The euro is JPY 118, JPY 5 appreciation on the Japanese yen side. This shows the details in our buy segment and for operating profit of JPY 20 billion or revenue of JPY 1.045 trillion.
I am quite happy to go through these numbers during the Q&A session later. But a major reason for this is a big decline both in Office and Professional Print from the previous plan. Industrial is still second to the target on showing how we are going to aim for growth from the previous year. As for new business, though the cost is down by JPY 3 billion Y-o-Y, but the second quarter shows a rather big increase in costs from the first quarter. Though we will make our best efforts in the second half, new business shows an increase in cost in Q2 over Q1.
Lastly, do allow me now to spend a few minutes to talk about FY '20, though we are here to talk about FY '19. Point 2 is how explaining the additional structure of our reform to accelerate the business transformation. I showed earlier, the additional expense is JPY 7.5 billion. We had already reserved the JPY 1.2 billion in the first half, and we used it. So on a full year basis, the company will spend a total of JPY 8.6 billion. Another area is the production cost reduction where now we are having some delay. We are already addressing this condition as surely as possible.
With a 0.2 only and it will not give us JPY 15 billion but if we are to include a short effect from 0.1 in 2020, then I believe, put them together, we should be able to add this JPY 15 billion, so that we can rest in operating profit of JPY 27.5 billion. So this is a temporary measure we are having now.
This is the first key takeaway. And I strongly believe that we have to have a good and profitable basis in FY 2020. Looking at a full year basis, office portfolio will change into a full lineup of i-series in the full 1 year. Professional Print, which is hit the hardest from the original target. May I remind you again that in the fourth quarter, we will launch new HPP products. And in May, we are to launch a long-waited new product, LPP. And in the second half, we will have new MPP products. So in the transition from FY '19 to FY '20, we will have those new lineups.
It will be a year of full new lineups. In the measurement business, the 2020 model is going to be in our focus to enable us to become profitable by responding to a midterm and long-term demands. As for Performance Materials, we will make a shift from TVs to touch panels and other new applications, small and medium sized. We will have a full engagement of those activities in FY '20. As for health care business, we'll definitely go for Dynamic X-Ray and the Medical IT. As for the new business, it's not going to be the case that we will reach our goals in everything in 2020. But it is critical for us to achieve a good top line, while keep an eye on FY '21, so that we can transform Konica Minolta's business portfolio for betterment, 3 years or 4 years ahead. We continue to reinforce ourselves and where we should do so. But in light of the FY '19 performance where we have the existing business operations damaged. So we simply cannot keep the same pace of making investments into new business areas. So we need to be more choosy, identifying our top priorities for the company. We have to look at the return on the investment we are to make.
So this is going to be our baseline if we are to look at 3 years as a whole. And if the investment is necessary, yes, we will continue to do so. I am a little over 30 minutes, so I would like to stop here for my presentation on the second quarter. Thank you indeed for your kind attention.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]