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Edited Transcript of 6810.T earnings conference call or presentation 26-Apr-19 8:00am GMT

Full Year 2019 Maxell Holdings Ltd Earnings Presentation

Tokyo May 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Maxell Holdings Ltd earnings conference call or presentation Friday, April 26, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Yoshiharu Katsuta

Maxell Holdings, Ltd. - President, CEO & Representative Director

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Presentation

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Yoshiharu Katsuta, Maxell Holdings, Ltd. - President, CEO & Representative Director [1]

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Thank you very much for attending our financial results briefing. As mentioned earlier, we have a lot of materials to cover today, so today's meeting may take slightly longer than usual. But I hope you can bear with us, as I will try to speak as consistently as possible.

Let me start by taking you through the outline of Consolidated Results for Fiscal Year 2018. I'll give you a highlight of fiscal year 2018 first, before going through the financial results. The slide shows management objectives. First, on growth strategy. During FY 2018, the first year of the mid-term plan, the company promoted the Maxell Business Platform, or the MBP strategy, making a major progress in the enhancement of business portfolio and the generation of group-level synergy. With Specialty Business, Izumi Product, Ube Maxell Kyoto and the Kureha Elastomer making contribution to the group performance, starting from FY 2018. We were able to strengthen the automotive lithium-ion battery, or LIB business, and build a foundation for further synergy generation.

Second, as FYI 2018 is also the year of the second foundation of the company, preparation was made for the re-launch of the Maxell brand as the brand for consumer and the beauty products as well as the brand for projector products, for which a new light source was also secured by building the structure to realize sales expansion.

As for unprofitable businesses, we have struggled again during FY 2018. Nevertheless, we were able to provide the projector business with a new light source, reorganized the beauty product business with renewed brand and the distribution network and reviewed the LIB business by transferring resources from consumer LIBs to automotive LIBs to optimize the cost structure. To improve Maxell group profitability, since last year started a profit and loss control by model or by product to drive cost reduction by discontinuing with unprofitable products and reviewing the product portfolio.

We are also strengthening business portfolio management and planning to introduce ROIC in FY 2019. As for new businesses, additional investment was made and sustained in priority businesses or growth businesses, such as head-up displays and metal masks for organic EL panels. That was my brief explanation of the background of consolidated financial results for fiscal year 2018.

Moving on to the consolidated financial results. Net sales were JPY 150.6 billion. The decline in consumer LIB was offset by the increase in growth businesses driven as part of the MBP strategy. So net sales were up 2% year-on-year.

Operating income was JPY 5.4 billion, down 39% year-on-year as the decline in consumer LIB was not covered up by the tightened cost control and cost reduction effort to increase profitability. Compared with the revised forecast announced at the end of October, when we made a downward revision, sales were JPY 1.4 billion lower and operating income was JPY 600 million lower. Net income, however, was JPY 400 million higher than the forecast at JPY 5.3 billion. Free cash flow, shown on the second line from the bottom, is significantly negative due to the promotion of the MBP strategy and aggressive capital investment. I will come back to this point later in my presentation with variance analysis.

This is a variance analysis of net sales shown with a simple graph. Year-on-year net sales grew JPY 2.4 billion. Sales quantity reduced net sales by JPY 10.6 billion, which is split between JPY 0.4 billion for consumer LIBs and JPY 0.9 billion for beauty care products. This negative impact, however, was more than offset by the MBP strategy implemented around January or in the latter half of FY 2018, resulting in net sales growing year-on-year to JPY 150.6 billion.

This is a variance analysis of operating income. Most of quantity variance is explained by consumer LIBs, which decreased operating income by JPY 4.4 billion, while JPY 0.3 billion is explained by beauty care product. In the meanwhile, growth investment executed throughout the year decreased operating income by JPY 1.2 billion and increase in raw material prices decreased operating income by JPY 0.7 billion. These negative factors were not covered up by the positive contribution of MBP, whose contribution was less than expected for the first year due to integration and other costs incurred, but the MBP's contribution is still positive after taking goodwill into account. The decrease in OP was also partly compensated for by cost reduction, but OP declined JPY 3.4 billion year-on-year to JPY 5.4 billion.

This is a variance analysis of cash flow. As mentioned earlier, capital expenditure decreased cash flow by JPY 12.4 billion and MBP by JPY 34 billion as total expenditure for the 5 companies. As a result, FCF declined from positive JPY 600 million to negative JPY 45.8 billion. Due to the first year of the mid-term business plan, the company incurred various one-off expenditures with the benefit of synergy to be realized going forward. We think that we can catch up with the plan.

This slide shows performance by segment. Starting with the Energy business. Both sales and profit are down year-on-year. Sales are down JPY 6.7 billion year-on-year and it is down JPY 1 billion compared with the plan at JPY 38.3 billion. As shown at the bottom of the slide, sales for consumer lithium-ion batteries decreased, while those of cylindrical lithium batteries for smart meters, electrodes, chargers and packed batteries transferred from Gsus are all incurred -- increased year-on-year.

The demand in Coin type lithium battery is expected to be driven by the TPMS demand in China after registration this year remained almost flat due to the slowdown in the economy. In terms of profit, however, as shown at the bottom, thanks to stable production activities, productivity improved. Nevertheless, affected by the decline in sales of consumer LIBs, operating income was down JPY 3.3 billion to JPY 2.3 billion.

Next is Industrial Materials. The segment sales were up but operating income was down. Net sales were up JPY 2.5 billion to JPY 52.4 billion, mainly due to an increase in the sales of adhesive tapes as well as the addition of coated-type separators of Ube Maxell Kyoto in January this year and industrial rubber products of Kureha Elastomer.

Due to the slowdown of the automobile market, especially during Q4, slowdown in sales of in-car camera lens units and LED headlamp lenses was experienced. Operating income was slightly down year-on-year due to the investment in the development of in-car camera lenses, OLED masks and other new products as well as the deceleration of the semiconductor market. Operating income margin was down slightly as well. There were 2 in-car camera lens products which were expected to perform well. Their performance, however, during Q4 was rather limited.

Next is Electronic Appliances and Consumer Products. Both sales and profit were up year-on-year. There was a dramatic improvement during Q4. Net sales were up JPY 6.6 billion year-on-year mainly because of the addition of Izumi Products company's lineup.

Sales of our own products, such as beauty care product and the consumer products, were down year-on-year. Projector sales improved, thanks to the last-minute demand for Hitachi brand products at the end of the fiscal year, before the Hitachi brand was replaced with the Maxell brand in April.

As for operating income, despite the delayed recovery of profitability for beauty care products, the projector business bottomed out in Q3, as reported previously, and the recovery looks even more [uncertain]. Projectors returned to positive profitability on a full-year basis with a shift to new light sources progressing from 30% to 40%.

Next let me move on to the forecast for fiscal year 2019. The outlook for fiscal year 2019 is challenging for reasons I will discuss later in my presentation. Net sales are projected at JPY 167 billion, up JPY 16.4 billion year-on-year. Operating income is projected at JPY 5 billion, down JPY 0.4 billion year-on-year, and the net income protected at JPY 3 billion, down JPY 2.3 billion year-on-year. The exchange rate assumption is JPY 110 to the dollar.

Capital expenditure is budgeted at JPY 8 billion, unchanged from the previous year, and depreciation expenses at JPY 6 billion, an increase of JPY 1.4 billion from the previous year. R&D expenses are expected to remain at JPY 10 billion, the same level as the previous year.

Dividend forecast is shown at the bottom of the slide. As announced today with the press release, we were distributing a special dividend of JPY 250 per share at the end of Q1 in addition to the ordinary dividend of JPY 36 per share, which is unchanged from the previous year.

This slide shows forecast by segment. Energy business project a year-on-year decline in sales due to the challenging situation of the LIB business where the company made a conscious decision to shift away from consumer LIB product and shift towards automotive LIB product, while micro batteries should show a steady growth. The segment's operating income is projected at JPY 1.5 billion, down JPY 0.9 billion year-on-year. Unfortunately, operating income margin is expected to go down to 4.2%. Industrial Material is expected to grow sales by JPY 13.2 billion to JPY 65.6 billion and operating income by JPY 0.6 billion.

Electronic Appliance and Consumer Product is expected to grow sales by JPY 6 billion to JPY 65.9 billion. This segment, benefit of MBP is expected. The Electronic Appliance and Consumer Product, however, will likely incur some expenses this year in relation to the ongoing brand switch activities. In total, the full-year guidance is JPY 167 billion in net sales and JPY 5 billion in operating income with OP margin of 3%.

Based on what I have discussed so far, I would like to take you through the revised mid-term plan, MG20. Last year, we have set the targets for MG20. Those were, as you can see on the left-hand side, JPY 200 billion in net sales with JPY 15 billion in OP, 7.5% in OP margin and 8% or higher in ROE. As a result of a major downward revision announced today for FY 2018, we are revising the target for MG20 to JPY 173 billion in net sales, JPY 10 billion in OP, 5.8% in OP margin and 6% or higher in ROE.

We have revised our targets in terms of maximum achievable levels under the ongoing competitive and a customer situation and arrived at these numbers. We will try to achieve the original target as soon as possible during the next mid-term plan period. We feel sorry for not being able to achieve the original targets within the current mid-term.

This is the background of the revised MG20 target. It's shown for each segment. The Energy segment impact on MG20 is negative JPY 2.6 billion in terms of operating income, while their sales forecast has been revised down by around JPY 15 billion.

Micro batteries are expected to show steady growth while we are shifting focus away from the consumer LIB business towards the automotive LIB business. We've made some changes to the production structure as well, relocating both human resources and production capacities.

The Industrial Materials segment has revised down the OP target by JPY 1.9 billion, while revising down the sales target by JPY 10 billion in view of the slowdown of the auto and the semiconductor market. The delayed launch of our mask product for OLED panels and so forth, those are the major factors.

We'll maintain and support the original forecast for the automotive business, such as coated separators and in-camera (sic) [in-car camera] lens units as well as LED headlamp lenses, whose detail will be shared with you later in my presentation.

As for the Electronic Appliances and the Consumer Product, we'll promote a shift away from volume sales and the change in sales methods. For beauty care products, while achieving more than 90% of new light source share for projectors, the segment net sales have been revised down by JPY 2 billion and OP by JPY 0.5 billion. Thus, the breakdown of the downward revision, JPY 27 billion in net sales and JPY 5 billion in OP.

I forgot to mention one thing about the Electronic Appliances and the Consumer Product. The segment will continue to apply disciplined approach to the P&L control.

Next slide shows the outline of the business portfolio. The chart shows revenue growth rate on the x-axis and operating profit on the y-axis. The growth rate is only year-on-year change rather than the average growth rate.

You can see FY 2018 result on the left and FY 2020 plan on the right-hand side. The growth drivers of energy sector are shown by the yellow circles. The micro battery are expected to maintain its growth and profitability with the promising heat resistant CR products or Coin Type Lithium Manganese Dioxide Battery products.

Please notice how LIB is moving from FY 2018 to FY 2020 with the ongoing shift from consumer LIBs to automotive LIBs. This is where we would like to position automotive LIBs by FY 2020.

As for Industrial Materials this year, given the heavy investments we are making and the decline of smart phones' camera lenses this year, substantial growth is expected going forward. Growth is expected, especially with adhesive tapes and inks, including coated separators. The purple circles are moving toward this direction by FY 2020. The purple circled behind the yellow one is lens units for in-car cameras. Expected CAGR is about 15%.

And next, the green circles show Electronic Appliances and Consumer Products. The circles were here up until Q3 this year, but by Q4, both projectors and the beauty care products came to around 0 level. Going forward, the segment is focusing on profitability rather than revenue. This segment is positioned as cash cow, while the company's growth is driven mainly by the yellow and the purple circle businesses beyond FY 2020.

If I may go back to the variance analysis of operating income on this page, you can see operating income is declining from JPY 5.4 billion to JPY 5 billion in FY 2019. The Energy segment is almost neutral because micro batteries are growing but the LIB is declining.

The Industrial Materials segment is up JPY 1.1 billion. Electronic Appliances and Consumer Products are up JPY 1 billion. Next arrow represent prior investments for FY 2020, as shown in the top-right corner, including expenses incurred by brand switch and new products development costs, totaling JPY 2.5 billion. As a result, the operating income forecast is JPY 5 billion.

This slide shows the variance analysis of operating income from FY '19 to FY '20. As mentioned earlier, our intention is to make adequate prior investment within FY '19 to make sure we can harvest the maximum benefits later on. So the starting line is JPY 7.5 billion. For Energy, as I said earlier, micro batteries are growing, but the LIBs are declining. So the net impact is around 0.

Industry Materials will make a positive contribution, as you can see there, with their key products. Electronic Appliances and Consumer Products will be free from one-off expenses and make a positive contribution from the new light sources. The share of those is about 90%. So that's the breakdown of JPY 10 billion forecast for FY 2020.

Next is business strategy. As shown at the bottom of the slide, we are planning to hold an Investor Meeting on May the 31st, to share the details of the business strategy. So let me make some comments here on our business strategy and the capital policy based on the summary shown on this page.

Starting with business strategy. Our strategy is focused on the enhancement of profitability. We will do so by realizing synergy under the MBP approach, making sure the benefits of the JPY 34 billion investment already made will be reflected on financial performance going forward.

For the disciplined management of the business portfolio, we will introduce ROIC, or R-O-I-C, as a KPI and practice the selection and the concentration approach with discipline. We'll also address unprofitable businesses while making necessary investments, of course, into growth domains. That's the outline of the business strategy.

Our business strategy and our capital policy are the 2 wheels of our cart. We are working on the optimization of the capital structure at the moment. Due to the downward revision by as much as JPY 10 billion this time, achieving the original ROE target became rather difficult. Nonetheless, we will remain focused on ROE. As the most important KPI, we will never forget about maximizing corporate value. That's the ultimate objective of the organization. We will attain it with the 2 wheels of the cart here.

We'll decrease shareholders' equity by enhancing shareholder return, as just announced today, and increase financial leverage based on disciplined fiscal policy.

We have decided to enhance shareholder return as a result of this discussion on how to realize optimum capital structure and maximize corporate value. Here are some details. As a result of the review of the current performance trends, we have revised the targets for FY 2020 to JPY 10 billion in operating income and a 6% or higher in ROE.

Including growth investment under the MBP approach, our capital policy over the MG20 period is as follows: over the next 2 years of MG20 period, we will enhance shareholder returns by making the payout ratio 100% or higher for FY '19. While maintaining the ordinary dividend payout of 30% to 40%, the company will distribute special dividends of JPY 250 per share on June the 30th, as the base state, and implement a share buyback program of JPY 5 billion, starting on July the 1st, making a total shareholder return of JPY 20.1 billion.

This is our perception in regards to the balance sheet. The balance sheet for FY 2017 was as shown on the left-hand side. The equity ratio was about 71% at that time. The balance sheet for FY '18 looks like this, and the balance sheet for FY '20 is as shown here. One difference is smaller cash and deposit. The sources of cash and deposits are more diversified financial services, including debt. The level of net asset is shown here as well, reflecting our capital policy. The capital-to-asset ratio should stay around 50% as written at the top. We should maintain the balance sheet that can support accelerated rate of growth and help surviving in the global market. The management will also consider optimized capital structure, keeping the equity ratio at around 50%.

Last but not least, this is the fourth point. Let me touch upon the new management structure, which has been already announced and to be proposed at the upcoming AGM. Changes from the previous management structure are shown in red. Mr. Senzai, currently Chairman and Representative Director, is nominated as Chairman and Director; and Mr. Sumoto and Mr. Masuda are nominated as newly appointed directors. A total of 6 nominees, excluding the members of Audit and Supervisory Committee, will be proposed at the upcoming AGM.

These are the reasons for the nomination of new members. Mr. Sumoto is expected to help strengthening the sales force, which is critical to support the MBP strategy that extends the scope of operations going forward. In addition to the extensive experience in sales, Mr. Sumoto was General Manager for the Battery and Industry Material business as well as the Functional Materials business in the past. The combined competencies of both sales and the business operations makes him a strong candidate for future leader of the organization.

On the other hand, Mr. Masuda has finance and accounting background with overseas experience as well. He is expected to help enhancing corporate value by implementing various new initiatives, including strategic corporate finance. Those are the rationale behind the nomination of the candidates. That's all I have for the new management structure.

With this, I would like to conclude my remarks. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]