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Edited Transcript of 6810.T earnings conference call or presentation 30-Oct-19 9:00am GMT

Q2 2020 Maxell Holdings Ltd Earnings Presentation

Tokyo Nov 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Maxell Holdings Ltd earnings conference call or presentation Wednesday, October 30, 2019 at 9:00:00am 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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This is Yoshiharu Katsuta, President and Representative Director. Thank you for taking time out of your busy schedule to join us today. I would like to review the financial results for fiscal 2019 first half ended September 30, 2019.

In the first slide, you can see the management efforts for fiscal 2019, which we are showing at every earnings briefing. After going over the financial results, I would like to review those items shown in blue in more detail. These are the highlights of the financial results for the first half.

Let me first review external factors and others. The U.S.-China trade friction and prolonged downturn of the automotive and the semiconductor markets are putting us in a very challenging business environment. And there also were internal factors such as delay in customer development, stagnation of inventory and a delay in improvement of productivity of unprofitable products, which had a combined effect of negatively affecting our performance. Currently, we are closely examining future condition and business forecast by segment and business.

Here is the summary of the financial results for the first half of fiscal 2019. Net sales totaled JPY 73.6 billion, up JPY 3 billion year-on-year. Operating income totaled JPY 700 million, down JPY 2 billion year-on-year. Ordinary income was JPY 800 million, down JPY 2.9 billion. Net income was JPY 800 million, down JPY 1.2 billion. Exchange rate during this period was JPY 109 to the U.S. dollar compared to the same period of the previous year, the Japanese yen appreciated by JPY 1.

On the right-hand side, you can see the full year forecast and the rate of progress. The figures we presented in April are shown as full year forecast. Progress rate relative to the forecast were: net sales 44%; operating income 14%; and net income 27%, all lagging way behind.

The next slide shows the various analysis of net sales and operating income, a year-on-year comparison. Sales increased from JPY 70.6 billion to JPY 73.6 billion, up JPY 3 billion. Quantity variance had a negative impact of JPY 10.5 billion. As annotation, you can see main factors in each of the 3 segments of energy, industrial materials and electronic appliances and consumer products. Exchange variance was negative JPY 0.8 billion; price variance, positive JPY 0.3 billion; and MBP, or the Maxell Business Platform initiative, executed last year, positive JPY 14 billion.

The next page shows the operating income variance analysis, JPY 2.7 billion, down to JPY 0.7 billion, a decrease of JPY 2 billion. As prior costs, we spent JPY 1.6 billion. Quantity variance was significant, negative JPY 2.8 billion. Exchange variance had no effect; price variance had positive impact of JPY 0.3 billion; and MBP after goodwill, positive JPY 1 billion; and the effective cost reduction was positive JPY 2 billion, a year-on-year change of JPY 2 billion at JPY 0.7 billion.

I would like to move on to the segment overview for more details. The Energy segment posted slight increase in sales and slight decrease in profit. Net sales increased from JPY 20.1 billion to JPY 20.4 billion. Operating income totaled JPY 1.5 billion, down JPY 0.3 billion. Operating profit ratio declined slightly to 7.5%. Sales increased by JPY 0.3 billion, as -- while sales of consumer LIB, or lithium-ion battery, decreased due to decrease in quantity. There were an increase in sales of cylindrical lithium batteries owing to increased demand for smart meters and an increase in sales of coin-type lithium rechargeable batteries for hearing aids on expanded orders.

As for operating income, heat-resistant coin-type CR batteries managed to maintain high profitability despite downturn in the automotive market. But due to the sales decrease of consumer LIB and development cost of all solid-state batteries, profit declined to JPY 1.5 billion, down JPY 0.3 billion.

The Industrial Materials segment felt the strong impact of external factors, and thus sales increased but profit decreased significantly. Net sales totaled JPY 27.3 billion, up JPY 2 billion. While sales decreased for camera lens for smartphone, the business from which we are withdrawing, there was an increase in sales coming from coated separator and industrial rubber products, the 2 new products. Mainly due to these factors, the sales increased by JPY 2 billion.

As for operating income, profit of embedded systems decreased significantly affected by downturn of the semiconductor market and the profit of optical components decreased by sales quantity decrease of camera lens and the effect of worsening car market. As a result, operating income was down JPY 1.1 billion at JPY 0.3 billion, with operating profit ratio of 1.1%.

In the Electronic Appliances and Consumer Products segment, sales increased while profit decreased or should I say, an increase in loss. Sales of projector decreased due to a drop in volume, as we showed earlier in the waterfall chart, but there was an increase in sales coming from newly joined electric home appliances and hydraulic tool business. As a result, net sales were up JPY 700 million to total JPY 25.9 billion.

As for operating income, affected by sales quantity decrease of projector and development cost for head-up display, HUD, and others, operating loss expanded by JPY 0.5 billion to total JPY 1.1 billion. We thus ended the first half with rather difficult results.

From here, I would like to review the current situation and the countermeasures going forward. First, the current situation, as mentioned at the outset, there are external factors and internal factors affecting the business. In particular, we feel that business environment significantly changed in the last 3 months during the second quarter. External environment surrounding the business remains severe. As shown on the top half of the slide, a direct impact of the U.S.-China trade friction on the automotive and semiconductor markets and stagnant economy in each country, a decrease in automotive sales affected products listed up there.

Related to the semiconductor market, profit decreased for embedded systems and dicing tape, the effect which was not felt strongly during the first quarter.

China market downturn affected by the U.S.-China trade friction is hurting our projector business as well as heat-resistant coin-type CR battery which we had expected to grow.

As for internal factors, we are listing them as new issues arising. There was a delay in customer development and improvement of productivity of unprofitable products, et cetera. And due to stagnation of distribution inventory, we are faced with a slowdown in shift to new light source for projector. I already talked about the projector issue.

And for health and beauty care products, we see a delay in development of professional sales route. And for cylindrical lithium battery, we see a delay in improvement of profitability despite sales increase due to a delay in productivity improvement.

So what are the countermeasures we have in mind. We are promoting replacing old with new through selection and concentration, ensuring thorough execution of disciplined financial policy. Here, you can see the large grouping, medium grouping and smaller grouping. We are implementing PIPJ, a profit and loss improvement by model project, which aims at managing profit and loss of about 8,000 models that we have.

A special project started in August in light of particularly severe situation surrounding our business. ABC/XYZ is a project to visualize profitability improvement by business so as to improve profitability of about 60 businesses. It is intended to slim down our operation as well and ROIC, return on invested capital, which we introduced this year. We are still in the introduction and education phase, but we are aiming at fostering a longer-term view in managing the business.

As for P&L improvement by model initiative, we have completed clarification of strength and weakness of each model, especially given that the downward pressure on profit is intensifying. We started to apply the practice of price increase or discontinue on the unprofitable models in August. This is bearing fruit. Through these initiatives, we are to shift resources to high profit businesses where the company has strength and we are to make a major change in the business portfolio focusing on profitability. And it is not just rhetoric, we are implementing measures to address unprofitable businesses and are planning to take more specific actions for the remainder of the year for the third and the fourth quarters.

First, we are implementing structural reform to realize financially independent businesses for 3 issue areas of consumer LIB, projector and health and beauty care. On consumer LIB, as we have explained previously, we are pushing for a major resource shift from consumer LIB to automotive. We are expecting a major recovery through fixed cost reduction in the second half. As for projector, we will work on the elimination of lamp models, including a reduction in the number of models, achieving new light source ratio of 100%, acceleration of shift to Maxell brand and shift to automotive imaging businesses.

In health and beauty care, we are working to achieve high efficiency by integration of resources with Maxell Izumi. In a nutshell, we have geared up our efforts to turn these businesses financially independent.

Turning our eyes to growth driver businesses. As the slide reads, we are working to concentrate resources to growth drivers. We set up here other products as growth drivers. They are products, so not strong enough to be a driver for the entire group. But by enhancing the product lineup and expanding to the adjacent areas as well as by developing a system or integrating them into systems, we hope to develop business groups leading the whole company. And it is with that intent that we are to concentrate resources to these product areas.

Lastly, but not the least, new growth drivers. Here, you can see products listed up. All solid-state battery for which we have started to supply samples, CLB, coin-type lithium rechargeable battery, HUD, the head-up display and EF2, or electro fine forming based high-definition hybrid mask for OLED and electromagnetic wave absorber. These are the examples of products on which we are to accelerate new development for growth in next generation through resource allocation. Through these, we are to transform the company into a new Maxell.

That concludes my presentation. Thank you for your kind attention.

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