Q&A of Financial Results for the Year Ended March 31, 2020
Disclaimer
This document (A Selection of Questions and Answers) is not a verbatim transcript of the questions and answers that took place at the presentation as of May 28, 2020. Rather, the company has exercised its discretion in providing a summary for those who did not participate.
Also, forward-looking statements, such as performance forecasts and the like, provided in these materials are based on certain assumptions and may differ significantly from actual business results as a result of a variety of factors.
Imaging Products Business
Q. Please tell us the status of sales and procurement for April and May by region.
A. In April, sales volumes of digital camera-Interchangeable lens type were down about 80% YoY. In May, China led other regions as volumes recovered to about 30% lower than last year. However, levels remain depressed in other regions. On the procurement side, things remained challenging through April, but have improved significantly more recently. In Asia including parts of China, disruptions persist. Meanwhile, we have reduced production volumes and therefore have been able to procure enough components to keep up with production.
Q. Given the impacts of COVID-19 and other risks, are there any plans to step up efficiency efforts in the plan to cut ¥50.0B from business costs or the optimization of overseas manufacturing sites?
A. To the extent the current situation continues, we recognize the initial plan will not suffice. Amid an unclear outlook, we are studying additional measures for a number of scenarios, based on a variety of assumptions about the economy and potential changes to consumer values. We have already begun preparing additional measures and plan to execute as appropriate as we discern market trends.
Q. FY2020/3 ended with a result of ¥2.7B in restructuring relevant expenses. That was below the plan of ¥5.0B, correct?
A. The ¥5.0B was a maximum amount, in the event measures to be implemented in FY2021/3 were all implemented within FY2020/3. The ¥2.7B result was close to our initial plan. The restructuring is progressing mostly in line with plan.
Precision Equipment Business
Q. Assuming there is no second wave of COVID-19, is it possible for both FPD and Semiconductor Lithography Businesses to see revenue grow this year?
A. Restrictions on movement have been a major impediment that has impacted shipments and installations in FPD Lithography Business in particular. Some sales may get pushed out into FY2022/3. Furthermore, there is a possible delay for our customers' plants to receive our systems. Therefore, we are taking a harsh view about the business outlook.
Q. In FPD Lithography Business, we understand that business activities have halted in China, which accounts for the lion's share of demand by region. Is it true that the systems which have been suspended to install in FY2020/3 and FY2021/3 will get booked in FY2022/3, instead?
A. Yes, those systems will be pushed out into FY2022/3.
Q. In Semiconductor Lithography Business, are there any changes to investments and demand for 7 nm node at your major customer? How do mask volumes for ArF immersion systems and the like change from 10 nm to 7 nm?
A. Even after EUVL is adopted, we currently expect the market size for ArF immersion lithography systems, including for 7 nm nodes, to be about 100 units, give or take. Meanwhile, mask volumes should decline as existing multi-patterning lithography is migrated over to single-pattern EUVL.
Overall
Q. Would you consider bringing more of the supply chain back to Japan given your experience with the spread of COVID-19?
A. In Imaging Products Business, where we have built out our manufacturing sites mainly in Southeast Asia, we plan to hedge risks and diversify geographically, based on the existing structure. In the BtoB businesses such as Precision Equipment Business, the majority of our tier 1 suppliers are in Japan. Therefore, we see little need to review this structure significantly.
Q. What businesses give you particular hope in terms of technological contributions or business opportunities in a world of post COVID-19?
A. We believe there is demand in society over the long run in the 3 growth areas we identify in our Medium-Term Management Plan. Social distancing will greatly impact facets of society where people come in contact with each other and will trigger a paradigm shift in manufacturing. We will propose solutions where vision systems monitor distancing with people and collaborative robots assist services directed at people, such as nursing care.
In the field of medicine, we will be involved in the manufacture of a MultiStem®, a cell therapy treatment, currently being evaluated in a clinical trial of ischemic stroke in Japan, concerning to increase among COVID-19 patients.
Q. With regard to the factors driving the change in operating profit on page 4 of the presentation, could you provide more detail on the makeup of the approx. ¥6.0B in efficiencies and cost reductions (approx. ¥2.0B in Imaging Products Business and approx. ¥4.0B in Others)? Also, please talk about initiatives this year and thereafter.
A. In Imaging Products Business, we are targeting business costs reduction and in Others, improvement of headquarter efficiency as cost reduction. Moving forward, we will continue to pursue both avenues.
Q. Is the ¥18.0B cost reduction effort progressing well?
A. There is no change to our plan to achieve greater efficiencies in headquarter and reduction in procurement cost within the timeframe of the Medium-Term Management Plan. In the first year of the plan (FY2020/3), results progressed slightly ahead of plan. That said, however, declining volumes in Imaging Products Business have led to concerns about future efforts to reduce procurement costs. We will look to achieve the ¥18.0B target through additional measures aimed at logistic reform, for example.
Q. Please tell us about advertising and sales promotion expenses for FY2020/3.
A. The result for FY2020/3 was approx. ¥19.8B, reduction of about 1/3, primarily in Imaging Products Business, compared to the approx. ¥30.0B used in FY2019/3.
Q. Please tell us about your priorities for shareholder returns.
A. Page 26 of the presentation discusses capital allocation. There is no change to our policy of deploying up to 40% of capital into strategic investments and 10% or more into shareholder returns. Unfortunately, the decline in capital available for distribution has made it difficult to sustain an annual dividend of ¥60.0 per share. Nevertheless, we maintain our policy with total return ratio of 40% or more.
Q. Do you expect free cash flow to turn positive this year?
A. We expect free cash flow to decrease due to the impacts of COVID-19 and the continuing decline in revenue in Imaging Products Business, in particular. We have cash on hand for at least 6 months of operations, so there is little concern about funding operations.