Edited Transcript of 4902.T earnings conference call or presentation 26-May-20 9:00am GMT

Tokyo May 28, 2020 (Thomson StreetEvents) — Edited Transcript of Konica Minolta Inc earnings conference call or presentation Tuesday, May 26, 2020 at 9:00:00am GMT

Konica Minolta, Inc. – President, CEO, Representative Executive Officer & Director

Shoei Yamana, Konica Minolta, Inc. – President, CEO, Representative Executive Officer & Director [1]

Now allow me to explain Konica Minolta’s consolidated financial results for FY ’19 ended in March 2020. The points I would like to convey to you are shown on Page 1: First, FY ’19 performance overview; secondly, our FY ’20 management policy; and lastly, I will cover the post-COVID-19 situation and the company’s view beyond it.

Now please turn to Page 2. As shown here, full year revenue was JPY 996.1 billion. Operating profit was JPY 8.2 billion, and profit attributable to owners of the company became minus JPY 3.1 billion. Revenue for the fourth quarter is shown in the top right. If we are to exclude the external and special factors such as the COVID-19 outbreak, the effective revenue declined only 1% year-on-year. This was caused by major restrictions in our sales activities. It was not necessarily driven by a loss in demand or lower competitiveness on our side. Full year revenue is the same, showing down 1% in real terms. The first quarter hit the bottom. And since then, we have been on the recovery trend. The revenue in the new business has also grown substantially.

Operating profit for the fourth quarter is also shown in the top right. In real terms, the profit grew 34%. It actually surpassed the forecast for the second half we made in the end of the first half. As for the full year performance, besides the delayed progress and in terms of the cost reduction, we were affected by the external and special factors. Operating profit went down significantly, making the profit attributable to owners of the company for the year posted a loss. Additional structural reform costs for the second half were recorded as planned.

Page 3 shows the details by segment. I appreciate if you could refer to this page later.

Next, Page 4. This page shows the details of the impact from COVID-19. Breakdowns are shown of the JPY 23 billion on revenue and JPY 11 billion on profit for the entire company. The impact on supply aspects was rather small, thanks to the quick efforts we made for recovery. That said, though, we had a great impact on sales from the lockdown first in China in February and next in Europe and the United States and Asia, in general, in March. 70%-plus of our business impact came from the printing equipment area, and we were not able to install the contracted equipments. The fact is that we have a larger business portion in the United States and Europe, thus resulting into a big loss.

Next, Page 5 and 6. The graphs from there show the change in sales on the quarterly basis in real terms vis-à-vis our revenue and operating profit. The bottom on Page 5 shows the change in Office Business revenue. As I mentioned earlier, due to the delayed contribution from the new office products, we had a sluggish business. But it recovered and has remained stable since then.

Page 6 on operating profit. It shows the same trend as the revenue. The fourth quarter operating profit, excluding special factors, shows JPY 17.5 billion. This is an increase of JPY 4.8 billion year-on-year basis. Professional Print was JPY 5 billion, showing a recovery in this area. Industrial Business materials and equipment, which has traditionally enjoyed a high profit margin, was JPY 6.3 billion. Thus, the company was able to increase its profit by growing high value-added business opportunities. Another factor for the growth in the real term is the reduced loss. In the new business, the company is now pushing on the mid- to long-term basis.

Page 7 shows the details and as for the real ups and downs in the operating profit. Here, I would like to go into some more details to explain. First, our Office Business. The numbers you see in there is showing a deterioration of profit mix. This was caused by the limited effect of segment 4 new products. However, may I remind you that during this period, the global unit sales share of A3 color products actually grew by 19.7% or up 1.2% year-on-year despite the fact that overall market has shrunk significantly due to the COVID-19 impact. The new product momentum accelerated in the third quarter with some large deals in Europe. Particularly in Europe, A3 color business grew the units sold. The share was 24%, up 2.4% year-on-year. We maintain our #1 position.

Professional Print. Here now, we were able to recover its profit. IQ-501 customer values became visible and were realized. Color MPP and LPP in the segment enjoyed over 40% market share, so we were able to maintain its #1 position worldwide. This business sustained its improvement from the first half. High-end HPP launched in the fourth quarter and will make its PV or the print volume contributions in FY 2020 onward.

Next, Healthcare. DR in the United States has further matured, but we observed a growth in sales in Europe, Asia and South America. We had an expansion in ultrasound business in the fourth quarter. Compared with the third quarter, we had a good growth in the digital X-ray dynamic digital radiography in the fourth quarter. This is our unique technology, and our competitiveness is further advancing. And this will become a driver for the growth for FY ’20 and onward.

Industrial Business shows the positive profit numbers in real terms. In Performance Materials, particularly, we succeeded in shifting our product portfolio toward high values. In the third quarter, some customers had inventory adjustment. But with that done, now we have gained those numbers, as you see here in the fourth quarter.

In regard to the new business, the loss became smaller, thanks to bio-healthcare business. And on top of that, we were benefited by Workplace Hub. Talking about the bio-healthcare, particularly in genetic diagnosis, a core field for Ambry Genetics, showed continued revenue growth. For this and as you see there in the right side, we enjoyed expanding the deployment of RNA testing. Besides this RNA testing expansion, we started our consulting business for our lab in Taiwan. Furthermore, we have a program called CARE for the healthy people. We completed a necessary M&A for IT in the fourth quarter.

Though it is not mentioned here, if I may, I would like to touch upon Workplace Hub briefly. The number of installations did not come in as we had planned. But finally, we completed our platform version 1.9. The third-party applications can now run on this platform. This is an open interface management. Finally, we made it. Here, I would like to explain that our original unit price per customer was $1,250 per month. But it became $2,000 or up to $2,500 per month, thanks to the managed IT capability we added. And with the relevant MEP solutions together, demand in price is now becoming $5,000 per month. So far, I have touched upon the major points and details for the fourth quarter.

Now please turn to Page 8. With the section I have just explained for FY ’19, it is quite regrettable for me to report that the year-end dividend became JPY 10. And as for directors’ compensation, as we announced in details at 3:00 p.m. in the company website today, in light of the big decline in the financial results as well as the reduction in the dividend, top management decided to voluntarily return a portion of their compensation.

In this section, I will explain FY 2020 management policy. First, Page 10. I have to say that at this moment, it is rather difficult to calculate reasonable earnings and dividend forecast for FY 2020. So we treat them as undecided. But going forward, we plan to announce our forecasts properly when it become possible to calculate them. That’s it, though.

On the following page, 11, we have indicated possible reasons for ups and downs with specific numbers for operating profit. Though the company is now faced which such a situation, on the following page, the company has indicated its assumption with specific numbers. As shown in the A bracket, FY ’19 normalized operating profit, excluding the special factors, is JPY 33.8 billion, and JPY 15 billion was the planned cost reduction and the structural and other effective measures we started in FY ’19. Next to the right is the business upsides in FY ’20 as we had planned since FY ’19.

As for the negative factors, we are assuming JPY 40 billion to JPY 50 billion possible impact from COVID-19. So this impact could be well beyond JPY 11 billion. We still have JPY 2 billion on impact coming from the U.S.-China trade friction and tariffs. With these negative numbers, we are considering emergency measures, including reduction in fixed cost. This will amount to over JPY 20 billion in its impact.

Now I’m happy to explain each factor in details a little bit starting from Page 12. Here first, now I’d like to go through the points on the COVID-19 impact, as much as JPY 40 billion to JPY 50 billion. This shows the major factors for each business on the quarterly basis. Unfortunately, we will have the biggest impact in the current first quarter. Delays in installations in March is a factor affecting us slowly, but delayed and restricted sales activities for new opportunities will have much more impact.

In the second quarter, we believe economic activities in general will improve. But in some materials business, we may still have an impact coming from possible inventory adjustment among some customers in the second quarter. Moving into the second half, we are assuming that in businesses and other than the printing equipment, economy will firmly recover. Even in the printing equipment sector, the economy will improve in the second half. But when it comes to the office printing volume, we are afraid that the recovering even in the second half could be rather slow. But here, I need to emphasize that recovery pace in terms of the printing volume is slower, particularly among big enterprises compared with our core client customers, namely in our SMBs.

Next, Professional Print. CRD or the centralized reprographic department and our commercial printing as a whole may slow down. But when it comes to our focus, namely digital printing or industrial printing, those label printing will grow in volume. Konica Minolta is not necessarily putting too much emphasis on CRD of those companies.

Next, on Page 13. Five priority policies for FY ’20 are listed here. I would like to explain each policy one by one.

First, on Page 14, the first policy, sustainable improvement and strengthening profitability. At the top, envisioned annual effect from cost reduction, which I explained in the first half, including improvement of productivity and services, is approximately JPY 6 billion in FY ’20. And structural reform to accelerate the transformation of business portfolio will have the effect of approximately JPY 9 billion, resulting in a total effect of JPY 15 billion.

Lower half of the page shows the priority measures, which are the upside for our business. This corresponds to the effect of JPY 5 billion, which I explained on Page 11. Office will contribute throughout the year in FY ’20 by switching over to new products. We can provide one-stop solutions for IT management and security measures for customers by managed IT service, and we’ll strengthen our business in managed content service by reforming paper-dependent workflow process and productivity improvements.

In Professional Print business, new HPP products launched in the fourth quarter and KM-1 products, which are digital inkjet printers for commercial printing, contributed from first half of FY ’20, and new LPP products will be introduced in second half. In addition, we will strengthen consulting services for identifying and resolving printing issues. In Industrial Business, measuring instruments capture the wave of display demand and deepen regional strategies. In Performance Materials, FY ’20 will be a year to contribute to earnings by developing the business for new applications. In Healthcare, we will accelerate the dynamic digital analysis business and strengthen medical IT. In new business, we’ll move full-scale toward expanded top line and control SG&A.

Page 15 shows the next policy, securing liquidity. We will place great importance on cash and conduct comprehensive cash flow management from both further securing liquidity and engaging in business operations. We will further secure liquidity. We already raised JPY 85 billion in April. In addition to the unused commitment line of JPY 100 billion, we have entered into agreements for a new commitment line of JPY 200 billion. With this, we have secured adequate liquidity for 6 months’ worth of sales to ensure we will continue and strengthen our business.

In our business operations, we will discard the idea of safe inventory and conduct comprehensive inventory reduction, careful selection and limitations of capital expenditure and investment, reconsider desired state of all operations and pursue overall efficiency improvements.

On Page 16, the third policy, comprehensive reduction of fixed costs. I said earlier that we aim for effect of more than JPY 20 billion. Work style will be transformed post-COVID-19. We have been promoting workplace reform, but we’ll shift from face-to-face to remote sales and services and DX operations. We will promote use of RPA and optimize personnel assignment and administration of expenses and reduce travel expenses and rent globally.

The next measure is improving capital productivity. We will make full use of Konica Minolta’s ROIC and inventory reduction, drastic improvement in CCC and curb CapEx. We will make yielding results of past investments, the top priority in M&A, and focus upon projects that are essential for future growth. We will review our business portfolio, including considering the possibility of carving out noncore unprofitable businesses. As for organizational structure, we focused upon autonomous flexible action and activated company-wide protective and proactive task forces and faced this unprecedented crisis by utilizing a mixture of top-down and bottom-up approach to change threat into an opportunity.

Page 17 shows our initiatives to address COVID-19 by businesses to support teleworking of SMEs and consultation on labor and granting aid applications by software and activities at Kinko’s. In Healthcare and bio-healthcare, we are contracting COVID-19 testing in the United States, which we would like to expand in Japan. Please read the details in your leisure time.

Now let me move on to the post-COVID-19 situation. Please refer to Page 19. New work styles and ways of communication are taking root. We are confident of the appropriateness of our business strategy. However, as the time horizon accelerated, we have to increase the speed of implementation. If I’m to explain the headwinds and tailwinds for us post-COVID-19, the headwinds for us is that clearly, the slow recovery of print volume or the pace of recovery is more challenging than expected. As customers are mainly SMEs, it is a mild headwind, but we have to recognize that it is a headwind for us.

On the other hand, there are tailwinds as well. There are 5 tailwinds, including digital workplace, digital printing and imaging IoT, as shown on Page 19, and health care and industrial businesses, as shown on Page 20. I’ll explain each one of them referring to the following slides.

On Page 21, the first one, digital workplace is shown. It is illustrated by different maturity levels. First, environment, making it possible to work at any time without being bound to paper, connected IT, that is the first stage. The next is environment, making it possible to work anywhere, connected work, we are strengthening this service. The next stage is connected people, environment, making it possible to work with anybody, collaboration inside and outside company, knowledge management and support for decision making. Print-less is sure to happen. We will offer digital workplace to our customers, depending upon their maturity level, and maximize their lifetime value, so that COVID-19 will be a tailwind for us against the backdrop of going print-less.

The second is digital printing on Page 22. Digital printing is important in the post-COVID-19 era. It is essential for us to support DX transformation of printing companies. On-demand printing will contribute to resolution of global environmental issues. By offering many products for on-demand printing, we have been in the genre-top position in automatic inspection functionality, high image quality printing and decoration printing. With on-demand production, we offer end-to-end production system all the way to post-press, improving efficiency of the overall production processes, visualize quality and operational status and support the DX of our customers.

Further, as written in the middle of the page, we use feeling evaluation for visualization of printing effectiveness and value and propose standardization and specification. In addition, as written on the right-hand side, in the field of marketing, smart packaging to support design that sell well and higher value-added, incorporating IoT in packaging to add higher value for customers.

Page 23, Healthcare. Contribute by risk diagnosis in healthy people and drug discovery support services for the benefit of humankind that coexists with viruses. Ambry is providing genetic testing for cancer patients. However, with COVID-19, infectious disease prevention and health management program that provides safety and security to employees will be launched in the United States in June as a broad CARE program. What it entails is, as written below, online counseling using AI chatbot; high-precision molecular level diagnostic services, tapping on Ambry’s genetic capability to conduct PCR testing and using Konica Minolta’s molecular analytics technology to conduct antigen and antibody testing; and the patient portal telemedicine, combining all these as a program.

Another field is supporting drug discovery. Establishment of image database to support R&D of COVID-19 therapeutics through industry-government-academia collaboration from May using the image base held by Invicro. As shown on the right — well, at the bottom, we will conduct analysis using AI in collaboration with Johns Hopkins University and Microsoft.

On Page 24, Industrial Business. PC, tablets, foldable smartphones, VR, automotive application, various displays will be expanded in the post-COVID-19 era. Utilizing our original ultrathin film production technology, we’ll maintain close to 20% operating profit margin, which currently stands at 18%.

Lastly, imaging IoT. Konica Minolta started to offer solutions for body surface temperature with thermal cameras using AI analysis. This contributes to entry point prevention of infection inside buildings by body temperature measurement, facial recognition and ensuring social distancing.

Lastly, on Page 26, employ prediction by means of visualization of invisible risks, data accumulation and analysis to contribute to a safe, secure society by preventing risks that invade people and society by stealth. Our imaging IoT will contribute to the human society in medical treatment, caregiving, security, occupational safety and key infrastructure monitoring.

So far, I have explained the post-COVID-19 world. I am convinced that our strategy to transform our business portfolio is the right one. I have clarified what are tailwinds for us. There are headwinds for us as well, but we will accelerate the speed of transformation to offset the impact of headwinds in FY ’20. We will guide ourselves against headwinds, but we will take proactive mid- to long-term measures.

This concludes my presentation on FY ’19 results and the management policy for FY ’20 and beyond. Thank you for your attention.

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

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