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Europa

Financial Results Conference Call - Q&A Transcript

3rd Quarter Ended December 31, 2019

Date and Time: 6:30-7:30 p.m. Monday, January 27, 2020

Please note that this document is not a direct transcript of the Q&A session from the conference call, but is a simple summary including additions and corrections at the discretion of the company. The results and forecasts are forward-looking statements determined by the Company based on currently available information that may include risks and uncertainties. Please be aware that actual results may vary significantly due to various factors.

1. Please tell us about the factors impacting consolidated operating profits for Q3 (9 months) of the fiscal year ending March 2020, via comparison with the previous fiscal year (Q3 of the fiscal year ended March 2019).

The factors impacting operating profits will be:

-Fixed costs +5.0   billion yen
-Product mix +5.0   billion yen
-Sales volume variance -14.0  billion yen
-Reactionary drops of earnings from oligonucleotide contract manufacturing by changes in our customer's situation on new drug development and part of the support fee in the technical partnership contract with the Hangzhou Jinjiang Group -11.5  billion yen
-Impact of foreign exchange -6.0    billion yen
-Price reduction offset by streamlining, etc. -0.5    billion yen
-Other -2.0    billion yen
(Majority is a reactionary drop of sales of subsidiaries in FY2018)

This all combined to give a loss of 23.9 billion yen.

2. Please tell us about the factors impacting consolidated operating profits for Q3 (3 months) of the fiscal year ending March 2020, via comparison with the previous fiscal quarter (Q2 of the fiscal year ended March 2019).

The factors impacting operating profits will be:

-Impact of foreign exchange +1.0   billion yen
-Sales volume variance -5.0    billion yen
-Product mix -1.5    billion yen
-Fixed costs -1.0    billion yen
-Other -0.5    billion yen

This all combined to give a loss of 7.1 billion yen.

3. Please tell us about the outlook for Q4 and the next fiscal year concerning non-TV display related products for Information Fine Materials. And also please explain factors of reduction from Q2 to Q3, concerning Optronics operating income.

In regard to polarizing films, smartphone and similar production was sluggish in Q4 during previous years. A slowdown is predicted for this fiscal year as well. For the next fiscal year and onward, numerous business environment factors are uncertain, therefore it’s difficult to forecast at present. Optronics operating income was pushed forward to the Q2 of the current fiscal year, although production of polarizing films for smartphones peaked in the Q3 every year. We recognize that this was due to the impact of the U.S.-China trade friction and other factors, including the front-loading of production.

Looking at the situation for this fiscal year, while shipments of products for OLED smartphones were lower than expected, shipments of products for LCD smartphones were higher than expected.

4. While a variety of shifts are anticipated in the business environment for smartphone products, please tell us how to address these in the medium to long term.

The number of smartphones produced is not expected to grow as rapidly as in the past. However, even in such circumstances, changes to shape and other elements are anticipated through further display processing. Over the medium to long term, we anticipate that these changes will continue to occur, and we will proceed with preparations for technological developments and other measures to respond to these changes and strive to continue generating added value even in an environment where production volumes are unlikely to grow.

5. Operating income for ITO film is expected to fall even more next fiscal year. Please tell us about future management of production equipment for ITO film.

As for production equipment, we are considering converting them to new themes. Metal tone decorative film is a representative example of the new usage themes. The need to use metals to create a luxury feel is increasing. With the increasing use of 5G, the use of metals in the exterior of smartphones is becoming increasingly difficult. Demand for decorative films, which produce the same luxury as metals, is rising. We are considering the use of these decorative films for these new themes.
Although we do not currently expect to record expenses associated with this rationalization in the current fiscal year, there is a possibility that expenses will be incurred from the next fiscal year onward.

6. Please tell us about qualitative factors concerning Q4 performance forecasts by segment for Industrial Tape, Optronics, and Life Sciences.

In the Industrial Tape business, the achievement of the 4Q forecast is expected to be difficult due to sluggish market conditions for electronics-related materials and continued weak global automobile production. Optronics remained strong in Q3, and is expected to exceed Q4 forecasts even if structural reform expenses are included. Life Sciences is expected to remain at roughly the same level as the forecast.
Furthermore, with the spread of novel coronavirus, we are on guard against potential impacts on our own business.

7. Please tell us about when Transportation results are expected to begin recovering.

It is difficult to predict when demand will recover, such as the number of automobiles manufactured. Although we do not anticipate a substantial decline in demand due to a certain level of replacement demand, we are currently seeing a price-conscious purchasing orientation in anticipation of the next generation automobiles. Furthermore, the trend toward reduced parts counts per vehicle is also growing stronger. We have also commercialized technologies for autonomous driving and other applications, and some models have begun to be equipped with these technologies. We expect that new technologies such as autonomous driving will spread widely in the future.

8. Please tell us how you are considering M&A.

We are constantly considering M&A. Target companies are selected from capital cost and other perspectives, and we consider M&A with companies that generate more added value when paired with Nitto.

9. Please tell us the reasons behind the current repurchase of 50 billion yen of treasury stock.

We currently hold roughly 300 billion yen in cash on hand. Of this amount, JPY50 billion was used for the repurchase of treasury stock, taking into account working capital, M&A, and other factors.

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