Nikon Corp

I am Tokunari, CFO of the company. Thank you very much for coming to our financial results meeting despite your busy schedules. I have three points. Action to improve PBR, which is below 1, in response to the request from the Tokyo Stock Exchange. Financial results for the year ended March 31, 2023, and the forecast for the year ending March 31, 2024. First, on the request from the Tokyo Stock Exchange. Nikon sees improvement of PBR, which is below 1, as an important management challenge. In the medium-term management plan, which started last year, we set an ROE target that is conscious of cost of equity. The ROE over the past two years was over 7%. As the FPD lithography system business cycle will hit the bottom this year, we expect a decline in ROE, but we expect recovery next year. As for the reasons for PBR below 1, as PBR is equal to ROE multiplied by PER, we believe that both the lower expected ROE due to lower profits this fiscal year and the lower PER compared to our competitors are the causes. In particular, we recognize that the challenge is to quickly launch growth businesses in order to improve PER. Based on this recognition of the current situation, Nikon will promote both investment in sustained growth and shareholder returns to ensure that we achieve the financial targets set forth in the medium-term management plan. Specific measures are on the material. First, in imaging products business, we will launch new products, including the new Z8 mirrorless camera announced yesterday in order to achieve earnings recovery and ROE improvement next year. In the precision equipment business, starting next February, Nikon will expand worldwide sales of the S625E ARF immersion lithography system, which achieves the highest productivity in the history of Nikon's lithography systems for the semiconductor market, which is expected to grow over an extended period. We will also strive to enhance disclosure of information to investors about our growth businesses, in particular our rapidly expanding healthcare business and the digital manufacturing business, which executed the SLM acquisition. I will talk about shareholder returns later. ROE will be at a standstill this fiscal year, but as President Umatate will explain later, we feel that we have made satisfactory progress in the first year of the midterm plan. As seen in top-line growth, business is expanding steadily, and we will steadily implement various measures to achieve revenue of 700 billion yen, operating income of 70 billion yen or more, and ROE of 8% or more in the final year of the medium-term management plan. Next I will talk about capital allocation, which will be the basis of investment in sustained growth and shareholder return. In the mid-term plan, the policy is to allocate between 700 billion yen and 800 billion yen of cash and deposits for distribution in the ratio shown on the right, while maintaining the equity ratio in the upper 50s, as you see on the left. The areas shown in yellow are actual allocations last year. For example, in the upper right, strategic investments, 88 billion yen was allocated for the acquisition of SLM Solutions in Germany. The total allocation for strategic investments R&D and capital expenditures is approximately 90% of the total, and the policy is to use capital primarily for growth. This framework remains unchanged, but we intend to flexibly implement share buybacks in the future with additional cash and deposits to be generated from the sale of cross-share holdings and other activities. This slide shows specific shareholder return measures. Last year, we increased the year-end dividend by 5 yen because the performance was better than what was expected at the beginning of the fiscal year. From this fiscal year onward, we intend to increase the dividend towards 60 yen for the final year of the medium-term management plan. Furthermore, we will flexibly implement share buybacks of 30 billion yen or more during the medium-term management plan period and will also continue to consider strategic investments and M&A. Now let me talk about the relationship between corporate value, officer compensation, and sustainability. Nikon's officer compensation system is designed to be linked to corporate value with more than half of officer compensation linked to performance. Specifically, officer bonuses are linked to ROE and operating profit, while stock-based compensation PSUs or performance share units are linked to sustainability-related KPIs and other factors. Sustainability for Nikon means creating social value through core technologies. This is central. We are also actively engaged in greenhouse gas reduction and diversity, equity, and inclusion, and have received higher ratings from external evaluation organizations than our peers. We will strive to earn the appreciation of the market by firmly implementing these medium-term management plan strategies and promoting both investment in sustained growth and shareholder returns. Now let me talk about the financial results last year. Revenue was $628.1 billion, operating profit $54.9 billion, profit attributable to owners of the parent $44.9 billion, which posted growth in both revenue and profit. Over the previous year, all segments but the precision equipment business grew both revenue and profit. Annual dividend will be 45 yen, which is 5 yen higher than the previous forecast. In the previous year, we acquired 21.45 million shares at 30 billion yen, and we cancelled all the stock including the 5 million treasury stock we already had. What I just explained is in table format here. The weekly yen contributed significantly to the increase in both revenue and profit, as you see on the right bottom side. Slide 12 is performance by segment, and excluding precision equipment business, we saw increase in both revenue and profit. In particular, the imaging products business posted a 2.2-fold year-on-year increase in operating profit to 42.2 billion yen, and the healthcare business posted a 2.6-fold increase to 11.5 billion yen, both significant growth, with healthcare recording record high revenue and operating profit. Now let me explain by business segment. First, in the imaging products business, both revenue and profit increased significantly due to higher average selling prices for both bodies and lenses, as well as the impact of foreign exchange rates. Operating margin landed at a high level of 18.6%. Slide 14 is the precision equipment business. This is the only business segment out of five which posted reduction in both revenue and profits. Revenue from FPD lithography systems declined as customers reduced capital investment in response to falling panel prices, while revenue from semiconductor ARF lithography systems were firm and increased, but overall revenue and profits declined. In the healthcare business, revenue increased 35% year-on-year, and operating profit was 2.6 times. The target for the final year of the medium-term management plan of 90 billion in revenue and 10 billion in operating profit was achieved three years before schedule. Life science solutions, mainly biological microscopes, and eye care solutions, mainly retinal imaging equipment, both expanded.

Slide 16 is the component business. AUV-related components, other semiconductor-related optical parts, encoders for robots performed well, resulting in increased revenue and profit. On the other hand, contracted additive processing company in the U.S., MOF3D business was poor. We reviewed its position and recorded an impairment loss of 3.9 billion yen. From this fiscal year, MOF3D will operate as a subsidiary of newly established digital manufacturing business. I will touch upon the details later. The last segment is industrial meteorology and others. Others include the newly acquired company SLM Solutions. Revenue increased due to strong sales of video measuring systems and X-ray and CT systems in the industrial meteorology business and also due to newly consolidating SLM Solutions. Operating profit increased despite a three-month amortization of intangible assets associated with the acquisition of SLM solutions. Next, I would like to explain the outlook for the current fiscal year. At the bottom of this page, please find the assumed exchange rate, 130 yen to a dollar and 140 yen to the euro. At the top, for the full fiscal year, we forecast ¥665 billion revenue, operating profit ¥43 billion, and profit attributable to owners or parents ¥35 billion revenue increase while operating profit decline. The increase in revenue is due to the solid performance of existing businesses and also due to SM Solutions' revenue to contribute for full year. Profit decline is mainly due to the FPD lithography business in the precision equipment business because a new digital manufacturing business starts with an operating loss. We plan to increase the annual dividend by 5 yen to 50 yen per share, anticipating a recovery next fiscal year and onward. Please go to slide 20. A list of the main forecast highlights in numbers this fiscal year with year-on-year changes. Lower right, we expect yen to appreciate from last year, which will have a negative impact of 2.4 billion yen on operating profit. Starting from this fiscal year, we partially changed our reporting business segments, and as you can see on the right side, we have a new segment, Digital Manufacturing Business Unit. This segment consists of Industrial Meteorology Business Unit and a newly established Advanced Manufacturing Business Unit. The MOF 3D and other material processing business was previously in the components business and SLM solutions, which was in others, and also the material processing research and development by next generation project division will be combined to form advanced manufacturing business unit starting from this fiscal year. Slide 22 shows our forecast for this fiscal year based on this new reporting segment. I will explain five segments separately in the following slides. First, imaging products business. As the digital camera market continues to shrink, Nikon will continue to focus on mid- to high-end models for professionals, aiming 700,000 units of sale, the same level as last year, by introducing new products such as Z8. Operating profit is expected to decrease as the benefit of weaker yen to dissipate and also due to higher sales promotion expenses with market normalization. OP margin is expected to be in the 15% range well above the mid-term plan forecast, showing that imaging products business is solid. Slide 24 summarizes Nikon's involvement in the semiconductor manufacturing process. Nikon sells equipment systems, shown at the top of this page, and provides components, shown at the bottom of this page, equipment manufacturers to integrators. The three segments of precision equipment, components, and digital manufacturing are the three businesses in the semiconductor-related area. I will now explain one of these segments, precision equipment business. This fiscal year, revenue is expected to slightly increase to 210 billion yen, while OP is expected to decrease significantly to 15 billion yen. FPD lithography system is the bottom of the market cycle, and customer capex is delayed, and therefore, as you can see lower left, sales will drop sharply from 29 units last year to 12 units this fiscal year. Although semiconductor lithography system revenue and profits are expected to grow on expanded sales to customers other than our core customers, FPD sales drop is larger and therefore the overall profits are going to decline. Last year, the healthcare business OP exceeded 10 billion yen for the first time, especially life science performed very well. Considering the FX impact, OP will be 11 billion yen this year, almost the same level as last year. Slide 27 shows a component business. Robust revenue is expected for EUV-related components and optical parts and components, but overall revenue is expected to be flat year-on-year due to lower sales of customized orders other than semiconductor-related products. OP is to decline impacted by the LAL and the collection of upfront investment in semiconductor-related component products. to enter mass production phase, but the total component business to maintain high OP margin over 35%. Finally, let me talk about digital manufacturing business. Revenue is expected to reach 64 billion yen with the full-year contribution from SLM Solutions, which was acquired last fiscal year. On the other hand, we expect an operating loss of 9 billion yen for the entire business as the newly established advanced manufacturing business will start the year with an operating loss. Let me explain more in detail. The left bar chart shows the breakdown of OP for the previous fiscal year and this fiscal year based on new reporting segments. The top green color, the industrial meteorology business, is expected to see a slight decrease in profit due to upfront investment. Dark blue amortization of intangible assets with SLM Solutions acquisition is expected to amount to 3.6 billion yen this fiscal year. Light blue shows advanced manufacturing division, including SLM Solutions. We forecast operating loss again due to the heavy burden of research and development expenses. Yellow is the integration cost of SLM Solutions acquisition, and orange is 3.9 billion yen impairment loss on MOF 3D recorded in the previous year. Both are one-time cost. The digital manufacturing business will start with an operating loss of about 9 billion yen the first year, but it is a business with a promising future, and we aim to achieve profit at an early point. The background of MOF3D's impairment is shown in the upper right, and public information by SLM Solution Business Frankfurt lists the companies shown in the lower right. According to the company's disclosure, SLM's non-consolidated performance is expected to improve steadily. Finally, I would like to summarize today's presentation. In the fiscal year, last year, fiscal year, both revenue and profits increased, and we almost achieved earnings forecast. As it was the first year of the medium-term management plan, we had a very good start. In this fiscal year, as the FPD's business cycle is at its bottom, we expect the precision equipment business to decline, and as a result, the company total OP is forecast to go down as well. However, the imaging... Healthcare business and component business are performing very well, and we expect our performance to recover in the next fiscal year and onward. Against this drop, we have decided to increase dividend this year to achieve 60 yen per share in the final year of our medium-term management plan. By increasing both investment for growth and shareholder returns, Nikon will aim for further growth with the support of shareholders. We'd like to ask investors and analysts for your continued interest and understanding and support to Nikon.

My name is Uma Tate, the president of the company. Thank you very much for participating despite your busy schedules. I will talk about the progress in the first year of the medium-term management plan, which started last year. On the details of the plan itself, please refer to the Investor Relations section of our homepage. Please turn to slide 2. First, I will talk about the outline of the plan. This medium-term management plan covers the four years starting fiscal 2022. First, we defined Vision 2030 and towards the realization of it, we identified the target where we will be in 2025 and developed the strategy and measures. Where we will be in 2025 is providing products and services optimized to meet our customer needs. we will move away from end product dependent business and strengthen solutions which combine service and components. Of the five businesses, we will stabilize the two main businesses, imaging products business and precision equipment business, and expand the three strategic businesses, healthcare components and digital manufacturing. Please turn to page three. The results for 2022, the first year of the plan, as Mr. Tokunari mentioned, posted increase in both revenue and profits, which was higher than planned. On the right-hand side is the latest forecast in operating profit by business. The solid line in yellow is the latest forecast of total operating profit, which is a profit and losses for each business minus management-based cost. There is another line in dotted line, which is the operating profit forecast as of start of the medium term plan period. As you see, for fiscal 2023, Although our outlook at the time of start of the medium-term management plan was that it would be difficult, it actually turned out to be slightly above the medium-term management plan projection. Please turn to slide 4. The revenue for the first year of the plan fiscal 2022 was higher except for the precision equipment business. The share of strategic businesses, which are businesses other than imaging products and precision equipment business, in operating profit for the first time exceeded 30%. Sources of profits are diversifying. The service and components business, which is a key point in the medium-term plan, is also growing steadily, especially in optical parts and EUV-related components. We aim to achieve growth in the digital manufacturing business following the healthcare and components businesses and achieve the target for fiscal 2025. Please turn to slide 5. This is a plot of the five businesses, revenue and profit. The horizontal axis is revenue, the vertical axis is operating margin, and the size of the bubble is operating profit. The dotted circle is the actual numbers for fiscal 2021, the year before the medium-term plan, and the circle in solid is the actual number for fiscal 2022, and the filled-in color circles are the targets for 2025. We have the five businesses, and in the middle, we have the company-wide average plotted. First, with regard to the two main businesses shown on the right, the precision equipment business fell short of expectations due to the impact of the external environment and other factors, but the imaging products business posted a large increase in operating profit due to profit due to strong sales of mirrorless cameras and a tailwind from foreign exchange rates. Meanwhile, with regard to the three strategic businesses on the left, the healthcare business significantly outperformed our expectations and generated profits that even exceeded our 25 targets. The components and digital manufacturing businesses are also making steady progress towards their fiscal 2025 targets. Thus, we aim to achieve 700 billion yen in total sales revenue and promote resilient portfolio management while also focusing on profitability with an operating margin of 10% or more. In the subsequent slides, I will very briefly review the first-year progress of the two businesses in the quality of life area, followed by the three businesses in the industry area. Please turn to slide 6. Imaging products business achieved a record high operating margin as structural reforms and a shift to mirrorless products improved profitability. The contest business has started smoothly. The healthcare business has greatly expanded its customer base, mainly in the private sector, and has made a leap from turning to profitability for the first time in fiscal 2021 to more than 10 billion yen in operating profit in a single year. Based on the analysis and evaluation using microscopy technology cultivated over many years, we are aiming for further growth, including the provision of new values such as contract cell development and manufacturing.

Please see slide 8. In the precision equipment business, semiconductors performed well with stable customers and service expansion, but FPDs were affected by a major market adjustment. In addition, as of April 1st of this year, the FPD business unit and the semiconductor business unit were merged into the Precision Equipment Group. This will enable us to flexibly manage the resources of the two businesses and to respond more dynamically to future market changes, while also strengthening initiatives for the future, such as digital lithography systems. Please refer to slide 9. The component business expanded its business by supporting the sophisticated needs of a wide range of customers in semiconductor-related fields. We will seize various opportunities such as EUV-related businesses by leveraging our core competence in precision and optics. Please see slide 10. Lastly, the digital manufacturing business. In order to promote the full-scale expansion of our material processing business, we acquired SLM Solutions of Germany, the largest acquisition ever for Nikon, and established the Advanced Manufacturing Business Unit as of April 1 this fiscal year. For the first time, Nikon established a business headquarters in the U.S., laying the good foundation for the global business development in Japan and the U.S. and Europe. In addition, we are making progress in introducing laser radar and X-ray CT systems of the Industrial Meteorology Business Unit into customers' production in-line. Please go to slide 11. This page is a summary of the year 1 business operations. Of the two main businesses, the imaging business has achieved significant operating profit growth and will continue to strengthen its product lineup of mirrorless cameras, among others. In the precision equipment business, we aim to achieve stable earnings by integrating two businesses to create a business structure more resilient to changes. In strategic businesses, in addition to the rapid growth in the healthcare and components business, we made strategic progress for the future in the digital manufacturing business. For FY2023, it's the mid-year of our mid-term plan. While maintaining the strong performance of the imaging and healthcare businesses, we will continue our efforts to realize our FY25 goals while paying attention on the precision equipment business with market slowdown and newly established digital manufacturing business. Please refer to slide 12. I would like to explain the status of capital allocation. Nikon recognizes that our shareholders and society expect us to grow as a technology company, and we will allocate most of our cash and deposits for distribution to growth. By FY20, out of the total 700 to 800 billion yen resources, our policy is to allocate about 30% to strategic investments such as M&A and human capital, a little less than 40% to research and development, and about 20% to capital expenditures, all of which were done successfully in the first year. In terms of shareholder returns, in addition to 30 billion yen share buyback last fiscal year, we will increase dividend and conduct opportunistic buybacks of more than 30 billion yen. We will continue to enhance both growth investment and shareholders' returns. In addition, we are also promoting human capital management and others to strengthen our management base. Please refer to slide 15 for details. Finally, I would like to summarize. Nikon hopes to be a key technology solutions company in a global society where humans and machines co-create seamlessly for 2030. Toward this vision, we work together with customers to truly anticipating customer needs, cooperating with partners and deliver solutions, integrating end products, service and components. We are committed to contribute to the sustainable society through our business and technology, leading to sustainable enhancement of corporate value and meeting the expectations of all stakeholders. We look forward to your continued support. Thank you very much for your kind attention.