1/22

I'd explain about our financial results for a Q2 FY2020 ending in March 2021.
The main points are here. FY2020 first half performance overview Q1 to Q2 and monthly changes and features. Then the Q3 FY2020, the targeted profit structure. And FY2020 full year revenue forecast and the priority initiatives. What are the basic policies and target profit levels? And with that in mind, the policy on shareholder returns and dividend forecast in FY2020.

2/22

3/22

We had revenue of ¥211.5 billion, operating profit of negative ¥5.2 billion, and profit attributable to owners of the company negative ¥4.9 billion in Q2.
Decrease in revenue YoY was 28% in Q1 but shrunk to 17% decrease in Q2. By business, measuring instruments increased in revenue while IT services remained flat YoY. Other businesses QoQ revenue increased in a big way. By region, China had big increase in revenue and Europe saw recovery to a little less than 90% of the prior level, and the Japan and the United States had recovered to a little less than 80% of the prior level.
As for the operating profit, as we had made assumption in the Q1, we were able to recover to that level. And in September, the profit on monthly basis as a company overall is in the black. And I go into more detailed explanation about the profit structure later on. But the product mix is affected from North America and it is still not how you like to see it, and the inventory cut in the production adjustment, we took some time to do that in the Q2. So that was reflected in the gross profit and we would like to implement our measures so that the SG&A continued to be held down under ¥100 million as same as Q1. The structure reforms implemented continues to show in our improved numbers about the improved capital efficiency and securing liquidity.
The operating cash flow return to black of ¥17.5 billion due to reduction in loses and steep reduction in inventory by 17.7 billion over Q1. Free cash flow improved to ¥6.9 billion due to the restraints on capital investments featured vast improvements over Q1. There were no problems with liquidity. ¥30 billion of the ¥85 billion in borrowings at the start of the fiscal year were repaid.

4/22

Here I continue to explain about the profit structure including Q2.
As mentioned, revenue and gross profit in North America was a little bit lagging behind in the product mix. And we had the inventory adjustment so the operation was worsened compared to our plan. But we are going to improve the gross profit toward the Q3.
SG&A is restrained to ¥100 million as I said. But it's not just that we are cutting the operation costs. Against this background of the COVID-19, we are doing a marketing in the online demonstration or using virtual web seminars. So not just in the business negotiation but deal-making and actually closing the deals, we are working on DX. We are putting emphasis on this as a company. And this endeavor is seeing fruitful results in the Q2.
About the overall fixed costs, we had fixed costs as costs of sales and SG&A. In the Q2, we reduced overall fixed costs by 24.2 billion YoY. As for labor costs, according to our plan, we reduced by nearly ¥9 billion. While we are realizing steadily improvement our revenues twice in the second half. So that we are not relying on the revenue and we can have a good structure in place.

5/22

Now getting into monthly figures. May was actually the bottom of our revenue. And after that the monthly numbers have started to show improvements according to business segments as we show here. And on the right-hand side, in Healthcare in August and September, it seems to be dropping down, but because there had been the consumption tax impact, the demand before the consumption tax increase. So if we exclude that effects we see this dotted line.

6/22

As for the business segments, you can see revenues and operating profit in the middle of this page. As you can see in this heading, Industrial Business segment continue to post profits as in the Q1. And Office and Healthcare Business returned into the black in the Q2. And professional print, as we forecasted, is lagging behind compared to Office. That is due to lagging recovery in halting sales promotion activities. But from QoQ, we are seeing improvement significantly and losses in new business is being declined.

7/22

Q1 to Q2 change points.
We show them by KPIs for office, non-hard sales or hard MFP units had recovered to roughly 80% of the level and IT services business recovered to previous year levels. As for the regional breakdown, China after June was seeing increase in revenue and that continues. Europe was seeing returned to 80% plus prior level, the US to 75% of prior level. Both in Europe and the US, in September we saw quite a big improvement. In IT services, business recovered in September by the contributions from solution projects for measure clients.
Production print compared to Office was lagging a little bit behind in this recovery, but in Europe it's 80% of the prior level and in the United States it’s 70% of the prior level. And industrial printing, in the US and Europe improved in non-hard, but for the hard, acceptance inspection was taking some time. But the order backlog is up in September so that we're going to have the realization of sales in second half.
As for Healthcare, a significant factor was the decrease in the number of the patients due to the impact from COVID-19 In the Q1 and Q2, but we're seeing the steady monthly improvements. As for genetic testing, we are recently seen rapid increase in the number of tests and in September it was recovered to 93% of that level in February, before the COVID-19. We had started the COVID-19 test in USA. And in the Q2, we're going to see the increase of the test. And as for the drug discovery support services, we had the order backlog of more than 150% compared to the March end. However, the central nervous system was a bit lagging, but order is coming back in the Q2 in the pipeline. And then in the second half, we can see the fruitful results from that.
As for the Industrial Business, material in equipment demand related to smartphone manufacturing is helping overall increasing in revenue trend. We will maintain this trend and towards the year end we're going to have the sales from the big TVs and it is in the increasing trend. Compared to our prior plan, the inventory adjustment in the supply chain was over so that revenue was increasing in September. these are the change points between Q1 and Q2. So that's roughly the summary of the first half and I would like to go into the explanation about the second half.

8/22

9/22

At first, I will talk about the environment in the second half and the assumptions of the environment after the Q3 by businesses.
In some countries around the world, we are seeing the second wave and the third wave of the COVID-19, so that there would be local lockdowns. That will be restraints on the economy and the activities and that is going to continue in the second half. In the Q1, we assumed the recovery in the end of the Q3 and Q4. We would need to be a quite conservative, but as assumption we are not going to see the lockdown as a country in a chain reaction. I don't think that is going to happen in the same magnitude as we saw in the spring.
I'm not going to discuss about the details, but the office print in the Q4 is going to be about 90% of recovery. And then in 2021, it's not going to be better by that level, and then it's going to go again into decrease. And as for the work style assumptions, we have the document automation and the digitalization in the essential business such as the local government and the health sectors, we have the business opportunities in their business renovation with DX by OCR and RPA.
As for Professional Print, it's lagging behind in recovery. In the FY2021, the demand from small and medium firms is still constrained and also that demand is shrinking for the centralized printing department of the corporations. But the digital printing is going to recover in FY2021 so that the medium and large companies will be focused. And in the industrial print, centering on the labels and the packages, the on-demand digital printing is increasing even under the environment of the COVID-19. So this is going to be a sector that is going to increase in a big way.
And Healthcare, in FY2020, those patients that are coming to the hospitals are going to recover, but in the United States it still at the constraint level. As for genetic testing, it is going to recover toward next year. As for drug discovery, the clinical trials will gradually start up again. And measuring instruments toward FY2021 is going back to the growth trend, so we feel this as a positive development.

10/22

We go into the targeted profit structure after Q3 in FY2020.
As in the first half, we're going to reduce the fixed costs. And as for the revenue, we would need to have assumption in relation to demand. We are going to show even more in what we do in the Q2 by putting efforts on the self-help efforts. To recover the gross profit margin according to the increase in the revenue, although it is in the slow recovery, shifting to high speed segment by the North America is going to see improvement to contribute to higher profit. The production adjustment ended and the production utilization rate will raise, so that it should have impact on the profit margin. There will be recovery of the non-hard which contribute to profit more than unit sales.
SG&A is going to be contained below ¥100 billion. It is not just to be shrunk, but by DX we're going to have the progress within the company and showing it as the numbers.
The total fixed costs, especially the labor cost is going to be cut in a quarterly ¥10 billion or more YoY.

11/22

And with that in mind, I go into the earnings forecast in FY2020.
The total of the first half is shown at the left in actual numbers. In the second half, we forecast that the revenue will be ¥485.3 billion and operating profit as ¥14.9 billion in black.
I will explain this in some more details later. But just briefly, we will book an allowance at the end of the Q4 for structural reform in Office Business to take measures early on, rather than simply waiting on to its recovery, which we have assumed to take time. The amount will be ¥6.5 billion. Without this, the operating profit in the second half is forecast to be ¥21.4 billion. But because of the ¥6.5 billion being subtracted, the forecast now is ¥14.9 billion. Our forecast for net profit is ¥4.2 billion.
Please take a look at the bottom part of this page. And let me explain about the capital efficiency a little more. We'll be selective in making investments, and the new Mikawa factory is a selected investment we are making in order to consolidate manufacturing department. This is to boost a production print business even against the backdrop of the US-China trade friction. But other than that, investment will be curbed to keep free cash flow in the black, as in the Q2 at the value of ¥5.6 billion.

12/22

This is our earnings forecast by segments. I'm not going to go into details here. But let's take a look at the breakdown of the ¥14.9 billion forecast for the second half of the year for profit. For Office Business, the number is ¥12.2 billion. But if you add back the ¥6.5 billion for the structural reform in view of the next fiscal year, this would be ¥18.7 billion. And this is the level we expect to return to for the second half of the year.

13/22

These are the priority initiatives for the second half by business areas.
First of all, for MFPs, in the second half we will complete the color and monochrome full lineup of bizhub i-series and through the completion we will make sure to close the deals. As for IT services, there is an increasing number of inquiries coming in for tele-work and MIT. We will be enhancing sales for that. And as for Workplace Hub, from the second half we will have the new product, Workplace Hub smart, which would be based on Windows which will provide better flexibility to be able to address the requirement of the customers better. This is not just for direct sales but for variety of partners. More flexibility is going to be provided.
As for the Professional Print, mid and major printing companies are where we find our demand so we will capture high end and KM-1e demand. And also as for LPP, new products are going to be launched in the second half. And we will support the firm demand for labels by further expanding sales of label printers.
As for the Healthcare, we will accelerate partner strategies according to the feature of each region and department, and we are seeing already some results in the first half. We will accelerate that and IT service which is added value. And also solutions for nurse care will make contribution in terms of sales in the second half. As for Ambry, for un-affected people or healthy people, we have CARE Program. Through that program, the number of testing has been increasing since the first half. And it will be further expanding in the second half. And we will be also expanding the tests for COVID-19. As for Invicro, we will harvest results from all the backlogs and expand pipelines.
And as for measuring instruments and performance materials, please read what is written here.
With this priority initiatives, we will aim to achieve ¥14.9 billion profit even after covering the cost for structural reforms.

14/22

From here, let me explain what we will do towards FY2022.

15/22

Let's take a look at this graph. And we have some basic policies to cover. We will restore operating profit in Office Business through the structure reform in the Q4. And we will return the profit level to the FY2018, because FY2019, our profit was not a satisfactory, so we'd like to aim for the level in FY2018 and what should be done will be implemented very quickly in order to restore the profit in FY2021.
And as you can see at the left bottom, we have some activities for enhancing new businesses. But we have deficit unfortunately and this is going to be one of the top priorities here in the company to reduce the deficit. Toward FY2021 what should be changed in the strategy will be changed and we will reduce the deficit by half.
And while maintaining the level of fixed cost, in the FY2022, we would like to have new core business that would be coming after Office Business so that such new business can contribute profit .
And as for FY2021, our management target is ¥40 billion as an operating profit. We're working on that target. And what is as a major initiative for that is to shift the revenue structure in order to increase the probability of achieving this ¥40 billion. And as for the FY2022, the target is ¥55 billion and rather than relying upon Office Business, we simply would like to enhance new business to achieve that target.

16/22

Now let's take a look at how to restore operating profit in Office Business. We will cover the items on the left-hand side, increased sales, greater efficiency, increasing gross profit and reduction in SG&A will be covering these items. I'm not going to go into details, but what we have been working on will be accelerated in order to build muscle, so to speak, in Office Business and we will accelerate that. On top of that, to the right-hand side we are looking at structural reforms through the allowance we're going to make and the expected results. 10% of office personnel globally is going to be optimized. They may be shifted to Workplace Hub or IT services, or they may be shifted to other areas within the group outside of the Office Business and they will be of course educated and trained for that purpose. We will be slimmer through the structural reforms and for that we have one-off the expenses of ¥6.5 billion.
As for the effect we expect in the FY2021, this ¥6.5 billion is on top of the structural reform we have been pursuing this fiscal year already and this will generate ¥15 billion effect. And on top of that we will have sales cost reduction as well as R&D cost reduction to generate ¥25 billion more profit with quite high probability. Now let's take a look at how we're going to accelerate improvements of profit in new businesses.

17/22

As for Workplace Hub, mainly, we have two strategies. We will make it available for customers to select MFP bizhub i-series as a part for Workplace Hub composition. This is to improve flexibility such as scan speed. And we can also leverage existing resources for Office Business to Workplace Hub. Although we had been developing dedicated Linux OS, we have replaced that with Windows and that way customers can get on cloud more easier and applications can be more easily combined. And this will be rapidly expanded, and this is not just for MFP sales, but also for IT service personnel within our company and this will provide more flexibility to the partners as well. As Linux based OS development has been taking too much time and we have not been agile enough to respond to customers requirement. We already have the sales network, so through the shift of the strategy we will be able to address this challenge.
As for bio-healthcare, and CARE Program is for unaffected people and healthy people, so this is going to be 8 times bigger than the genetic market that we see right now. According to other market research, it is actually as high as 32 times and this is what's written in the appendix. On that market research not just in the US but also in Japan, we would like to start such genetic testing in the FY2021. We will, of course, improve efficiency and we will reduce the time needed for analysis that would be leading to cost reduction as well. And together with Invicro, we will be able to establish a global molecular analysis platform and we have been making quite heavy investment into that in the fiscal 2020, but we will be able to start utilizing that data in the FY2021.
Ambry and Invicro, they are unique in their own light. But by combining capabilities of Ambry and Invicro, we will be able to become a global key player. And the analytic platform which is really at the core of the genomic analysis, we have a lot of potential for making investment going forward. This is something I feel on the ground in the United States. And in that sense, the value of this business, how are we going to materialize that and how are we going to attract more investment into this new opportunity for growth? We have to think about the finance. And we have flexibility here and we have some options on the table that are under consideration.
And As for other new business, we will be having selection and concentration and if growth is not expected we will deal with that business area appropriately.

18/22

Now we have changed our business segmentation. And this was actually something that was decided for the new medium-term plan, which has not been announced yet. As you can see in the left side, we have core and growth businesses and we have new businesses, and they are incorporated into new business segments. We have expertise imaging IoT platform and would like to pursue digital transformation through these knew segments. Regarding core business that is Office Business, towards the FY2021, we will have structural reform and we would like to build new business areas and that would be next to Office which can be Professional Print or Healthcare Business. And we would like to focus on measurement, inspection and diagnosis and would like to increase the share of profit contribution of such businesses towards the FY2022.

19/22

We're now looking at the three pillars that will be generated after Office Business, Professional Print, Industry and Healthcare, and we have expertise in measurement, inspection and diagnosis. Rather than providing just simple devices, we would like to provide imaging IoT platform. As growing these three business areas, they can have profit contributions starting from the fiscal 2022.
We will have further announcement in the IR day that is planned for the end of November. Other members and I as the management will give you further explanation.

20/22

As for capital policy, we will solely raise ability to generate cash with revenue structure reforms and changes of business portfolio. In terms of investment we will be selective and that way we will solidify the shareholders return.
This year we show a loss in the FY2020, but we will implement the measures towards FY2021. We will shift the portfolio and we will return the profit level to the level before and would like to expand the probability of that. And with that in mind, for the dividend of the FY2020, we will maintain the level of the FY2019. For the interim dividend, we will pay ¥10 per share, and for the period end dividend, ¥15 per share, and a total of ¥25 per share.

21/22

This is just to show you. The new segments and earnings forecast of that.

22/22