results of operations for fiscal 2019 (ended march …1 results of operations for fiscal 2019 (ended...

1

Results of Operations for Fiscal 2019

(Ended March 31, 2020)

Nihon Dempa Kogyo Co., Ltd.

July 15, 2020

[Note] Statements made in this presentation with respect to our current plans, estimates, strategies and beliefs and other statements that are not historical facts are forward-looking statements about our future performance. These statements are based on management's assumptions and beliefs in light of information currently available to it. We caution that a number of important risks and uncertainties could cause actual results to differ materially from those discussed in the forward-looking statements, and therefore you should not place undue reliance on them. You also should not rely on the belief that it is our obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Risks and uncertainties that might affect us include, but are not limited to, fluctuation of currency exchange rates, overall supply and customer demand in the industry, product development and production capacities, performance of affiliated companies, and other risks and uncertainties.

１．Results for FY2019 (Ended March 31, 2020) ２．Overview of Medium-Term Management Plan ３．Background and Purpose of Issuing Class-A

Shares

2

＜Contents＞

Presented by Hiromi Katoh, Representative Director and President

① ② ③ ④＝②＋③ ④－①

FY2018 Result

(Excluding temporary factors）

FY2019 Initial Outlook as of May 10

FY2019 Result

Temporary Factors

FY2019 Result

（Excluding temporary factors）

Change from Outlook

as of May 10 （Excluding temporary factors）

Net Sales 42,498 42,500 39,468 - 39,468 ▲3,032

Operating Income/Loss

▲1,049 600 ▲8,286 6,288 ▲1,998 ▲2,598

Net Income before Tax

▲1,511 200 ▲8,644 6,288 ▲2,356 ▲2,556

Net Income/Loss

▲1,706 100 ▲8,709 6,288 ▲2,421 ▲2,521

Exchange Rate

￥110.69 ￥107.00 ￥109.10 - ￥109.10 +￥2.10

Summary of Performance

3

(Million yen)

<Temporary factors included in profit/loss> FY2018 FY2019

Impairment losses 397 3,932

Cost of structural reform - 2,500

Grant from Suzhou government - ▲144

Gain on sales of land use rights and building of subsidiary in China

▲1,852 -

Temporary factors in Net Income/ Loss ▲1,455 6,288

１．Results for FY2019 (Ended March 31, 2020)

4

Net Sales by Application – FY2018 vs Initial Outlook

(Billion yen)

19.6 20.2 18.9

5.0 5.0 3.5

6.8 6.1 6.8

1.9 1.9 2.3

5.5 5.4 4.4

1.7 2.1

1.7

2.0 1.9

1.8

0

50

100

150

200

250

300

350

400

450

500

FY18実績 FY19期初予想 FY19実績

その他

シンセ・センサ・超音波機器等

民生

IoT

移動体

産業機器

車載

Others

Synthesizers, Sensors and Ultrasonic, etc. Consumer

Industrial Equipment

IoT

Mobile Communications

Automotive

FY19 Result FY20 Initial Outlook FY20 Result

42.5 42.5

39.5


50

45

40

35

30

25

20

15

10

5

0

5

Comments by Application

Automotive

Industrial Equipment

Mobile Communications

/IoT

Consumer

Synthesizers, Sensors and

Ultrasonic, etc.

Applications Net Sales

FY19 Trends, Current and Future Outlook

19.6 → 18.9

FY18 FY19

5.0 → 3.5

8.7 → 9.1

5.5 → 4.4

3.7 → 3.5

• In fiscal 2019, demand for new cars globally was slow and suffered a year-on-year decline

• The impact of COVID-19 is dragging down economic activity In the medium to long-term demand for ADAS is expected to grow

• Orders for 5G base station projects will gradually increase, but year-on-year sales will decrease due to a shift in the dates for major projects

• Despite COVID-19, activity will be steady

• The supply-demand balance tightened from FY19Q2, but profitability improved due to raising prices

• Sales and orders from products where NDK has a competitive advantage are steady

• In the optical filter business, there is a decrease in demand along with the decline in the SLR camera market

• Currently, a restructuring of the production system is underway in line with a decline in optical demand

• In fiscal 2019, year-on-year sales remain flat • Proactively respond in areas where we have technological

advantages, such as external sales of photolithographic blanks


(Billion yen)

6

Operating Income – Factor Analysis compared to FY2018

(Billion yen)

Effect of sales decline

▲¥1.39 billion

Exchange rate fluctuation

▲¥0.08 billion

Change in fixed cost

+¥1.35 billion

FY19 Result

(Excluding temporary factors） ▲¥2.00 billion

▲¥0.95 billion

¥42.5 billion ¥39.5 billion Net Sales ▲¥3.0 billion

FY18 Result

(Excluding temporary factors） ▲¥1.05 billion

Profitability fluctuation Change in

product mix ▲¥0.08 billion


Fixed cost structure significantly improved, and despite a worsening in the product mix

(decrease of industrial equipment, increase of mobiles/IoT) maintained profitability by raising prices of mobiles.

Effect of change in

inventories, etc.

▲¥0.74 billion

0.5

0

-0.5

-1.0

-1.5

-2.0

-2.5

Opera

ting In

com

e

7

Operating Income – Factor Analysis compared to Initial Outlook

(Billion yen)

Effect of sales

decline ▲¥1.39 billion

Exchange rate

fluctuation +¥0.1 billion

Change in fixed cost

±¥0.0 billion

Effect of change in inventories, etc.

▲¥0.65 billion

FY19 Result

(Excluding temporary

factors) ▲¥2.0 billion

▲¥2.6 billion

¥42.5 billion ¥39.5 billion Net Sales ▲¥3.0 billion

Initial outlook +¥0.60 billion

Profitability fluctuation Change in

product mix ▲¥0.66 billion


Revised approach to make medium-term management plan, since there were issues with the decision-making process of conventional planning and PDCA.

1.0

0.5

0

-0.5

-1.0

-1.5

-2.0

Opera

ting In

com

e

8

Results for FY2019 – Quarterly Results

Nets Sales (Billion yen)

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

10.4 10.8 11.0

10.3

9.3

10.5 9.9 9.8

Profit (Billion yen, excluding temporary factors）

FY19 FY18

営業利益 (特殊要因除く) 税引前利益 Income before income tax

FY19 FY18

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

▲0.32

▲0.27

▲0.18

▲0.44

▲0.04

▲0.32

▲0.51

▲0.47 ▲0.52 ▲0.55

▲0.32

▲0.36

▲0.50

▲0.60

▲0.67

▲0.85


Operating income (Excluding temporary factors)

Results for FY2019 – Quarterly Net Sales by Key Application

Automotive

0

10

20

30

40

50

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Mobiles

Industrial Equipment Mobile Communications/IoT

FY18 FY19 FY18 FY19 FY18 FY19

IoT

(Billion yen)

9


5.0

4.0

3.0

2.0

1.0

0

Outlook for FY2020

10


Sales

• The impact of COVID-19 varies by market, region and customer

• Sales in the automotive market, which accounts for about half of our sales, bottomed out in May

As it is difficult to predict the impact of COVID-19 on business performance, we have been unable to prepare the outlook for the current fiscal year (ended March 31, 2021) . We will announce the outlook as soon as it becomes possible. The current sales, production and financial condition are as follows:

Production

Japan: Following the implementation of COVID-19 measures, maintained normal operations China (Suzhou): Operations resumed close to normal after April Malaysia: Operation gradually resumed from April 9, and operations resumed close to normal after May

Financial Position

• There are no problems with the current financial position including the commitment line

• If a third-party allocation of shares is implemented, the balance of borrowings will be maintained and stable financial position will be secured over the medium to long term


shares

11

12

Current Status of NDK and the Medium-Term Management Plan

２．Overview of Medium-Term Management Plan

Lehman Shock

2010 2015 2020 2023 2025~

Business stagnate

COVID-19

Groundwork prepared from FY18 • Production transfer • Structural reform

(Head office/Suzhou) • Joint ventures

for SAW

Current medium-term management plan • Steady effort • To move to a “muscular” financial position

Full-fledged 5G/ADAS

Aggressive recovery

13

Major Issues and Measures

Improve business profit

Major Issues Direction of Measures Specific Measures

Expenses: Reduce fixed costs further

Sales: Not targeting a big increase

in the top line but shift to highly profitable products and businesses

(1)Continue structural reforms/ drastically reduce fixed expenses

(2) Review the break down in sales of existing products and business portfolio

Stabilize finances

Capital: Issue classified stock (Accept investment of ￥5.0 billion)

Debt: Reached agreement with all financial institutions to maintain the debt balance over approximately 3 years

(3) Improve financial position

Clarification of investment

strategy

Front-end processes: Based on market needs, strengthen areas where we have a competitive advantage Back-end processes: Focus investment to enhance productivity of mass-produced products

(4) Invest in resources for front-end processes

(5) Enhance productivity of back-end processes

Period of the Medium-Term Management Plan; FY2020~FY2022


Improve business profit

Stabilize finances

Clarification of investment

strategy

Improve Business Profit – Achieve Targets in FY2022

43.8 44.0 42.5

39.5

42.0

FY16 FY17 FY18 FY19 FY22

7% Operating

income ratio

Sales (Billion yen)

PL (Sales/Operating Income Ratio) Targets

+￥2.5 billion


…

1%

-23%

-1%

-21%

Key points of the Medium-Term Management Plan

• Do not pursue excessive sales level

• Lower the break even point (BEP) by eliminating fixed costs

• Increase the composition sales of high value-added products that can take leverage of our technological advantage

FY22 Target a 7% operating income ratio

14

• Drop in the volume of sales for new vehicles (Drop in demand in China)

• Reduced investment in base stations (LTE)

15

Improve Business Profit – Achieve Targets for Operating Income


FY19 Result ▲¥8.3 billion

(Operating Margin ▲21%)

Temporary factors

¥6.3 billion

FY19 Result

(excluding temporary

factors) ▲2.0 billion

Fixed cost reduction

About ¥2.0 billion

Sales increase About ¥1.0

billion

Change in product mix Improvement in profitability, etc. About ¥2.0 billon

FY22 Plan About ¥3.0 billion (Operating income ratio of about 7%)

• Improving the sales composition (Increasing the ratio of high value-added products, reducing/withdrawing from low-profit products)

• Improve yield (lower variable ratio)

• From fiscal 2019 to fiscal 2022, operating income is expected to improve by about ¥5 billion

• In addition to the effect of reducing fixed costs (by about ¥2 billion), there is an increase of about ¥3 billion due to combination of an increase in sales, a change in product mix and improvement in profitability

Details next page

(Billion yen)

16

Improve Business Profit (1) Drastically reduce fixed costs

Trends and Outlook for NDK’s Fixed Costs


Reduction in fixed costs through production transfers

• Structural reforms by NDK on a non- consolidated basis (announced/implemented in fiscal 2019, for voluntary retirement 129 people) • Conducted structural reforms related to the

Suzhou factory relocation • Partial business transfer of SAW filters • Decrease in depreciation due to impairment loss

• Measures such as production transfers and restructuring at Head Office and Suzhou are now underway and a reduction in fixed costs of about ¥4 billion has been achieved (compared to fiscal 2017)

• After this, the ongoing reduction in fixed costs will continue and in fiscal 2022 costs are expected to be reduced to ¥18 billion


• Already achieved a fixed cost reduction of about ¥4 billion (20%) compared to fiscal 2017

(Billion yen)

22.9

21.7

20.3 Approx. 19.0

Approx.18.0

Even when sales are increasing • Continue measures to enhance productivity • Continuous reduction of fixed costs

such as the use of OEM

△¥2.0 Billion

17

Improve Business Profit (2) Revise the composition of sales for existing products

Potential of the Automotive Crystal Market

0

1000

2000

3000

4000

CY18 CY19 CY20 CY21 CY22 CY23 CY24 CY25

(Million units)

ADAS Related Large needs in high

precision/ high reliability

• In the automotive market, where NDK holds about 50% of the global market share, we anticipate an increase in demand centered on ADAS

• Aiming to maintain a high market share in response to needs for high precision and high reliability

Source: The Company estimate (as of 2019)

NDK’s Global Share

Approx. 50%

Other uses


• Heightened needs in high precision and high reliability present NDK with a business opportunity • A market with high entry barriers. NDK is strengthening its superiority in the automobile market

by leveraging its advantage based on actual results as a supplier

18


Market Potential of Base Stations

• 5G base stations are expected to enter full-scale operations during period of the Medium-Term Management Plan

• Aiming to capture demand centered on OCXO (Oven controlled crystal oscillators) with limited market players

Source: The Company estimate (as of 2019)


• 5G specifications make blank accuracy more important. NDK has an advantage because it can integrate production from raw crystal (other OCXO competitors have no blank production function and blanks are procured externally).

• Keeping a close eye on developments of base station manufacturers (Especially in relation to US-China trade friction).

0

500

1000

1500

2000

2500

3000


５G

LTE

(1,000 units)

• Globally there are five main players in the market for OCXOs for base stations (NDK is the only Japanese company )

• 5G requires stricter standards in high precision and high frequency

19


Unit Volume Potential of the 5G Smartphone Market

• The spread of 5G smartphones is in full swing. In addition to the miniaturization needs unique to mobile units, there is a high possibility that high-frequency needs will increase

• Even in the mobile market, we are aiming to shift policy to ensure an emphasis on profitability instead of chasing after volume and scale

Source: The Company estimate (as of 2019) *1: Crystal blank using microfabrication technology. Enables smaller size, higher precision and higher frequency than conventional products.


• Photolithographic blanks*1 are indispensable for compact and high frequency characteristics, and there is a high possibility that the number of companies that can enter this market will be limited.

• NDK examines sales strategy by identifying products considering the competitive conditions and determining the product superiority and profitability.

0

100

200

300

400

500

600

700

CY19 CY20 CY21 CY22 CY23

(Million units)

• 5G requires high frequency compatibility

• NDK is currently the only maker certified by Qualcomm for high frequency 76.8MHz product, small thermistor crystal units

20


• Convert the SAW business from NDK’S own business to a joint venture with a Chinese partner • Aiming for growth and expansion by combining NDK’s technological development and production

capabilities with our Chinese partner’s sales channels in the Chinese mobile market and their financial capabilities


(NDK)

NDK SAW

Devices Co., Ltd. (NSD)

Jiaxing Jiawang Investment Partnership*2

Transfer amount Approx. ¥3.5 billion

NSD shares 51%

(0%→) 51%

(100%→)

49%

Hakodate NDK

• Established July 1,2020 as a subsidiary to handle the SAW business (through an

integration of the technical department from NDK and production department from Hakodate NDK) • Sales in the SAW business in

fiscal 2019 were approx. ¥1.1 billion.

SAW Business Joint Venture (Share Transfer of NSD Shares) Schematic Diagram*1

• Consolidation of NDK-owned resources (technology development capabilities/production capabilities) and Chinese partner-owned resources (sales channel/financial capabilities) • Aiming to expand business centered on mobile demand in China

JIC Technology Investment Co., Ltd.

*1：The above is the first share transfer scheduled for August 31, 2020 and with the second share transfer (scheduled to be executed on December 31, 2020) NDK

expects to have a voting rights share of 25% in NSD. *2： Actually, a newly established subsidiary will be the transferee.


21

Stabilize finances (3) Improve Financial Position

FY19 JIS増資利益計上等 FY22Profit, etc.

5.3

Approx. 12.0

2.0 level (/3 years)

5.0

Net Assets (Billion yen)

9.8%

Over 20%

Shareholders’ equity ratio

Liabilities

＜Outlook for interest-bearing debt balance＞

• Over the course of the Medium-

Term Management Plan, priority

will be given to stabilizing the

financial foundations and bringing

about a recovery in business, and

repayment of loans will be limited.

• Agreement reached to maintain the

debt balance until September 2023

Targets under the Medium-Term Management Plan

• The balance is expected to be over

¥30 billion

• The D/E ratio at the end of fiscal 2022 is assumed to be around 2.6.

• Targeting a shareholders’ equity ratio of over 20% by the end of fiscal 2022 by increasing capital and accumulating three-years of profits

• Over the course of the Medium-Term Management Plan, we will prioritize business recovery set on a stable financial foundation and from fiscal 2023 we will establish “sound financial basis.”

From fiscal 2023 we will establish “sound financial basis”


• Explained in the following section

Capital from JIS

22

Clarification of Investment (4) Strengthening Resources for Front-End Processes

Manufacturing Processes for Main Crystal Products

Front-end processes Back-end processes

Developing raw crystals Wafer slice Photolithographic

process

Assembly/ adjustment

Sealing Testing

Developing Raw Crystals • High quality (=High Q value) for synthetic crystal manufacturing • It is impossible to build quality that exceeds the characteristics of the raw crystal.

(=Defines the potential of the crystal product ■ Photolithographic Process (Micro processing technology) • “Compact/high precision/high frequency” crystal processes • Stable and mass production possible with little variation

Realizable customer needs • Ultra miniaturization • Low phase noise (Higher precision) • Producing higher frequencies Main Target Markets • Fields of 5G, ADAS (Advanced driver-assistance systems) • High function smartphones, etc.


Main Targets

23

Clarification of Investment Strategy (5) Enhance Productivity of Back-End Processes

Manufacturing Processes for Main Crystal Products

Front-end processes Back-end processes

Developing raw crystals

Wafer slice Photolithographic

process

Features of back-end processes • A relatively capital-intensive process • As it is basically a mechanical process,

equipment capacity is directly linked to productivity (takt time, precision, etc.)

NDK’s Current Situation • Since investment has been heavily focused

on new products, investment aimed at improving productivity has been suppressed.

• Delay in equipment renewal compared to the competition with China/Taiwan

Aim of investment • Enhance productivity by improving takt time Secure top line with lower fixed

costs at factories • Improve yield for both miniaturized

products and those with strict specifications Improvement in variable cost

(material cost) rate Main Target Products

• Mass-produced crystal units


Assembly/ adjustment

Sealing Testing


shares

24

• Sales were slow due to the impact of sluggish demand in the automotive market and intensifying

competition in the mobile/IoT market. In addition, NDK reported two large impairment losses. This resulted

in the third consecutive fiscal year in the red

• Despite the structural reforms implemented in fiscal 2019, and full-scale cuts to the structure of fixed costs,

the outlook for this fiscal year's results remain unclear due to the influence of COVID-19

NDK’ Business Performance

44.9 43.8 44.0 42.5 39.5

3 6

-10.2

-0.3

-8.7

-200

-100

0

100

200

300

400

500

売上高当期利益 Net Sales


Impairment loss: ¥6.5 billion • Impairment loss: ¥3.9 billion • Restructuring cost: ¥2.5 billion

The outlook for this fiscal year's results remain unclear due to the influence of COVID-19

(Billion yen)

25

３．Background and Purpose of Issuing Class-A shares

50

40

30

20

10

0

-10

-20

Net Income

• Posted large losses in fiscal 2017/fiscal 2019 leading to a significant worsening of NDK’s financial position.

(Undercapitalization and Excessive debt)

• Although the business environment is currently uncertain, it is essential to make investments to improve

productivity to facilitate cost improvements and ensure we can contribute to a range of changes in the

market along with the progress of ADAS and 5G as it gears up into full swing

Financial Condition

25.7 25.2 15.1 14.7

5.3

13.0 15.7

15.8 14.0

14.9

29.3 27.9

29.9 32.1

34.3

FY15末 FY16末 FY17末 FY18末 FY19末 End of

FY15

End of

FY15

End of

FY16

(Billion yen)

Interest-bearing debt

Other liabilities

Net equity

D/E ratio (Interest-bearing-debt÷net equity)

Shareholders’ equity ratio

(Net equity ÷total assets) 37.8%

1.14

36.7%

1.11

24.8%

1.98

24.2%

2.18

9.8%

6.42

It is essential to procure capital funding • It is necessary to

improve the undercapitalization and excessive debt situation

• It is essential to secure funds to invest in growth

26


End of

FY15

End of

FY19

End of

FY17 End of

FY18

Stabilize finances

27

Receiving external investment • Accepted investment*1 from Japan Industrial Solutions Co., Ltd. (JIS) by issuing Class-A

shares Approval required at the July 31 Ordinary General Meeting of Shareholders Amount of investment of ¥5 billion: Used for capital investment for medium- to long-

term growth

Consultation and agreement with the financial institutions we borrow from • Based on consultations with all the financial institutions we borrow from, we agreed to maintain

debt balance amount until the end of September 2023.

Achieve a stable financial foundation along with receiving investment • Maintenance of commitment line by main bank

Respond to sudden demands for funding

"Securing growth capital" + "Stabilizing financial foundation (cash management)"

⇒ Opening the way to business recovery & growth

*1: Investment from "Japan Industrial Solutions Fund II Investment Business Limited Partnership" operated by JIS

３． Background and Purpose of Issuing Class-A shares

Overview of Investment Scheme

28


Japan Industrial Solutions Co., Ltd.

Development Bank of Japan (DBJ) Mizuho Bank Ltd.

Sumitomo Mitsui Banking Corporation MUFG Bank, Ltd.

JIS Limited Liability Company*1

14.9% 14.9% 14.9% 14.9% 40.4%

Japan Industrial Solutions Fund II Investment Business Limited Partnership

Invests (¥5.0 billion) NDK issues Class-A shares

Fund management

• JIS is a Japanese fund backed by DBJ and three mega banks • This scheme involves NDK issuing Class-A shares and accepting a capital injection of ¥5 billion

One JIS executive to be appointed as outside

director at NDK

*1：JIS executives constitutes JIS


29

Direction Following the Issuing of Class-A shares


Period for NDK to exercise its options • In principle, common stock cannot be converted (No dilution will occur) • Partially redeemable

July 2020

General meeting of shareholders

Investment (¥5 billion)

June 2023

September 2023

Net A

sse

ts

Common stock conversion request exercisable Dilution rate up to 98.4%

Debt balance is maintained

Approved

Stabilize the financial base

Implementation of the Medium-Term Management Plan ⇒ Become a company that can earn steady profits

Sales: Shift to sales structure centered on high-value-added products such as 5G Costs: Continue to reduce fixed costs

Lia

bilitie

s

Fin

ancia

l Stra

tegy

Busin

ess

Stra

tegy

Realize “Enhanced corporate value and enhanced share value” Fiscal 2022 target EPS (Earnings per share): Over ¥50 (After maximum dilution)

Invest in growth application

30

For Investor relations related inquiries, please contact:

Corporate Planning Group

Nihon Dempa Kogyo Co., Ltd. Mail: [email protected]

Thank you everyone for your time

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