Bridge Report:（6914）OPTEX GROUP the first half of Fiscal Year December 2019

Isamu Oguni, President and CEO	OPTEX GROUP CO., LTD. (6914)

Company Information

Stock Information

*The share price is the closing price on August 6, 2019. Shares Outstanding is the number of shares at the end of June 2019 excluding treasury shares. ROE and BPS are the results at the end of the previous term.

Earnings Trend

*The estimated values are from the company.Net profit is net profit attributed to parent shareholders. The same shall apply hereinafter. On April 1, 2018, a 2-for-1 stock split was implemented. Both EPS and DPS are revised retroactively.

This Bridge Report presents OPTEX GROUP’s earnings results for the first Half of fiscal year ending December 2019.

Table of Contents

Key Points
1.Company Overview
2.First Half of Fiscal Year ending December 2019 Earnings Results
3.Fiscal Year ending December 2019 Earnings Forecasts
4.Business Strategy: Visual Verification by sensors and cameras working in conjunction with each other
5.Conclusions
<Reference: Regarding Corporate Governance>

Key Points

• The sales in the second quarter of the fiscal year ending in December 2019 were 18,593 million yen, down 5.5% year on year due to the sales decrease from all of the 3 core businesses. The sales from the FA business have a double-digit decline due to the sluggish sale of the sensors targeted at SICK and China. Domestic sales amounted to 8,072 million yen, down 1.4% year on year, and overseas sales were 10,521 million yen, down 8.4% year on year. Operating profit dropped 49.6% year on year, to 1,315 million yen. Other than the decreased sales, the increase of cost due to the factory that produces sensor products exported to the US being transferred from China to Vietnam to avoid rising tariffs caused by China–United States trade friction, the rise in costs of product mix in the SS business and the increase in SGA of acquiring subsidiary are the factors led to the decrease in operating profit. As a result, both sales and profits fell short of the initial forecast.

   

• The forecast for the full fiscal year was revised downward. The sales for the fiscal year ending in December 2019 are expected to remain flat year on year at 40 million yen. Domestic sales are projected to be 17.1 billion yen, up 0.1% year on year, and overseas sales are forecasted to decrease 0.6% year on year to 22.8 billion yen. Operating profit is expected to drop 31.9% year on year to 3.4 billion yen. Dividends are expected to be 32.50 yen/share. The expected payout ratio would be 47.8%

   

• The financial situation is expected to be recovered from the second half of the term. The sales would increase 3 billion yen compared to the first half. Improvement in sales of the outdoor sensors (for Southern Europe) in the SS business (security-related), release of a new model for major security companies in Japan, the increased sales of UV-related products in the MVL business and synergy generated from acquiring a French startup called Effilux are the causes projected to improve sales. In addition, cost rate is also forecasted to drop by 3 points because producing location of sensors that are exported to the US is transferred from China to Vietnam, and the local manufacturing is getting on the right track.

   

• While sales declined and profit considerably dropped in the first half quarter, the company seems to be confident in the recovery of their financial situation from the second half period. Their confidence is reflected by their forecasts revising for not only the first half but also full fiscal year as of July. Nevertheless, as for the FA business, the effects caused by the trade friction between the U.S. and China are still unknown and unclear, consequently the report will firstly focus on the company’s performance in the third quarter.

   

• On the other hand, the company’s focus on image verification system by sensors and cameras working in conjunction with each other in the SS business which contributed to a new business model including the subscription model are noteworthy. While the business itself is considered to start officially from the next term, most investors have high expectations to its progress.

   

1. Company Overview

OPTEX GROUP Co., Ltd. is a holding company centered around OPTEX Co., Ltd. that manufactures and sells outdoor sensors (top share of 40% in the global market), automatic door sensors (30% share of the global market and 50% share of the domestic market) and environment-related products.
OPTEX GROUP holds subsidiaries including OPTEX FA CO., LTD., which deals with FA related sensing business; CCS Inc., which holds the global top share in the LED lighting business for image processing; Three Ace Co., Ltd., which specializes in the development of various systems, applications, and digital content; Optex MFG Co., Ltd., which is responsible for manufacturing Group products, RAYTEC LIMITED (UK), which has attained the largest global share (about 50 %) for supplemental lights for CCTV; and FIBER SENSYS INC. (US), which deals with optical fiber intrusion detection systems.

1-1. Business Description

The Company’s business is composed of its main Sensing Solution (SS) business (security-related business and automatic door-related business), Factory Automation (FA) business (sensors for industrial machinery), Machine vision lightning (MVL) business (LED lighting device and system for image processing), “EMS business,” which was included in the SS business up until the previous term and provides contract manufacturing services for electronic equipment in China, and Other business (operation of sport clubs and development of applications and digital content).

1-2. Advantages: Diversified Technologies/Expertise on Sensing and Unique Sensing Algorithm

To produce stable and reliable sensors, it is essential to build on a number of elemental technologies and expertise, as well as “algorithms” to control physical changes. The company takes advantage of its technologies/expertise suitable for intended applications and its unique sensing algorithm to secure the largest share in the global market.

1-3. Corporate History

OPTEX was established in 1979 and developed the world's first automatic door sensors using infrared rays in the following year. Back then, most of the automatic doors were using pressure sensitive rubber mats, which contained sensors, and sensors using infrared rays were very innovative. The company also showed unrivaled abilities in product maintenance and implementation, and captured the top share in the automatic door sensors market in only three years since its foundation (currently, about 60% share in the domestic market). The company expanded operations and got listed on the over-the-counter market (equal to listing on JASDAQ) in 1991. Then it got listed on the second section of Tokyo Stock Exchange in 2001 and moved to its first section in 2003.
Recently, it has been working on enhancement of solutions based on image processing technologies and high-end security systems. In 2008, it acquired ZENIC INC., which specialized in contracted development of IC/LSI for image processing systems. Furthermore, it acquired FIBER SENSYS INC. (US) in 2010 and RAYTEC LIMITED (UK) in 2012, respectively. Also, CCS Inc. (6669, JASDAQ), which holds the largest market share in the world for LED lighting for image processing, was reorganized into a subsidiary in May 2016 (and became a wholly owned subsidiary in July 2018). On January 1, 2017, the company shifted to the holding company system, with the aim of advancing to next-generation management and pursuing group synergy.

1-4. ROE analysis

ROE in FY December 2018 achieved “10% or more” as targeted for two consecutive terms. Net profit margin for the current fiscal year is projected to be 6.3%. It is expected that the high ROE will continue due to accumulation of profits even if total assets and capital increase.

1-5 Efforts on ESG

The company actively responds to ESG issues and strives to improve corporate value.

2. First Half of Fiscal Year ending December 2019 Earnings Results

（１）Business Results

*Unit: million yen. The Net profit is the profit attributable to owners of the parent company. The same shall apply hereinafter.

Sales and profit decreased.
Sales were 18,593 million yen, down 5.5%, year on year due to the sales decrease from all of the 3 core businesses. The sales from the FA business have a double-digit decline due to the sluggish sale of the sensors targeted at SICK and China. Domestic sales amounted to 8,072 million yen, down 1.4% year on year, and overseas sales were 10,521 million yen, down 8.4% year on year.
Operating profit dropped 49.6% year on year to 1,315 million yen. Other than the decreased sales, the increase of cost due to the factory that produces sensor products exported to the US being transferred from China to Vietnam to avoid rising tariffs caused by China–United States trade friction, the rise in costs of product mix in the SS business and the increase in SGA of acquiring subsidiary are the factors led to the decrease in operating profit. As a result, both sales and profits fell short of the initial forecast.

Earnings result by quarter

◎Average exchange rate

（２）Earnings by Segment

①Trends in each segment and region

*Unit: million yen

②Trends in each segment and region

*Unit: million yen

◎SS Business
（Security-related）
Japan ：Sales increased as the sales of the outdoor security sensors for security companies and important large-scale facilities such as airports were healthy.
AMERICAs ：Sales dropped as the sales of the sensors for important large-scale facilities by the sales subsidiary in North America were sluggish.
EMEA ：Sales decreased as the sales of the sensors for general residence in Southern Europe region by the sales subsidiary in the U.K. were sluggish.
Asia ：Sales dropped as the sales of the sensors for Australia and South-east Asian countries were stagnant

The sale of sensors targeted at domestic security companies is on the track of recovery. New products are planned to be introduced in the second half quarter.
The sales of the outdoor sensors in Southern Europe had been sluggish until new products being introduced recently, which shows a recovery in the number of orders.

（Automatic door-related）
Japan ：Sales decreased as the sales of the sensors of automatic doors for major domestic customers were sluggish.
AMERICAs ：Sales increased due to the steady sale of automatic door sensors targeted at major clients in North America.
EMEA ：While the sales of automatic door sensors targeted at major clients in Europe had been steady, sales decreased due to fluctuation of exchange rates.

Orders related to Tokyo Olympic and Paralympic games have not contributed to sales yet.

◎FA Business
Japan ：Sales declined as the growth of sales of the products for semiconductor, rechargeable battery and electronic parts-related industries was sluggish, while sales were steady for automobile-related industries.
EMEA ：Sales dropped as the sales of the products to OEM were stagnant due to declining business confidence of the world’s economy.
Asia ：Sales decreased due to the sluggish growth of sales of displacement sensors as a result of deceleration of demand for capital investment caused by economic slowdown in China.

The business was considerably affected by the ongoing problems between the U.S. and China.
Decline in the sales quantity of displacement sensors which have high margin also resulted in the decrease of profit.

◎MVL lighting business
Japan ：Sales dropped because of a slowdown in demand for capital investment mainly in semiconductor and smartphone industries.
AMERICAs ：Even though new transactions has increased, sales remained flat after because backlash from large-scale projects for the existing customers occurred.
EMEA ：A French LED lighting manufacturer for image inspection, which was made into a subsidiary in the fourth quarter in 2018, contributed to increased sales.
Asia ：Sales remained flat as the growth of sales by the local subsidiaries was stagnant due to deceleration in demand for capital investment in China.

The total Sales dropped, but the sales of UV-related sensors rose in performance.
The company is actively investing in testing rooms to strengthen solution providing capability.

（３）Financial Conditions and Cash Flow

◎Main BS

*Unit: million yen

Total assets were 42,976 million yen, down 315 million yen from the end of the previous term due to a decline in receivables.
Total liabilities dropped 498 million yen from the end of the previous term to 10,447 million yen, as a result of decreased payables.
Net assets augmented 184 million yen from the end of the previous term to 32,529 million yen.
Equity ratio improved 0.9 points from the end of the previous term to 75.4%.

◎Cash Flow　

*Unit: million yen

Operating CF and Free CF turned positive due to a decline in receivables, etc.
The decrease in cash-inflow from long-term debt caused Financing CF to turn negative.
The cash position was nearly unchanged.

（４）Topics

◎ Acquisition of treasury shares
The company decided to acquire treasury shares nor only to improve shareholders’ return, but also to implement a flexible capital policy in response to changes in the business environment.

◎Dividends payment plan in celebration of the company’s upcoming 40th anniversary.
The company decided to distribute a dividend of 2.50 yen/share along with the interim dividend for the fiscal year ending December 2019 in celebration of its upcoming 40th anniversary to show their gratitude to the shareholders. The annual dividend is expected to be 32.50 yen per share, including the year-end dividend of 15 yen per share.

3. Fiscal Year ending December 2019 Earnings Forecasts

（１）Business Results

*Unit: million yen. Ratio to sales equals to Sales Profit margin.

Performance forecast was revised downward. Sales and profit are projected to decline.
The company revised its financial performance forecast downward. The sales for the fiscal year ending in December 2019 are expected to remain flat year on year at 40 million yen. Domestic sales are projected to be 17.1 billion yen, up 0.1% year on year, and overseas sales are forecasted to decrease 0.6% year on year to 22.8 billion yen. Operating profit is expected to drop 31.9% year on year to 3.4 billion yen.
Dividends are expected to be 32.50 yen per share as described above. The expected payout ratio would be 47.8%

*Unit: million yen

The financial situation is expected to be recovered from the second half of the term.
The sales would increase 3 billion yen compared to last half term. Improvement in sales of the outdoor sensors (Southern Europe) in the SS business (security-related), release of a new model for major security companies in Japan, the increased sales of UV-related products in the MVL business and synergy generated from acquiring Effilux (France) are the causes projected to contribute to improve sales.
In addition, cost rate is also forecasted to drop by 3 points because producing location of sensors that are exported to the US is transferred from China to Vietnam, and the local manufacturing is getting on the right track.

（２）Trends in each segment and region

*Unit: million yen

4. Business Strategy: Visual Verification by sensors and cameras working in conjunction with each other

The company aims to realize well balanced growth between SS and FA businesses, so they established a new business model in the SS (security-related) field.
The company will release the new model in this year, under the expectation of the business contributing to sales and profits from the next term.

(1) Scale of the alarm monitoring market

The number of contracts for alarm monitoring using outdoor sensors has reached 90 million worldwide. The detailed numbers are as followings: 40 million contracts in North America and 20 million contracts in EMEA (including 3 million contracts in U.K.). These data show that North America and U.K. occupy almost 50% of the total number of contracts.

(2) Current situation and problems regarding alarm monitoring

While alarm monitoring is widely installed overseas, still 95% of the security reports are said to be incorrect. Most of them are caused from operational mistakes by users, and some are resulted from malfunction of the outdoor sensors.

The current alarm monitoring systems are usually running through the processes that alarm signals from sensors and camera images from surveillance cameras are sent separately to the monitoring company, as shown in the figure below.
Therefore, the monitoring company need to look for camera images to report to users or the police even if they receive alarm signals right away.
However, depending on the situation, sometimes monitoring company reports without checking the camera images, which usually leads to false reports.
Also, in the U.S., it is the police who receive reports from monitoring companies, but the ones who get penalized for dispatch of police officers in case for false reports are usually those users. Likewise, there are various problems lie in the operation of alarm monitoring.

（Source: the company）

As OPTEX’s outdoor sensors are highly rated and trusted globally, the company decided to develop a new alarm monitoring system that would solve the problems of false reports and lead to familiarization of alarm monitoring.

(3) Visual Verification System

①Mechanism
The new system comes with a gateway that interlocks the alarm monitoring system and the surveillance camera system.
By adding up gateway and operation software to the existing system, monitoring companies will be able to receive alarm signals linked with camera images, which will lower the chances of false reports.

（Source: the company）

This system was made by utilizing a gateway incorporated with image verification solutions created by CHeKT (U.S.), which is a strategical alliance company with the company.
CHeKT is a startup company established in 2014, which possesses great knowledge about the security industry as its CEO is also the owner and the CEO of a security company.
Therefore, CHeKT can provide appropriate solutions that are developed based on business experiences in the security company and meet the local needs. Also, it is one of their strengths that they provide free, easy-to-use operation software in addition to establishing a system that can be connected to network cameras of the industry standards without requiring advanced IT skills.

②Business model
OPTEX GROUP possesses an exclusive license to sell the system mentioned above in North America and the U.K. The company will not only sell them as a separate item, but also initiate a subscription-type billing business by providing the system.
The company considers that the system is beneficial for all related groups, including users, monitoring companies and the police, as it can be installed at low cost and has less chances of false reports, and aims to familiarize this win-win business model.

（Source: the company）

③Target and quantitative goal
The company will provide the system for high-end customers such as commercial facilities, offices and high-class houses in North America and EMEA region.
The sales targets are 2.5 billion yen in 2023 (2 billion yen in North America and 500 million yen in the U.K.), and 10 billion yen in 2028 (8 billion yen in North America and 2 billion yen in the U.K.)

5. Conclusions

While sales declined and profit considerably dropped in the first half quarter, the company seems to be confident in the recovery of their financial situation from the second half period. Their confidence is reflected by their forecasts revising for not only the first half but also full fiscal year as of July. Nevertheless, as for the FA business, the effects caused by the trade friction between the U.S. and China are still unknown and unclear, consequently the report will firstly focus on the company’s performance in the third quarter.
On the other hand, the company’s focus on visual verification by sensors and cameras working in conjunction with each other in the SS business which contributed to a new business model including the subscription model are noteworthy. While the business itself is considered to start officially from the next term, most investors have high expectations to its progress.

＜Reference: Regarding Corporate Governance＞

◎Organization type, and the composition of directors and auditors

◎Corporate Governance Report
The latest revision date : March 28, 2019

<Fundamental concept>
As the Group, we recognize that it is our greatest mission to continuously improve corporate value while earning the trust of our shareholders, investors, customers and society. To practice it, we consider enhancement of the corporate governance as one of important management tasks and aim to improve the transparency of management, maintain management systems accompanying fair and prompt decision making and strengthen management monitoring function.

<Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)>

<Disclosure Based on the Principles of the Corporate Governance Code (Excerpts)>

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