Bridge Report:（6914）OPTEX GROUPFiscal Year December 2019

Isamu Oguni President and CEO	OPTEX GROUP (6914)

Company Information

Stock Information

*The share price is the closing price on February 26. Figures are from the brief financial report for December 2019.

Earnings Trend

*The estimated values are from the company. Net profit is net profit attributed to parent shareholders. 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 Fiscal Year Ended December 2019, its Medium-term management plan, and so on.

Table of Contents

Key Points
1. Company Overview
2. Fiscal Year Ended December 2019 Earnings Results
3. Fiscal Year Ending December 2020 Earnings Forecasts
4. Medium-term management plan
5. Conclusions
<Reference: Regarding Corporate Governance>

Key Points

• The sales in the fiscal year ending December 2019 were 37,517 million yen, down 6.5% year on year. Sales dropped in all the 3 core businesses. A double-digit drop in sales was observed in the FA business, whose sales to SICK and China were sluggish. Domestic sales dropped 1.1% year on year to 16,971 million yen, while overseas sales declined 10.5% year on year to 20,546 million yen. Operating profit dropped 42.8% year on year to 2,856 million yen. Decreasing of profit was thought to be affected by the following reasons. The effect of sales drop about 1,000 million yen, the tariff hike caused by China-United States trade war, temporary cost increasing due to the factory relocation from China to Vietnam for products targeted at the U.S. market, the augmentation of cost for the product mix in the SS business, and the rise in SGA for the acquired subsidiary about 300 million yen.

   

• For the fiscal year ending December 2020, sales are estimated to grow 6.6% year on year to 40 billion yen and operating profit is projected to rise 12.0% year on year to 3.2 billion yen. The company aims to get back on a growth track with the MVL business being a growth driver. The dividend amount is to be 30.00 yen/share, including the dividend for commemorating the 40th anniversary of the establishment of the company (2.50 yen/share), unchanged from the previous year. The estimated payout ratio is 46.7%.

   

• The impact of coronavirus disease 2019 has not been considered like many other cases. Until now about 30% to 40% of factory workers have resumed work, and it is estimated that the stocks of completed parts will remain until the end of March. Unfortunately, it is difficult to predict the future situation.

   

• Accordingly, investors should judge medium-term directions. We would like to pay attention to the progress of each business, especially the speed of launch of “Visual verification solutions” that introduced a subscription business model.

   

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

The company failed to achieve the target ROE: “10% or higher.” The net profit margin for this term is estimated to be 5.9%, unchanged from the previous term.
The company aims to recover it to over 10% by the final year of the medium-term management plan, which starts this term.

1-5 Efforts on ESG

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

2. Fiscal Year Ended 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 declined
The sales in the fiscal year ending December 2019 were 37,517 million yen, down 6.5% year on year. Sales dropped in all the 3 core businesses. A double-digit drop in sales was observed in the FA business, whose sales to SICK and China were sluggish. Domestic sales dropped 1.1% year on year to 16,971 million yen, while overseas sales declined 10.5% year on year to 20,546 million yen. Operating profit dropped 42.8% year on year to 2,856 million yen. Decreasing of profit was thought to be affected by the following reasons. The effect of sales drop about 1,000 million yen, the tariff hike caused by China-United States trade war, temporary cost increasing due to the factory relocation from China to Vietnam for products targeted at the U.S. market, the augmentation of cost for the product mix in the SS business, and the rise in SGA for the acquired subsidiary about 300 million yen.

Trends in each quarter

In the fourth quarter (Oct. to Dec.), sales and profit declined year on year, but ordinary profit recovered significantly.

◎Average exchange rate

(2) Earnings by Segment

①Trends in each segment

*Unit: million yen. Ratio to sales of Operating profit refers to Sales Profit margin.

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 due to the sluggish sales of sensors for important large-scale facilities in Latin America.
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 declined due to the sluggish sales of security sensors by a Korean subsidiary that distributes the products of Optex.

（Automatic door-related）
Japan：The curtailment of opening of new shops in the retail industry affected the business, and the sales of sensors for automatic doors were sluggish and dropped.
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.

◎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.

◎MVL lighting business
Japan ： Sales declined due to the lingering curtailment of investments on semiconductors and smartphones caused by the prolongation of the trade friction between the U.S. and China.
AMERICAs：Sales grew, as the company received large-scale orders for the smartphone industry.
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.

(3) Financial Conditions and Cash Flow

◎Main BS

*Unit: million yen

Total assets were 43,967 million yen, up 676 million yen from the end of the previous year, due to the increase in cash deposits and tangible assets.
Total liabilities augmented 650 million yen to 11,595 million yen, due to the rise in short-term debts.
Net assets were 32,372 million yen, nearly unchanged from the end of the previous year, as retained earnings grew, but treasury shares increased, etc.
Capital-to-asset ratio dropped 1.3 points from the end of the previous term to 73.2%.

◎Cash Flow

*Unit: million yen

Due to the decrease in inventory assets, etc., the surplus of operating CF expanded, the deficit of investing CF shrank, and the surplus of free CF increased. The deficit of financing CF expanded, as there was no longer proceeds from long-term loans payable.
The cash position improved.

(4) Topics

◎Selection of candidates for outside directors
In Feb. 2020, the following three people were selected as candidates for outside directors. A formal resolution is to be made at the annual meeting of shareholders on March 26, 2020.

*Mr. Kazuhiro Yoshida and Ms. Nanako Aono were selected as outside directors who do not belong to the audit and supervisory committee members, while Mr. Yasushi Sakemi was selected as an outside director who belongs to the audit and supervisory committee member.

Mr. Kazuhiro Yoshida and Ms. Nanako Aono satisfy the requirements for independent executives in the regulations of Tokyo Stock Exchange, Inc. and the criteria for independence set by OPTEX GROUP Co., Ltd. If they are appointed, the company will report that they are independent executives defined by Tokyo Stock Exchange, Inc.
Mr. Yasushi Sakemi satisfies the requirements for independent executives in the regulations of Tokyo Stock Exchange, Inc. and the criteria for independence set by OPTEX GROUP Co., Ltd. If he is appointed, the company will report that he continues to be an independent executive defined by Tokyo Stock Exchange, Inc.

3.Fiscal Year Ending December 2020 Earnings Forecasts

(1) Earnings forecasts

*Unit: million yen.

It is estimated that sales and profit will grow. The company aims to get back on a growth track with the MVL business being a growth driver.
Sales are estimated to grow 6.6% year on year to 40 billion yen and operating profit is projected to rise 12.0% year on year to 3.2 billion yen.
The sales of all business segments are expected to rise. The MVL business will increase its sales by double digits, serving as a growth driver.
The dividend amount is to be 30.00 yen/share, including the dividend for commemorating the 40th anniversary of the establishment of the company (2.50 yen/share) in the previous year, unchanged from the previous year. The estimated payout ratio is 46.7%.

(2) Trends in each segment and region

*Unit: million yen.

*Unit: million yen.

4. Medium-term management plan

The company launched a 3-year medium-term management plan, whose initial year is this term.
Under the group philosophy “We aim to become a corporate group full of Venture Spirit! Let’s do something new!,” the company will work on the “endeavor to reform business models” in each business, and aim to attain the following managerial goals.

Medium-term consolidated managerial goals

(1) Activities in each business segment

① Endeavor of the SS business: Shift from “sale of materials” to “sale of things”
The company has mainly offered products with good performance, quality, and specs, but under the recognition that customers and users are demanding “solution services,” the resolution of challenges, with products rather than products themselves, the company set two growth strategies.

【Growth strategy 1: “Visual verification solutions” for the spread of prevention of crimes in outdoors】
(1) Scale, current situation, and problems of the market of alarm monitoring
The number of contracts for alarm monitoring with outdoor sensors is over 90 million around the world. It is 40 million in North America and 20 million in EMEA (including 3 million in the U.K.). North America and the U.K. account for nearly half of them.

However, alarm monitoring has been adopted in many places outside Japan, 95% of security alarms are reportedly false. In most cases, users fail to operate the device, but in some cases that is malfunction of outdoor sensors.

In the current alarm monitoring system, alarm signals from sensors and videos from surveillance cameras are transmitted to a monitoring company without linkage, as shown in the figure below.
Accordingly, the monitoring company calls a user or the police without verifying the videos of the scene after receiving alarm signals. It leads to false alarms.
In the U.S., the police receive calls from monitoring companies. If the police move due to a false alarm, the user has to pay a fine. Like this, there are various problems with actual operation.

(Taken from the reference material of the company)

(2) Outline of the image check system
OPTEX GROUP Co., Ltd., which is highly evaluated and trusted for its outdoor sensors around the world, decided to develop a new alarm monitoring system, while considering that solving the false alarm problem would lead to the distribution of outdoor alarm monitoring and the expansion of the market.

①　System
In the new system, a gateway is installed for linking an alarm monitoring system and a monitoring camera system.
By adding a gateway and operation software to the existing system, a monitoring company can always receive camera videos linked to alarm signals, so it is possible to reduce false alarms significantly.

(Taken from the reference material of the company)

This system was embodied by utilizing a gateway that incorporates the Visual verification solutions of CHeKT (in the U.S.), with which the company formed a strategic alliance.
CHeKT is a venture firm established in 2014, and its CEO is the owner and CEO of a security company, so he is versed in the security industry.
Therefore, it is possible to offer solutions suited for on-site needs, which were developed based on the experience at the security company. In addition, there are a lot of advantages. Advanced IT skills are not required, a system that can be connected to the network camera with standard specs has been established, and charge-free, easy-to-use operation software is provided.

②　Business model
OPTEX GROUP Co., Ltd. has the exclusive right to sell this system in North America and the U.K., and not only sells products, including the gateway, but also carries out the subscription-type charging business providing the system.
This system can be installed at low cost and rarely causes false alarms, so it is considered beneficial to all stakeholders, including users, monitoring companies, and the police. The company aims to diffuse a win-win business model.

③　Targets and numerical goals
In North America and EMEA regions, the company offers the system to high-end clients, including commercial facilities, offices, and luxury housing, etc.
The company aims to earn cumulative sales of around 2.5 billion yen in 2023.

【Growth strategy 2: The change of detection targets from “people” to “things”: “Car detectors” and “Occupancy/vacancy solutions”】
With the aim of actualizing a convenient, safe car society, the company offers two products and solutions.

(1) “Car detectors”
The company developed and released “car detectors” that do not need to be buried in the ground for coin-operated parking areas.
Since they do not need to be buried, it is possible to halve the installation period and reduce labor and costs for maintenance.
Based on the tie-up with a parking area equipment manufacturer, the company sells them to parking area operation firms.

(2) “Occupancy/vacancy management solution”
The company offers “occupancy/vacancy management solutions” for checking the vacancy information of parking areas.
With wireless car detectors, the occupancy status of parking areas and vacant spaces are grasped, and occupancy/vacancy information is managed in the cloud.
Drivers can grasp the situation remotely, so convenience would improve considerably.

(Taken from the reference material of the company)

In 2022, the company aims to achieve sales of around 1 billion yen.

【Growth strategy 3: The change of detection targets from “people” to “things”: “Hygiene control solution”】
While entrusting Kikkoman Biochemifa Company as an OEM, the company offers hygiene state monitoring solutions.
With sensors, the cleaning states of fingers, chopping boards, cooking tables, etc. are gauged, and results are checked. Potential risks in various places, including food product manufacturing sites, are visualized.
Measurement results can be checked immediately, so hygiene administrators can conduct unified management and analysis, reduce management costs, and shorten management hours.
It will contribute to hygiene control in various places.

(Taken from the reference material of the company)

② Endeavor in the FA business: “Strengthening of highly functional products” and “Compatibility with Industry 4.0”
The company concentrates on image and displacement sensors, which are the strengths of the company.
As for image sensors, the company will proceed with the cultivation of overseas markets, which has not been started.
As for displacement sensors, the company will upgrade them and release a new product with the industry’s highest level in the current term. The company aims to meet the demand related to 5G and robots.

“Strengthening of highly functional products”

(Taken from the reference material of the company)

“Compatibility with Industry 4.0”
Through the unified management of sensors, the company will release “IO-Link Sensor” and “IO-Link Gateway,” which are compatible with Industry 4.0.
With IO-Link, which is a communications technology for exchanging various data interactively between sensors and a superior control system, it is possible to grasp the status of each device remotely, estimate durability, and recover devices as soon as possible at the time of breakdown.
The company promotes distribution in cooperation with SICK, which is the No.1 sensor manufacturer in Germany.

(Taken from the reference material of the company)

③ Endeavor of the MVL business: From “a manufacturer of lamps for imaging tests” to “a comprehensive solution vendor”
In the current medium-term management plan, this business is positioned as a driver.
CCS Inc., which deals with this business, offers lamps, power sources, and solutions with cameras and lenses, and aims to develop extended solutions combining boards, image processing software, AI, and robots, and go ahead with stages of giving proposals, under the basic concept that users demand “Visible!” and “Possible!” rather than power sources for lighting.
They consider speed is important in order not to fall into price competitions.

(Taken from the reference material of the company)

In addition, the company aims to cultivate the visual check market, whose scale is said to be 250 billion yen, by utilizing AI and robots.

5.Conclusions

The impact of coronavirus disease 2019 has not been considered like many other cases. Until now about 30% to 40% of factory workers have resumed work, and it is estimated that the stocks of completed parts will remain until the end of March. Unfortunately, it is difficult to predict the future situation.
Accordingly, investors should judge medium-term directions. We would like to pay attention to the progress of each business, especially the speed of launch of “image check solutions” that introduced a subscription business model.

＜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)>