Bridge Report:（6914）OPTEX GROUP the fiscal year ended December 2020

Isamu Oguni President and CEO	OPTEX GROUP (6914)

Company Information

Stock Information

*The share price is the closing price on February 16. The numbers are taken from the brief financial report for the FY December 2020.

Earnings Trend

* 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 the fiscal year ended December 2020, fiscal year ending December 2021 earnings forecasts and so on.

Table of Contents

Key Points
1. Company Overview
2. The Fiscal Year Ended December 2020 Earnings Results
3. Fiscal Year Ending December 2021 Earnings Forecasts
4. Medium-term Managerial Goals and Measures
5. Conclusions
<Reference: Regarding Corporate Governance>

Key Points

• The sales in the fiscal year ended December 2020 were 34,846 million yen, down 7.1% year on year. Economic activities were curtailed by the worldwide spread of COVID-19. Sales in the FA business were virtually flat, and sales in the other segments decreased. Domestic sales dropped 8.7% year on year to 15,494 million yen, while overseas sales declined 5.8% year on year to 19,352 million yen. Compared to the second quarter cumulative total, the rate of the decrease in profit increased domestically, while it shrank overseas. Operating profit dropped 26.5% year on year to 2,098 million yen. Although SG&A expenses declined 5.4% year on year, it was not possible to absorb the impact of the decrease in sales. Despite both sales and profits decreased, there were recoveries from the second half of the fiscal year. Therefore, both sales and profits exceeded the forecast announced in July 2020.

   

• For the fiscal year ending December 2021, sales are estimated to grow 14.8% year on year to 40 billion yen, and operating profit is projected to rise 43.0% year on year to 3 billion yen. The company aims to increase sales in all segments. Sanritz Automation Co., Ltd., which the company made into a subsidiary, will contribute approximately 3 billion yen to sales. By region, Asia, centered on Japan and China, will drive sales. The dividend is scheduled to be the same as the previous fiscal year at 30.00 yen/share. The estimated payout ratio is 49.3%.

   

• Although sales and profits declined for the full-year, overseas sales headed toward recovery after bottoming out in the second quarter and exceeded expectations in the fourth quarter (Oct. to Dec.). In particular, European business focused on the outdoor warning sensors which was “expected to be sluggish again in the fourth quarter” in the previous report significantly exceeded expectations. Domestic sales were also lower than expected in the fourth quarter (Oct. to Dec.). However, sales increased compared to the third quarter. As a result, company-wide sales headed upward after bottoming out in the second quarter and landed higher than expected.

   

• This fiscal year will be the first step in once again taking on the challenge of achieving sales of 50 billion yen. Accordingly, investors should pay attention to how the three measures to achieve that — (1) create business synergies through M&A, (2) strengthen sales capabilities in the Europe, and (3) facilitate the shift of the business model from selling products to selling services — progress, and in particular to what extent the image confirmation solution business, which forms the core of the business reform model that has been around for almost two years since its release, will contribute to an increase in sales in Europe and America in this fiscal year.

   

   

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; Sanritz Automation Co., Ltd., which has a wealth of results in the development, manufacturing and sales of industrial computers and systems, 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.
As of December 31, 2020, the company operates in 80 locations worldwide, including 26 overseas companies.

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. It acquired THREE ACE Co., Ltd. in June 2018, which specializes in the development of various systems, applications, and digital content. On December 2020, the company acquired Sanritz Automation Co., Ltd., which has a wealth of results in the development, manufacturing and sales of industrial computers and systems.

1-4 ROE analysis

The company is aiming for an early recovery to the target of 10% or more.

1-5 Efforts on ESG

The company believes that building a relationship of trust with a wide range of stakeholders is essential for improving corporate value and has posted 「ESG information」（https://www.optexgroup.co.jp/en/esg/stakeholder.html）on its website to further enhance ESG information disclosure. In addition, Published the ESG Bridge Report through Investment Bridge Inc.
The company identify the materiality for sustainable growth for the first time, and mention the challenges and initiatives for the future in the report.
https://www.bridge-salon.jp/report_bridge/archives/eng/6914/20200609.html

2. The Fiscal Year Ended December 2020 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. Ratio to the estimates: Compared with the estimates announced in July 2020.

Although Sales and profit declined, both exceeded the forecast
The sales were 34,846 million yen, down 7.1% year on year. Economic activities were curtailed by the worldwide spread of COVID-19. Sales in the FA business were virtually flat, and sales in the other segments decreased. Domestic sales dropped 8.7% year on year to 15,494 million yen, while overseas sales declined 5.8% year on year to 19,352 million yen. Compared to the second quarter cumulative total, the rate of the decrease in profit increased domestically, while it shrank overseas. Operating profit dropped 26.5% year on year to 2,098 million yen. Although SG&A expenses declined 5.4% year on year, it was not possible to absorb the impact of the decrease in sales. Despite both sales and profit decreased, there were recoveries from the second half of the fiscal year. Therefore, both sales and profit exceeded the forecast announced in July 2020.

◎Trends in each quarter

On a quarterly basis, in the fourth quarter, sales recovered to a level of 97% and ordinary profit returned to a level of 78%, respectively year on year.

◎Regional trends

*Unit: million yen. Ratio to the estimates: Compared with the estimates announced in July 2020.

Sales increased year on year and exceeded expectations in Asia due to a recovery in the Chinese market. Although sales in Europe fell, they exceeded expectations.

◎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. Taken from the brief financial report for the FY December 2020.

MVL business: Sales and profits decreased. Sales and profits were impacted by the decrease in the volume of orders due to business restrictions in Japan. The rate of the decrease in profit was high due to the decrease in sales since the profit margin was originally high. Nevertheless, in addition to SE recruitment and the opening of a testing room to strengthen consulting business, aggressive upfront investment with the establishment of a European supervising company (Jan. 2021) and the manufacturing plant relocation of CCS also contributed to a decline in profits.

②Trends in each segment and region

*Unit: million yen

◎SS Business
Sales and profits decreased. Business activities were restricted for both security related and automatic door related business due to lockdowns.

（Security-related）
Japan: The sales of outdoor security sensors for security companies and large important facilities were sluggish, and sales declined.
AMERICAs: Due to restrictions on operations, sales, and installation activities because of the novel coronavirus crisis, projects at large important facilities were postponed, and sales decreased.
EMEA: Sales of outdoor warning sensors for large important facilities, commercial facilities, and regular households were sluggish and declined in all countries except South Africa. This was due to restrictions on business, sales, and installation activities because of COVID-19.
Asi Sales were sluggish in China and South Korea due to COVID-19 until the third quarter. However, sales increased in the fourth quarter with receiving orders for projects for large important facilities in China and South Korea.

（Automatic door-related）
Japan: Sales declined due to continued restraint on store-related investment in major markets.
AMERICAs: Operations, sales, and installation activities for major North American OEM customers were restricted, resulting in a significant drop in sales.
EMEA: Operations, sales, and installation activities for major European OEM customers were restricted, resulting in a significant sales decrease.

◎FA Business
Sales and profits increased. Sales of displacement sensors in China were strong. Sales of displacement sensors for SICK, an OEM, have also recovered.
Japan: Although the sales of image sensors to the food industry were firm, profit declined due to sluggish capital investment demand in the automobile-related industry.
EMEA: Sales for OEM destinations in Germany rapidly recovered and increased.
Asi Due to an increase in demand for capital investment in China, sales of displacement sensors increased steadily, resulting in a significant rise in sales.

◎MVL lighting business
Sales and profits decreased. Sales and profits were impacted by the decrease in the volume of orders due to business restrictions in Japan. The rate of the decrease in profit was high due to the decrease in sales since the profit margin was originally high. Nevertheless, in addition to SE recruitment and the opening of a testing room to strengthen consulting business, aggressive upfront investment with the establishment of a European supervising company (Jan. 2021) and the manufacturing plant relocation of CCS also contributed to a decline in profits.

Japan: The sales for 5G-related investments were firm, but sales declined due to restrictions on operating activities from the second quarter onward.
AMERICAs: Sales increased due to strong sales to the medical industry in the North American region.
EMEA: Sales decreased due to restrictions on business activities because of lockdowns.
Asi Sales in China recovered. However, sales decreased due to restrictions on business activities in other regions.

(3) Financial Conditions and Cash Flow

◎Main BS

*Unit: million yen

Total assets increased by 3,423 million yen compared to the end of the previous year to 47,390 billion yen, mainly due to Sanritz Automation Co., Ltd acquisition. Total liabilities increased 3,170 million yen to 14,765 million yen. Net assets increased by 253 million yen to 32,625 million yen, due to an increase in retained earnings. The equity ratio was 68.4%, down 4.8 points from the end of the previous fiscal year.

◎Cash flow

*Unit: million yen

The negative investing CF increased due to the acquisition of Sanritz Automation. However, free CF remained positive.
The cash position improved.

(4) Topics

Made Sanritz Automation Co., Ltd. into a Subsidiary
The company acquired and made Sanritz Automation Co., Ltd. into a wholly-owned subsidiary from Toyota Motor Corporation and others in December 2020.

(Overview of Sanritz Automation Co., Ltd.)
Established in 1971. Manufactures embedded board products that pursue high-quality and long-term supply for various industrial fields, and builds systems for production lines and social infrastructure. Offers services from providing platforms to building application systems necessary for building embedded computers (e.g., CPU boards, I/O boards, and controller devices). In addition, they support a wide-range of customer needs. For example, they provide the latest sensing and control devices. Sales were 3.7 billion yen and operating profit was 350 million yen in the fiscal year ended August 2020. Total assets are 3 billion yen and net assets are 2.4 billion yen.

(Background to Making Sanritz Automation Co., Ltd. into a Subsidiary)
The company will promote the cultivation of business in fields that are expected to grow in the future (e.g., traffic control and parking lot management, security and safety management of airports and railroads, and the IoT related field) by combining the technologies and customer bases built up by both the OPTEX Group and Sanritz Automation. This will lead to an improvement in corporate value.

(Taken from the reference material of the company)

3. Fiscal Year Ending December 2021 Earnings Forecasts

(1) Earnings forecast

*Unit: million yen.

Sales and profit are estimated to increase
Sales are estimated to grow 14.8% year on year to 40 billion yen, and operating profit is projected to rise 43.0% year on year to 3 billion yen. The company aims to increase sales in all segments. Sanritz Automation Co., Ltd., which the company made into a subsidiary, will contribute approximately 3 billion yen to sales. By region, Asia, centered on Japan and China, will drive sales. The dividend is scheduled to be the same as the previous fiscal year at 30.00 yen/share. The estimated payout ratio is 49.3%.

◎Regional trends

*Unit: million yen.

(2) Trends in each segment

①Sales of each segment

*Unit: million yen. The actual results for FY2020 are given on a rearranged basis due to the reorganization of the second-tier subsidiary, GARDASOFT VISION LIMITED. (UK), into the MVL business from the SS business (security related). The new operating company refers to Sanritz Automation Co., Ltd.

②Trends in each segment and region

*Unit: million yen. The actual results for FY2020 are given on a rearranged basis due to the reorganization of the second-tier subsidiary, GARDASOFT VISION LIMITED. (UK), into the MVL business from the SS business (security related).

4. Medium-term Managerial Goals and Measures

(1) Medium-term Managerial Goals

Under the group philosophy, “We aim to become a corporate group full of Venture Spirit!,” the company will continue to (1) reduce fixed costs aiming for a consolidated sales operating profit margin of 10% or more in the fiscal year ending December 2022, (2) improve profit per person, and (3) achieve sales growth of 10%. In this way, the company will take on the challenge again of achieving sales of 50 billion yen in the fiscal year ending December 2023 as a medium-term managerial goal.
The company will curb the increase in indirect costs over the entire group by strengthening the group’s head office functions.
The company will get back on track for growth by expanding existing business and promoting new business.

(Taken from the reference material of the company)

The management policy of the group is to curb the increase in indirect costs over the entire group by strengthening the group’s head office functions while getting back on track for growth by expanding existing business and promoting new business.

(2) Main Measures

The measures to achieve this policy are as follows: (1) create business synergies through M&A, (2) strengthen sales capabilities in the Europe, and (3) facilitate the shift of the business model from selling products to selling services.

① Create Business Synergies through M&A
As mentioned above, the company made Sanritz Automation Co., Ltd. into a subsidiary in December 2020. This is a firm specializing in the manufacturing of embedded board products that pursue high-quality and long-term supply in the industrial field and the construction of systems for production lines and social infrastructure.

As a first step, the company believes it is possible to expect synergistic effects with the SS business that is promoting a shift in business from the “sales of materials” to the “sale of things.”
Combining the technological capabilities and customer bases of both the group and Sanritz Automation will create new business opportunities in fields that are expected to grow in the future (e.g., traffic control and parking lot management and safety management of railways).
As a second step, the company will aim to sell products in the FA business and the MVL business to the manufacturing sites of automobile, semiconductor manufacturing device, machine, and medical equipment manufacturers — the main business partners of Sanritz Automation.

The company will continue to aggressively pursue M&As that can be expected to generate business synergy in the future.

② Strengthen Sales Capabilities in the Europe
In security related operations in SS business, the company has established a subsidiary in Hague in the Netherlands as a part of the reorganization of European bases to accelerate business expansion in the region to deal with market changes caused by the United Kingdom’s withdrawal from the European Union (EU). This subsidiary began operating in January 2021.

The new subsidiary will aim to cover customers from the Netherlands to the countries of Europe and to promote image confirmation solution business that links sensors and images — one of the growth strategies of security related business.
Customer-orientated business activities and technical support are indispensable in this business. Accordingly, the company is looking to expand and accelerate on the European continent by increasing market contact points with localization and strengthening sales capabilities.
Moreover, this will avoid the turmoil feared to result from the United Kingdom’s withdrawal of the EU and to achieve optimization of sustainable logistics over the medium- to long-term.

The following is an overview of the image confirmation solutions business being deployed in Europe and America through an alliance with a U.S. venture company called CHeKT.

(Taken from the reference material of the company)

The company established CCS Europe Holding B.V., a European supervising company, near Amsterdam in the Netherlands in January 2021 in the MVL business.

The company established CCS Europe N.V., a sales subsidiary, in Belgium in Europe in 2004 in the same business. The company then made Effilux SAS, a machine-vision lighting manufacturer headquartered in France with a base in Germany, into a subsidiary in 2018. These have led to an expansion in market share in the machine-vision industry in Europe.

The company made GARDASOFT VISION LIMITED., a machine-vision controller manufacturer in the United Kingdom, into a subsidiary through a simple absorption-type split from the OPTEX group company in January 2021. There is now a structure of four bases in Belgium, France, Germany, and the United Kingdom in Europe.
The company established CCS Europe Holding B.V. (CCS Netherlands) to supervise and strengthen group cooperation and maximize competitiveness in the European area consisting of these four bases.

In terms of sales, the three companies will improve the quality and speed of product and solution provision by handling each other’s products. In addition, smooth collaboration among the companies on the development of products for the European region will make it possible to provide image inspection solutions that meet customer needs more than ever before.
The company is aiming to increase European sales in this business from their current level of approximately 1.5 billion yen to 4 billion yen in 2025.

③ Facilitate the shift of the business model from selling products to selling services
The company started operating OMNICITY in February 2021 as a specific example of the reform to the business model. This is a sharing service that utilizes automatic door sensors equipped with beacon functions in the automobile door related business of SS business.

Overview of OMNICITY
The OPTEX Group holds a 50% share of the domestic market for automatic door sensors. These sensors have been installed in one million automatic doors at the entrances of various commercial facilities and stores in Japan. Tens of millions of people come and go every day around these entrances. The company developed OMNICITY to effectively utilize this perfect position. It is the first sharing service in the industry that effectively utilizes the location information of automatic door sensors.

The company will encourage purchases with the distribution of advertisements and coupons which match the hobbies and preferences of visitors by utilizing the sensors equipped with a beacon function that can distribute information to smartphones owned by passers-by.
The company is working to switch the two million automatic door sensors installed across Japan to automatic door sensors equipped with the beacon function.
Moreover, they will increase the spots of OMNICITY by rolling out to the company’s sensors installed in various outdoor spaces (e.g., buildings other than stores and parking lots) and by linking up with the sensors of other companies.
First, the company plans to gradually expand automatic door sensors up to one million by 2023.

If these sensors spread widely, it will be possible to grasp location information by surfaces. Therefore, the company believes the need for advertising companies to distribute various information using this location information will grow.
The company will match stores and advertising companies with a business model in which income will be obtained monthly on a continued basis if matching is established. It is possible to expect extremely high profitability.

5. Conclusions

Although sales and profits declined for the full-year, overseas sales headed toward recovery after bottoming out in the second quarter and exceeded expectations in the fourth quarter (Oct. to Dec.). In particular, European business focused on the outdoor warning sensors which was “expected to be sluggish again in the fourth quarter” in the previous report significantly exceeded expectations. Domestic sales were also lower than expected in the fourth quarter (Oct. to Dec.). However, sales increased compared to the third quarter. As a result, company-wide sales headed upward after bottoming out in the second quarter and landed higher than expected.
This fiscal year will be the first step in once again taking on the challenge of achieving sales of 50 billion yen. Accordingly, investors should pay attention to how the three measures to achieve that — (1) create business synergies through M&A, (2) strengthen sales capabilities in the Europe, and (3) facilitate the shift of the business model from selling products to selling services — progress, and in particular to what extent the image confirmation solution business, which forms the core of the business reform model that has been around for almost two years since its release, will contribute to an increase in sales in Europe and America in this fiscal year.

＜Reference: Regarding Corporate Governance＞

◎Organization type, and the composition of directors and auditors

◎Corporate Governance ReportThe latest revision date: March 27, 2020

<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)>
The company has implemented all of the principles of the Governance Code.

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