Nikon's 2017 Annual Report

Nikon last week published their 2017 Annual Report. Only it's no longer called an annual report, it's just a report that's done annually ;~).

Right up front you get a sentence that should immediately give you pause: "In November 2016, Nikon decided to discontinue the Medium-Term Management Plan Update announced in 2015, and enter in a period of restructuring." 

Now a great deal of that restructuring had to do with finally coming to reality with the Semiconductor Lithography business, but there are hints throughout the report that it wasn't just the results at one division that caused this change. Indeed, further down you find that two "extraordinary Board of Directors" meetings were held to discuss all the restructuring. 

Short term, the impacts of those meetings were to establish three specific shorter-term goals that are currently in effect: establishing breakeven with the semiconductor lithography business, increasing profits in the imaging business, and dealing with building a better management team and process.

The big problem for Nikon, of course, is that they've been contracting in revenue since 2013, and profit peaked in 2012. While their underlying economic fundamentals are still sound overall, contracting businesses eventually reach levels where the fundamentals start to fail. 

Going forward, Nikon has six business: imaging (cameras/lenses), FTP lithography, semiconductor lithography, healthcare, industrial metrology, and other. The current "plan" is to resume value creation through growth beginning in 2019. It's unclear where that growth really comes from, though healthcare is often mentioned by Nikon elsewhere as the potential driver of future growth.

But let's talk cameras and lenses as outlined in the report. In particular Nikon's current plan is to "target a profit-structure able to sustain profit in a declining market." I've got two problems with this. First, it's not clear that the camera market is still declining. Certainly, Nikon's share of it is still declining, but there's actually been a bit of growth during the trailing 12 months in the ILC market where Nikon mostly competes. My second problem is that the way Nikon intends to achieve their plan is to cut costs. Nikon's already cut costs in the imaging group to the point where virtually every customer has seen the result of it. 

Nobuyoshi Gokyu is quoted as saying "It fills me with shame when I think of how many people had to leave the Imaging Business Unit due to voluntary retirement program and reassignments as part of the restructuring." That's part of the latest round of large-scale cost-cutting that went on, but it also seems to have left a slightly unsettled management team in its wake. The only significant product introduced after the restructuring was the D850, a product that had a long gestation period and was already deeply in progress. 

In other words, we've not yet seen the results of what the restructuring means in terms of products. Gokyu-san says "we will extensively increase...basic performance, improve connectivity with smart devices, and pursue usability." All good things, obviously. But considering that they appeared on a page with photos of the Coolpix W300, the Nikon 1 J5, and D7500, it makes one wonder ;~).

There are some other eye-openers in Nikon's Report: "we have moved away from [paying dividends on total return of 30%] to 40%." In other words, all that profitability Nikon is pursuing: they want to reward shareholders even more. Given that their board is overrepresented by financial interests, this isn't surprising. Still, trying to raise dividend payouts at a time many parts of the business are under high stress and probably need more investment seems wrong to me.

Or this one: number of female group directors or officers at Nikon: 0. Non-Japanese: 0. How well they do in the owned subsidiaries is masked by the fact that they don't state the total number of directors and officers overall, so 3 women and 39 non-Japanese in the subsidiaries are meaningless numbers without knowing the full number of peers. What we have here is a 100-year old company that is still basically 100% Japanese men in terms of corporate management. 

Overall, the annual report appears to say this: we realize we had a problem, we went into quick and deep restructuring, and by some magical bean method we'll start growing again in the not very distant future. The closest you can get to a description of that magical bean is "cost cutting," or perhaps "higher ROE and ROIC" if you prefer those terms. What we all worry about, of course, is how Nikon gets to that, particularly with their customer-facing camera and lens products. Is this more "taking out a card slot" ala the D7500, or something more substantive? Unknown.

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