SATO Holdings 6287

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Recent Updates

2021-11-11

1H FY03/22 flash update

2021-09-14

Q1 FY03/22 report update

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msb Tamachi, Tamachi Station Tower N 3-1-1 Shibaura, Minato-ku Tokyo, Japan 108-0023

https://www.sato.co.jp/

03-6628-2438

Summary

Provides Auto-ID Solutions to help gather data on people and things at the site of business operations such as production, logistics, and retail. Mainstay products are mechatronics products, including label printers, reader equipment, maintenance services, and software, as well as consumables, including variable data labels and RFID tags.

Commercial Services & Supplies

Key dates

2012-07-13

Coverage initiation

Full Report

2021-11-11

1H FY03/22 flash update

2021-11-11

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Executive summary

SATO Holdings Corporation primarily manufactures and sells mechatronics products, including label printers, handheld labelers, reader equipment, maintenance services, and software, and consumables, including variable data labels (allowing printing of barcodes, serial numbers, or other data that varies from label to label), primary labels (containing the same data on each label, e.g., packaging label), RFID tags, printer ribbons, and MC cards. Its customer base is broad, including the manufacturing, logistics, retail, healthcare, food & beverage, and public markets. Mechatronics products account for about 40% of total sales, and consumables for about 60%. The company is distinctive for having higher gross margins on sales of mechatronics than on sales of consumables.

Shared Research estimates SATO’s share of Japan’s barcode printer market is fairly high, around 40%. Having direct connections with some 40,000 customers, the company has a system that allows it to respond rapidly to changes in customer needs. Customers choose to use the company’s products, as they produce labels in a timely fashion on production, logistics, and sales sites, with relatively little effort on the part of the customer. They also appreciate that the company’s devices rarely have trouble, after-sales service is thorough, and the company is ready to propose new solutions suited to the characteristics of individual customer sites. Meanwhile, Shared Research estimates that SATO’s share of the overseas market is only a few percent and its shift in overseas strategy is proceeding rather slowly. There seems to be ample room for the company to expand overseas sales by leveraging the expertise and services it has cultivated in Japan.

In recent years, M&A has also served as a growth driver. Companies SATO has acquired or invested in include an Asian printer manufacturer with competitive pricing capabilities, South American and Russian primary labels manufacturers, and a company in Oceania with strengths in advanced RFID reader and RFID tag tracking technology.

Trends and outlook

In FY03/21, SATO generated sales of JPY109.1bn (-6.3% YoY), operating profit of JPY5.8bn (-21.6% YoY), and net income attributable to owners of the parent of JPY13.0bn (net loss of JPY1.9bn in FY03/20). The COVID-19 pandemic had a major impact on the auto-ID solutions business in Japan and overseas. Operating profit declined significantly as a recovery starting in Q2 overseas and in Q3 in Japan, and decision to exit the IDP business, were not sufficient to make up for the 1H shortfall. The company booked an extraordinary gain on the sale of its former headquarters building, resulting in a sharp rise in net income. The company expected to pay an annual dividend of JPY70.0 per share, in line with the previous forecast.

The company announced a new three-year medium-term business plan starting from FY03/22 in view of the recent external environment.

SATO forecasts FY03/22 sales of JPY122.0bn (+11.9% YoY), operating profit of JPY6.4bn (+9.5% YoY), net income attributable to owners of the parent of JPY4.0bn (-69.1% YoY), and EPS of JPY119.1. When announcing 1H results, the company lifted its full-year FY3/22 sales forecast by JPY5.0bn, but left its profit forecasts unchanged. In Japan, the recovery from the pandemic is patchy and differs by market and industry. The company plans to focus its sales efforts on strong industries and applications enjoying healthy demand. In addition, it expects to grow earnings overseas by expanding solutions offerings, and forecasts sales growth and, for the first time in three years, higher operating profit. The company does not expect operating profit to reach the pre-pandemic levels of FY03/20 due to higher development and strategic marketing expenses. Net income is likely to fall sharply due to the absence of the extraordinary gain booked in FY03/21. The company expects to pay an annual dividend of JPY70.0 per share, including an interim dividend of JPY35.0 per share.

SATO targets FY03/23 sales of JPY123.0bn and operating profit of a record high JPY8.6bn. It plans FY03/24 sales of JPY130.0bn, operating profit of JPY11.8bn, and OPM of 9.1% (versus FY03/22 forecast of 5.5%). It appears that one factor contributing to earnings will be that SATO will concentrate its business resources in the auto-ID solutions business following its withdrawal from the IDP business. The company also plans strategic investments focusing on the transition to common printer platforms and development of new IT infrastructure over the three years with a view to long-term growth, and targets an OPM of over 10% in FY03/26, when the benefits start flowing through in earnest.

Strengths and weaknesses

Shared Research believes the company’s strengths are 1) its ability to provide solutions based on a good knowledge of customers’ on-site needs, 2) the high proportion of sales coming from stable recurring-revenue businesses, and 3) its wealth of knowledge on on-site data collection. Weaknesses include 1) insufficient management of overseas operations, 2) low cost competitiveness, and 3) uncertain consumables profitability in overseas markets (see Strengths and weaknesses section for details).

Key financial data

Income statement			FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21	FY03/22
(JPYmn)			Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Est.
Sales			87,257	96,774	99,831	105,505	106,302	113,383	116,179	116,372	109,052	122,000
	YoY		8.3%	10.9%	3.2%	5.7%	0.8%	6.7%	2.5%	0.2%	-6.3%	11.9%
Gross profit			36,411	41,180	42,709	44,942	45,022	48,655	50,676	50,179	45,735	-
	YoY		6.4%	13.1%	3.7%	5.2%	0.2%	8.1%	4.2%	-1.0%	-8.9%	-
	Gross profit margin		41.7%	42.6%	42.8%	42.6%	42.4%	42.9%	43.6%	43.1%	41.9%	-
SG&A expenses			30,958	34,422	35,265	38,487	38,917	42,405	42,997	42,718	39,888	-
	YoY		4.7%	11.2%	2.4%	9.1%	1.1%	9.0%	1.4%	-0.6%	-6.6%	-
	SG&A ratio		35.5%	35.6%	35.3%	36.5%	36.6%	37.4%	37.0%	36.7%	36.6%	-
Operating profit			5,453	6,759	7,444	6,455	6,104	6,249	7,679	7,461	5,847	6,400
	YoY		17.2%	23.9%	10.1%	-13.3%	-5.4%	2.4%	22.9%	-2.8%	-21.6%	9.5%
	Operating profit margin		6.2%	7.0%	7.5%	6.1%	5.7%	5.5%	6.6%	6.4%	5.4%	5.2%
Recurring profit			5,430	7,084	7,484	6,120	5,426	5,888	7,618	6,571	5,521	6,200
	YoY		30.2%	30.5%	5.6%	-18.2%	-11.3%	8.5%	29.4%	-13.7%	-16.0%	12.3%
	Recurring profit margin		6.2%	7.3%	7.5%	5.8%	5.1%	5.2%	6.6%	5.6%	5.1%	5.1%
Net income			2,726	4,295	3,763	3,688	3,221	4,074	3,773	-1,882	12,959	4,000
	YoY		39.6%	57.6%	-12.4%	-2.0%	-12.7%	26.5%	-7.4%	-	-	-69.1%
	Net margin		3.1%	4.4%	3.8%	3.5%	3.0%	3.6%	3.2%	-1.6%	11.9%	3.3%
Per-share data ('000 shares, JPY)
Shares issued (year-end)			32,001	33,408	34,880	34,921	34,921	34,921	34,921	34,921	34,921	-
	Shares outstanding (avg.; ex. treasury shares)		30,110	30,344	33,022	33,502	33,527	33,527	33,558	33,571	33,587	-
EPS			90.6	141.6	114.0	110.1	96.1	121.5	112.5	-56.1	385.9	119.1
Dividend per share			37.0	40.0	45.0	55.0	60.0	65.0	70.0	70.0	70.0	70.0
Book value per share			1,331	1,455	1,579	1,525	1,580	1,635	1,650	1,423	1,735	-
Balance sheet (JPYmn)
	Total current assets		46,690	53,647	56,331	54,235	55,571	57,161	59,367	66,195	74,641
		Cash and cash equivalents	12,670	17,760	19,034	18,043	17,375	16,461	16,837	23,796	33,037
		Trade receivables	20,942	22,390	23,354	22,460	23,215	24,737	25,522	23,766	24,878
		Inventories	8,680	9,277	10,959	10,481	10,990	11,365	13,453	13,053	13,072
	Tangible fixed assets		18,694	20,337	21,126	24,853	27,351	31,398	30,720	28,936	27,306
	Intangible assets		6,600	7,708	12,760	10,834	16,607	14,436	11,933	3,688	3,356
	Investments and other assets		5,536	5,043	4,956	6,963	4,750	3,450	5,552	4,326	4,007
Total assets			77,522	86,737	95,175	96,888	104,280	106,447	107,574	103,147	109,312
	Total current liabilities		27,405	31,346	33,271	33,750	34,446	34,064	36,904	41,492	36,988
		Trade payables	5,180	5,698	7,067	6,475	7,702	7,085	7,304	6,720	7,569
		Short-term debt	4,525	4,661	4,178	8,459	5,024	4,049	4,967	8,550	4,792
	Total fixed liabilities		9,911	8,656	8,745	10,982	15,616	16,157	14,000	12,832	12,862
		Long-term debt	8,083	6,145	5,578	7,508	11,832	12,671	10,917	9,798	10,555
Total liabilities			37,316	40,002	42,016	44,732	50,063	50,221	50,905	54,324	49,850
Total net assets			40,205	46,735	53,158	52,155	54,217	56,225	56,668	48,823	59,462

	Interest-bearing debt		12,608	10,806	9,756	15,967	16,856	16,720	15,884	18,348	15,347	-
	Net cash		62	6,954	9,278	2,076	519	-259	953	5,448	17,690	-
	R&D expenses		2,043	2,226	2,292	2,414	2,387	2,994	3,460	3,377	3,046	3,900
	Capital expenditures		3,060	6,106	7,372	6,718	5,723	9,044	4,801	3,835	4,931	8,000
	Depreciation		1,941	2,179	2,501	3,941	3,996	4,307	4,489	5,043	4,092	4,150
	Amortization of goodwill		819	933	1,099	1,177	1,195	1,258	1,081	871	223	250
	EBITDA		8,214	9,871	11,044	11,573	11,296	11,814	13,250	13,376	10,163	10,800
		EBITDA margin	9.4%	10.2%	11.1%	11.0%	10.6%	10.4%	11.4%	11.5%	9.3%	8.9%
Cash flow statement (JPYmn)
	Cash flows from operating activities		3,793	10,589	9,205	6,091	10,769	6,184	9,365	11,259	5,806
	Cash flows from investing activities		-984	-4,776	-6,221	-9,596	-8,716	-3,504	-5,212	-2,449	-102
	Cash flows from financing activities		-2,839	-1,511	-3,062	3,254	-1,343	-3,458	-3,534	-1,311	-7,131
Financial ratios
	ROA (RP-based)		7.1%	8.6%	8.2%	6.4%	5.4%	5.6%	7.1%	6.2%	5.2%
	ROE		7.2%	9.9%	7.6%	7.1%	6.2%	7.6%	6.9%	-3.6%	24.4%	6.7%
	Equity ratio		51.7%	53.7%	55.6%	52.8%	50.8%	51.5%	51.5%	46.3%	53.3%

Source: Shared Research based on company data

Recent updates

1H FY03/22 flash update

2021-11-11

On November 10, 2021, SATO Holdings Corporation announced earnings results for 1H FY03/22; see the results section for details.

Trends and outlook

Quarterly trends and results

Cumulative		FY03/20				FY03/21				FY03/22		FY03/22
(JPYmn)		Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	% of Est.	FY Est.
Sales		28,463	57,875	87,803	116,372	23,651	49,872	79,271	109,052	30,177	60,261	49.4%	122,000
	YoY	1.2%	2.5%	1.2%	0.2%	-16.9%	-13.8%	-9.7%	-6.3%	27.6%	20.8%		11.9%
Gross profit		12,298	25,129	37,970	50,179	9,877	20,855	33,316	45,735	12,544	24,554		-
	YoY	-0.3%	0.9%	0.6%	-1.0%	-19.7%	-17.0%	-12.3%	-8.9%	27.0%	17.7%
	Gross profit margin	43.2%	43.4%	43.2%	43.1%	41.8%	41.8%	42.0%	41.9%	41.6%	40.7%
SG&A expenses		10,784	21,586	32,324	42,718	9,491	19,384	29,538	39,888	10,838	21,774		-
	YoY	-0.7%	0.2%	0.1%	-0.6%	-12.0%	-10.2%	-8.6%	-6.6%	14.2%	12.3%
	SG&A ratio	37.9%	37.3%	36.8%	36.7%	40.1%	38.9%	37.3%	36.6%	35.9%	36.1%
Operating profit		1,514	3,542	5,645	7,461	385	1,470	3,777	5,847	1,706	2,779	43.4%	6,400
	YoY	2.8%	6.0%	3.7%	-2.8%	-74.6%	-58.5%	-33.1%	-21.6%	343.1%	89.0%		9.5%
	Operating profit margin	5.3%	6.1%	6.4%	6.4%	1.6%	2.9%	4.8%	5.4%	5.7%	4.6%		5.2%
Recurring profit		1,338	3,237	5,362	6,571	618	1,231	3,469	5,521	1,644	2,695	43.5%	6,200
	YoY	-4.6%	1.5%	5.1%	-13.7%	-53.8%	-62.0%	-35.3%	-16.0%	166.0%	118.9%		12.3%
	Recurring profit margin	4.7%	5.6%	6.1%	5.6%	2.6%	2.5%	4.4%	5.1%	5.4%	4.5%		5.1%
Net income		842	2,880	4,157	-1,882	213	3,249	11,604	12,959	1,085	1,848	46.2%	4,000
	YoY	7.8%	50.1%	35.1%	-	-74.7%	12.8%	179.1%	-	409.4%	-43.1%		-69.1%
	Net margin	3.0%	5.0%	4.7%	-1.6%	0.9%	6.5%	14.6%	11.9%	3.6%	3.1%		3.3%
Quarterly		FY03/20				FY03/21				FY03/22
(JPYmn)		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2
Sales		28,463	29,412	29,928	28,569	23,651	26,221	29,399	29,781	30,177	30,084
	YoY	1.2%	3.7%	-1.1%	-2.9%	-16.9%	-10.8%	-1.8%	4.2%	27.6%	14.7%
Gross profit		12,298	12,831	12,841	12,209	9,877	10,978	12,461	12,419	12,544	12,010
	YoY	-0.3%	2.1%	0.0%	-5.7%	-19.7%	-14.4%	-3.0%	1.7%	27.0%	9.4%
	Gross profit margin	43.2%	43.6%	42.9%	42.7%	41.8%	41.9%	42.4%	41.7%	41.6%	39.9%
SG&A expenses		10,784	10,802	10,738	10,394	9,491	9,893	10,154	10,350	10,838	10,936
	YoY	-0.7%	1.0%	0.0%	-3.0%	-12.0%	-8.4%	-5.4%	-0.4%	14.2%	10.5%
	SG&A ratio	37.9%	36.7%	35.9%	36.4%	40.1%	37.7%	34.5%	34.8%	35.9%	36.4%
Operating profit		1,514	2,028	2,103	1,816	385	1,085	2,307	2,070	1,706	1,073
	YoY	2.8%	8.4%	0.1%	-18.7%	-74.6%	-46.5%	9.7%	14.0%	343.1%	-1.1%
	Operating profit margin	5.3%	6.9%	7.0%	6.4%	1.6%	4.1%	7.8%	7.0%	5.7%	3.6%
Recurring profit		1,338	1,899	2,125	1,209	618	613	2,238	2,052	1,644	1,051
	YoY	-4.6%	6.3%	11.0%	-51.9%	-53.8%	-67.7%	5.3%	69.7%	166.0%	71.5%
	Recurring profit margin	4.7%	6.5%	7.1%	4.2%	2.6%	2.3%	7.6%	6.9%	5.4%	3.5%
Net income		842	2,038	1,277	-6,039	213	3,036	8,355	1,355	1,085	763
	YoY	7.8%	79.1%	10.2%	-	-74.7%	49.0%	554.3%	-	409.4%	-74.9%
	Net margin	3.0%	6.9%	4.3%	-21.1%	0.9%	11.6%	28.4%	4.5%	3.6%	2.5%

Source: Shared Research based on company data

By segment				FY03/20				FY03/21				FY03/22		FY03/22
Quarterly (JPYmn)				Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	% of Est.	FY Est.
Sales				28,463	29,412	29,928	28,569	23,651	26,221	29,399	29,781	30,177	30,084	49.4%	122,000
	YoY			1.2%	3.7%	-1.1%	-2.9%	-16.9%	-10.8%	-1.8%	4.2%	27.6%	14.7%		11.9%
	Auto-ID Solutions			28,362	29,318	29,827	28,501	23,574	26,161	29,399	29,781	30,177	30,084	49.4%	122,000
		YoY		1.3%	3.7%	-1.1%	-2.8%	-16.9%	-10.8%	-1.4%	4.5%	28.0%	15.0%		12.0%
		% of total		99.6%	99.7%	99.7%	99.8%	99.7%	99.8%	100.0%	100.0%	100.0%	100.0%		100.0%
		Overseas		10,867	10,740	11,118	9,923	7,844	10,169	11,046	11,290	12,929	12,355	50.6%	50,000
			YoY	-0.4%	0.5%	-2.6%	-3.7%	-27.8%	-5.3%	-0.6%	13.8%	64.8%	21.5%		23.9%
			% of total	38.2%	36.5%	37.1%	34.7%	33.2%	38.8%	37.6%	37.9%	42.8%	41.1%		41.0%
		Japan		17,495	18,578	18,709	18,578	15,730	15,992	18,353	18,491	17,248	17,729	48.6%	72,000
			YoY	2.4%	5.7%	-0.1%	-2.4%	-10.1%	-13.9%	-1.9%	-0.5%	9.7%	10.9%		5.0%
			% of total	61.5%	63.2%	62.5%	65.0%	66.5%	61.0%	62.4%	62.1%	57.2%	58.9%		59.0%
	IDP			100	94	100	69	75	61	-	-	-	-
		YoY		-20.0%	-10.5%	-13.8%	-14.8%	-25.0%	-35.1%	-	-	-	-
		% of total		0.4%	0.3%	0.3%	0.2%	0.3%	0.2%	-	-	-	-
Operating profit				1,514	2,028	2,103	1,816	385	1,085	2,307	2,070	1,706	1,073	43.4%	6,400
	YoY			2.8%	8.4%	0.1%	-18.7%	-74.6%	-46.5%	9.7%	14.0%	343.1%	-1.1%		9.5%
	Operating profit margin			5.3%	6.9%	7.0%	6.4%	1.6%	4.1%	7.8%	7.0%	5.7%	3.6%		5.2%
	Auto-ID Solutions			1,878	2,360	2,472	2,046	476	1,132	2,214	2,083	1,760	1,001	43.8%	6,300
		YoY		5.7%	3.8%	-2.4%	-22.4%	-74.7%	-52.0%	-10.4%	1.8%	269.7%	-11.6%		6.7%
		Operating profit margin		6.6%	8.0%	8.3%	7.2%	2.0%	4.3%	7.5%	7.0%	5.8%	3.3%		5.2%
		Overseas		560	595	773	349	77	684	1,043	880	1,175	698	55.1%	3,400
			YoY	1.3%	-10.8%	14.7%	1.2%	-86.3%	15.0%	34.9%	152.1%	1,426.0%	2.0%		26.7%
			Operating profit margin	5.2%	5.5%	7.0%	3.5%	1.0%	6.7%	9.4%	7.8%	9.1%	5.6%		6.8%
		Japan		1,318	1,765	1,699	1,697	399	448	1,171	1,203	585	303	30.6%	2,900
			YoY	7.7%	9.8%	-8.7%	-25.9%	-69.7%	-74.6%	-31.1%	-29.1%	46.6%	-32.4%		-10.0%
			Operating profit margin	7.5%	9.5%	9.1%	9.1%	2.5%	2.8%	6.4%	6.5%	3.4%	1.7%		4.0%
	IDP			-394	-343	-318	-262	-70	-78	-	-	-	-
		YoY		-	-	-	-	-	-	-	-	-	-
		Operating profit margin		-394.0%	-364.9%	-318.0%	-379.7%	-93.3%	-127.9%	-	-	-	-
	Adjustments			30	11	-51	32	-21	31	93	-13	-54	72

Source: Shared Research based on company data

1H FY03/22 results (out November 10, 2021)

Results summary

1H (April–September) FY3/22 results were are follows.

Sales: JPY60.3bn (+20.8% YoY, vs. company 1H forecast of JPY56.7bn)
Operating profit: JPY2.8bn (+89.0% YoY, JPY2.4bn)
Recurring profit: JPY2.7bn (about +2.2x YoY, JPY2.3bn)
Net income attributable to owners of the parent: JPY1.8bn (-43.1% YoY, JPY1.5bn)

The company intends to pay an interim dividend of JPY35 per share (in line with forecast).

Driving overall earnings in 1H, the auto-ID solutions business overseas saw sales increase of over 40% YoY (reaching a record high) and operating profit expand roughly 2.5x YoY. Sales in the same business were also firm in Japan, rising by more than 10% YoY, with operating profit up about 5% YoY. 1H sales and profits both exceeded the forecasts made by the company at the beginning of the term.

Q2 (July-September) FY3/22 results were as follows.

Sales: JPY30.1bn (+14.7% YoY)
Operating profit: JPY1.1bn (-1.1% YoY)
Recurring profit: JPY1.1bn (+71.5% YoY)
Net income: JPY763mn (-74.9% YoY)

In the auto-ID solutions business, sales continued to expand in Japan and overseas in Q2. Sales in the business were up more than 20% YoY overseas and more than 10% YoY in Japan. However, operating profit growth overseas was held to just 2.0% YoY due to soaring raw material prices, printer supply constraints, and higher transportation and other costs. Changes in the product mix and investment aimed at future growth resulted in operating profit on the domestic side of the business dropping 32.4% YoY. As a result, consolidated operating profit in Q2 dipped 1.1% YoY, marking the first YoY decline in four quarters. Recurring profit improved for the fourth consecutive quarter while net income fell for the first time in five quarters. Net income declined sharply YoY because there was an effective reduction in tax expenses in Q2 FY03/21 (July–September 2020).

Note: Shared Research intends to update this report after interviewing management.

Factors affecting change in operating profit

Factors affecting OP change			FY03/20				FY03/21				FY03/22
Quarterly (JPYmn)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2
Operating profit			1,514	2,028	2,103	1,816	385	1,085	2,307	2,070	1,706	1,073
	YoY change		41	158	2	-419	-1,129	-943	204	254	1,321	-12
		Sales change	364	709	86	-232	-1,803	-1,403	-31	331	2,128	1,491
		GP-related factors, other	-231	-205	148	-357	-441	-323	-219	-127	336	-637
		SG&A: Auto-ID Solutions	-51	-340	-229	53	770	517	52	-370	-1,299	-1,030
		SG&A: IDP	-37	9	49	131	326	298	367	346	129	120
		Forex impact	-4	-15	-52	-14	19	-32	35	74	27	44
Auto-ID Solutions: Overseas			560	595	773	349	77	684	1,043	880	1,175	698
	YoY change		7	-72	99	4	-483	89	270	531	1,098	14
		Sales change	177	178	22	-29	-887	-103	82	610	1,534	651
		GP-related factors, other	-209	-230	29	-17	74	120	248	146	169	-402
		SG&A-related factors	77	47	97	71	346	146	22	-178	-631	-256
		Forex impact	-38	-67	-49	-21	-16	-74	-82	-47	26	21
Auto ID Solutions: Japan			1,318	1,765	1,699	1,697	399	448	1,171	1,203	585	303
	YoY change		94	158	-161	-594	-919	-1,317	-528	-494	186	-145
		Sales change	205	498	-20	-224	-881	-1,296	-159	-29	707	827
		GP-related factors, other	19	31	87	-397	-552	-450	-432	-73	198	-259
		SG&A-related factors	-145	-390	-215	26	481	387	-54	-517	-719	-736
		Forex impact	15	19	-13	1	33	42	117	125	0	23

Source: Shared Research based on company data

Auto-ID Solutions (Japan)

Auto ID Solutions: Japan			FY03/20				FY03/21				FY03/22		FY03/22
Quarterly (JPYmn)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	% of Est.	FY Est.
Sales			17,495	18,578	18,709	18,578	15,730	15,992	18,353	18,491	17,248	17,729	48.6%	72,000
	YoY		2.4%	5.7%	-0.1%	-2.4%	-10.1%	-13.9%	-1.9%	-0.5%	9.7%	10.9%		-0.6%
	Mechatronics		6,954	7,676	7,456	8,711	6,176	6,320	7,028	8,444	6,739	7,337		-
		YoY	11.8%	9.7%	7.3%	-3.5%	-11.2%	-17.7%	-5.7%	-3.1%	9.1%	16.1%
	Consumables		10,540	10,903	11,253	9,867	9,554	9,672	11,325	10,047	10,526	10,406		-
		YoY	-3.0%	3.0%	-4.5%	-1.4%	-9.4%	-11.3%	0.6%	1.8%	10.2%	7.6%
Gross profit			8,740	9,318	9,136	8,998	7,339	7,614	8,663	9,019	8,246	8,204		-
	YoY		2.8%	6.3%	0.6%	-6.4%	-16.0%	-18.3%	-5.2%	0.2%	12.4%	7.7%
	Gross profit margin		50.0%	50.2%	48.8%	48.4%	46.7%	47.6%	47.2%	48.8%	47.8%	46.3%
Operating profit			1,318	1,765	1,699	1,697	399	448	1,171	1,203	585	303	30.6%	2,900
	YoY		7.7%	9.8%	-8.7%	-25.9%	-69.7%	-74.6%	-31.1%	-29.1%	46.6%	-32.4%		-58.5%
	Operating profit margin		7.5%	9.5%	9.1%	9.1%	2.5%	2.8%	6.4%	6.5%	3.4%	1.7%		4.0%

Source: Shared Research based on company data

Sales by market			FY03/20				FY03/21				FY03/22
Quarterly (JPYmn)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2
Sales			17,495	18,578	18,709	18,578	15,730	15,992	18,353	18,491	17,248	17,729
	YoY		2.4%	5.7%	-0.1%	-2.4%	-10.1%	-13.9%	-1.9%	-0.5%	9.7%	10.9%
	Manufacturing		5,426	5,584	5,697	5,786	4,138	4,247	5,165	5,605	4,802	4,996
		YoY	-	-	-	-	-23.7%	-23.9%	-9.3%	-3.1%	16.0%	17.6%
		% of total	31.0%	30.1%	30.5%	31.1%	26.3%	26.6%	28.1%	30.3%	27.8%	28.2%
	Logistics		3,570	3,743	4,498	4,530	3,168	3,185	4,472	4,341	3,586	3,587
		YoY	-	-	-	-	-11.3%	-14.9%	-0.6%	-4.2%	13.2%	12.6%
		% of total	20.4%	20.1%	24.0%	24.4%	20.1%	19.9%	24.4%	23.5%	20.8%	20.2%
	Retail		2,502	2,487	2,087	1,787	2,423	2,443	2,408	2,300	2,683	2,636
		YoY	-	-	-	-	-3.2%	-1.8%	15.4%	28.7%	10.7%	7.9%
		% of total	14.3%	13.4%	11.2%	9.6%	15.4%	15.3%	13.1%	12.4%	15.6%	14.9%
	Healthcare		1,884	2,357	2,289	2,130	1,676	1,922	2,096	2,132	1,911	2,066
		YoY	-	-	-	-	-11.0%	-18.5%	-8.4%	0.1%	14.0%	7.5%
		% of total	10.8%	12.7%	12.2%	11.5%	10.7%	12.0%	11.4%	11.5%	11.1%	11.7%
	Food & beverage		1,961	2,075	1,749	1,638	1,840	1,787	1,722	1,549	1,881	1,696
		YoY	-	-	-	-	-6.2%	-13.9%	-1.5%	-5.4%	2.2%	-5.1%
		% of total	11.2%	11.2%	9.3%	8.8%	11.7%	11.2%	9.4%	8.4%	10.9%	9.6%
	Public		411	536	562	853	650	554	591	684	535	831
		YoY	-	-	-	-	58.2%	3.4%	5.2%	-19.8%	-17.7%	50.0%
		% of total	2.3%	2.9%	3.0%	4.6%	4.1%	3.5%	3.2%	3.7%	3.1%	4.7%

Source: Shared Research based on company data
Note: The company changed its market classifications from FY03/22. Figures for Q1 and Q2 FY03/20 and Q1 and Q2 FY03/21 have been retrospectively adjusted.

Sales trends by market

(JPYmn)			FY03/20	FY03/21	FY03/22	Change		Description
Manufacturing	Q1	Sales	5,426	4,138	4,802	+664	Industry	Overall production activity recovered. In particular, the electronic components industry performed well in response to 5G demand.
		YoY	-	-23.7%	+16.0%		SATO	Consumables sales recovered to almost the same level as in FY03/20. Despite focus on strong industries and applications, mechatronics were yet to fully recover as investment appetite remained mixed.
	Q2	Sales	5,584	4,247	4,996	+749	Industry	The surge in demand for semiconductors has led to strong performance in the chemical and electronic components industries. On the other hand, production in the automobile and steel industries stagnated.
		YoY	-	-23.9%	+17.6%		SATO	Sales of consumables grew significantly YoY, reflecting strong industry demand. Mechatronics product sales grew substantially due to the need to address labor shortages and improve efficiency.
Logistics	Q1	Sales	3,570	3,168	3,586	+418	Industry	The e-commerce industry continued to be brisk. Demand for automation and digitization increased to combat labor shortages and to initiate e-commerce businesses.
		YoY	-	-11.3%	+13.2%		SATO	Consumables sales rose versus FY03/20 in many industries. Mechatronics increased slightly due to needs in logistics and wholesale industries, which account for a large portion of sales, to shift to e-commerce.
	Q2	Sales	3,743	3,185	3,587	+402	Industry	Various industries are responding to the expansion of the EC market and the continued stay-at-home demand. The need for automation and digitalization has risen.
		YoY	-	-14.9%	+12.6%		SATO	Consumables grew by responding to the needs of wholesalers (tied to stay-at-home demand), which account for a high percentage of sales. Sales of mechatronics products grew substantially, thanks to automation and digitalization of shipping management.
Retail	Q1	Sales	2,502	2,423	2,683	+260	Industry	Boom in supermarkets and e-commerce continued. Demand for automation increase in industries promoting e-commerce.
		YoY	-	-3.2%	+10.7%		SATO	Consumables sales increased slightly compared to FY03/20 contributed by new businesses acquired in 2H FY03/21. Mechatronics grew in light with sales for supermarkets.
	Q2	Sales	2,487	2,443	2,636	+193	Industry	Supermarkets and e-commerce continue to thrive. The　automation need to improve the efficiency of store operations and support e-commerce increased.
		YoY	-	-1.8%	+7.9%		SATO	Sales of consumables declined, as shortened hours at specialty stores offset strong market demand. Mechatronics sales increased significantly, capturing the need to address labor shortages.
Healthcare	Q1	Sales	1,884	1,676	1,911	+235	Industry	Although the recovery in the number of outpatient visitors to medical institutions was sluggish, demand in general such as for measures to address labor shortages, recovered.
		YoY	-	-11.0%	+14.0%		SATO	Consumables declined versus FY03/20 as sales did not recover for hospitals, which account for a large percentage of the total. Mechatronics grew thanks to the automation demand in the pharmaceutical manufacturing industry.
	Q2	Sales	2,357	1,922	2,066	+144	Industry	The number of outpatients at medical institutions is recovering. Demand is firm across the board, including efficient management of medical equipment and response to labor shortages.
		YoY	-	-18.5%	+7.5%		SATO	Consumables sales increased due to increased demand from medical equipment manufacturers and hospitals. Mechatronics sales decreased due to the absence of a large order booked in the pharmaceutical industry in the same period the previous year, although sales to hospitals recovered.
Food & beverage	Q1	Sales	1,961	1,840	1,881	+41	Industry	Food manufacturing was robust for retailers but struggled for restaurants and commercial sectors. Traceability demand increased with higher regulatory compliance needs.
		YoY	-	-6.2%	+2.2%		SATO	Consumables sales were yet to recover to FY03/20 levels due to sluggish volumes in the food manufacturing industry, which accounts for a large portion. Mechatronics failed to reach the record high in FY03/20 despite proposals for improved traceability and automation.
	Q2	Sales	2,075	1,787	1,696	-91	Industry	Demand for traceability and business efficiency is increasing due to increased awareness of legal compliance and quality control.
		YoY	-	-13.9%	-5.1%		SATO	Consumables sales recovered in general, but decreased slightly due to the absence of the special demand for meals in the previous year. Mechatronics sales decreased due to the absence of large orders in the same period of the previous year, despite a recovery in food service sales.
Public	Q1	Sales	411	650	535	-115	Industry	The overall business environment remained stable.
		YoY	-	+58.2%	-17.7%		SATO	Consumables sales increased compared to FY03/20 due to orders from larger customers, Mechatronics were down YoY due to the absence of large orders seen in FY03/21, but sales were up versus FY03/20.
	Q2	Sales	536	554	831	+277	Industry	The overall business environment remained stable.
		YoY	-	+3.4%	+50.0%		SATO	Consumables sales increased due to the accumulation of new orders. Mechatronics sales grew significantly due to orders from large customers.

Auto-ID Solutions (Overseas)

Auto-ID Solutions: Overseas			FY03/20				FY03/21				FY03/22		FY03/22
Quarterly (JPYmn)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	% of Est.	FY Est.
Sales			10,867	10,740	11,118	9,923	7,844	10,169	11,046	11,290	12,929	12,355	50.6%	50,000
	YoY		-0.4%	0.5%	-2.6%	-3.7%	-27.8%	-5.3%	-0.6%	13.8%	64.8%	21.5%		15.4%
	Base		8,539	8,286	8,758	7,795	5,755	7,779	8,500	8,976	10,023	9,400		-
		YoY	-2.2%	-1.6%	-3.9%	-6.8%	-32.6%	-6.1%	-2.9%	15.2%	74.2%	20.8%
	Primary labels		2,328	2,454	2,360	2,128	2,089	2,389	2,547	2,314	2,905	2,955		-
		YoY	6.8%	8.4%	2.5%	9.7%	-10.3%	-2.6%	7.9%	8.7%	39.1%	23.7%
Gross profit			3,784	3,722	4,004	3,362	2,751	3,572	4,093	4,019	4,693	3,993		-
	YoY		-5.7%	-8.0%	-4.4%	-5.7%	-27.3%	-4.0%	2.2%	19.5%	70.6%	11.8%
	Gross profit margin		34.8%	34.7%	36.0%	33.9%	35.1%	35.1%	37.1%	35.6%	36.3%	32.3%
Operating profit			560	595	773	349	77	684	1,043	880	1,175	698	55.1%	3,400
	YoY		1.3%	-10.8%	14.7%	1.2%	-86.3%	15.0%	34.9%	152.1%	1,426.0%	2.0%		51.9%
	Operating profit margin		5.2%	5.5%	7.0%	3.5%	1.0%	6.7%	9.4%	7.8%	9.1%	5.6%		6.8%
	Base		577	518	741	348	-26	422	728	733	894	448		-
		YoY	21.0%	-3.7%	9.1%	-27.2%	-	-18.5%	-1.8%	110.6%	-	6.2%
		Operating profit margin	6.8%	6.3%	8.5%	4.5%	-0.5%	5.4%	8.6%	8.2%	8.9%	4.8%
	Primary labels		-33	60	61	6	100	245	271	140	266	220		-
		YoY	-	-59.2%	408.3%	-	-	308.3%	344.3%	2,233.3%	166.0%	-10.2%
		Operating profit margin	-1.4%	2.4%	2.6%	0.3%	4.8%	10.3%	10.6%	6.1%	9.2%	7.4%
	Overseas eliminations		16	16	-29	-5	3	15	45	7	14	30

Source: Shared Research based on company data

Auto-ID Solutions (Overseas): Earnings by region

The Americas			FY03/20				FY03/21				FY03/22
Quarterly (JPYmn)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2
Sales			3,374	3,301	3,309	3,202	2,159	3,159	3,366	3,716	4,106	3,615
	YoY		-0.8%	2.4%	-8.9%	-3.1%	-36.0%	-4.3%	1.7%	16.1%	90.2%	14.4%
	Base		2,797	2,715	2,811	2,665	1,781	2,661	2,794	3,140	3,458	2,971
		YoY	-2.0%	2.8%	-7.6%	-3.2%	-36.3%	-2.0%	-0.6%	17.8%	94.2%	11.6%
	Primary labels		577	586	498	537	378	498	572	576	648	644
		YoY	5.7%	0.3%	-15.3%	-2.4%	-34.5%	-15.0%	14.9%	7.3%	71.4%	29.3%
Operating profit			191	178	188	71	-42	243	322	250	368	80
	YoY		274.5%	334.1%	-	82.1%	-	36.5%	71.3%	252.1%	-	-67.1%
	Operating profit margin		5.7%	5.4%	5.7%	2.2%	-1.9%	7.7%	9.6%	6.7%	9.0%	2.2%
	Base		174	117	150	43	-44	170	232	156	251	4
		YoY	314.3%	1,571.4%	-	290.9%	-	45.3%	54.7%	262.8%	-	-97.6%
		Operating profit margin	6.2%	4.3%	5.3%	1.6%	-2.5%	6.4%	8.3%	5.0%	7.3%	0.1%
	Primary labels		17	61	38	28	2	73	90	94	117	76
		YoY	88.9%	79.4%	216.7%	0.0%	-88.2%	19.7%	136.8%	235.7%	5,750.0%	4.1%
		Operating profit margin	2.9%	10.4%	7.6%	5.2%	0.5%	14.7%	15.7%	16.3%	18.1%	11.8%

Europe			FY03/20				FY03/21				FY03/22
Quarterly (JPYmn)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2
Sales			4,137	3,934	4,067	3,856	3,164	3,892	4,111	3,735	5,002	4,704
	YoY		4.8%	2.4%	0.5%	5.1%	-23.5%	-1.1%	1.1%	-3.1%	58.1%	20.9%
	Base		2,386	2,067	2,205	2,265	1,453	2,001	2,137	1,997	2,746	2,392
		YoY	3.1%	-4.3%	-5.4%	-0.7%	-39.1%	-3.2%	-3.1%	-11.8%	89.0%	19.5%
	Primary labels		1,751	1,867	1,862	1,591	1,711	1,891	1,974	1,738	2,256	2,312
		YoY	7.2%	11.1%	8.6%	14.6%	-2.3%	1.3%	6.0%	9.2%	31.9%	22.3%
Operating profit			58	26	109	108	12	229	274	66	264	165
	YoY		-72.8%	-81.6%	105.7%	-	-79.3%	780.8%	151.4%	-38.9%	2,100.0%	-27.9%
	Operating profit margin		1.4%	0.7%	2.7%	2.8%	0.4%	5.9%	6.7%	1.8%	5.3%	3.5%
	Base		109	26	86	129	-86	57	93	20	115	21
		YoY	-0.9%	-10.3%	62.3%	10.3%	-	119.2%	8.1%	-84.5%	-	-63.2%
		Operating profit margin	4.6%	1.3%	3.9%	5.7%	-5.9%	2.8%	4.4%	1.0%	4.2%	0.9%
	Primary labels		-51	0	23	-21	98	172	181	46	149	144
		YoY	-	-	-	-	-	-	687.0%	-	52.0%	-16.3%
		Operating profit margin	-2.9%	0.0%	1.2%	-1.3%	5.7%	9.1%	9.2%	2.6%	6.6%	6.2%

Asia and Oceania			FY03/20				FY03/21				FY03/22
Quarterly (JPYmn)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2
Base
	Sales		3,355	3,505	3,741	2,865	2,520	3,118	3,568	3,839	3,817	4,038
		YoY	-5.8%	-3.2%	-0.1%	-13.9%	-24.9%	-11.0%	-4.6%	34.0%	51.5%	29.5%
	Operating profit		294	374	505	176	104	196	401	557	527	423
		YoY	-9.3%	-25.6%	-24.6%	-49.7%	-64.6%	-47.6%	-20.6%	216.5%	406.7%	115.8%
		Operating profit margin	8.8%	10.7%	13.5%	6.1%	4.1%	6.3%	11.2%	14.5%	13.8%	10.5%

Source: Shared Research based on company data

Company forecast for FY03/22

		FY03/20			FY03/21			FY03/22
(JPYmn)		1H	2H	FY	1H	2H	FY	1H Act.	2H Est.	FY Est.	FY Orig. Est.
Sales		57,875	58,497	116,372	49,872	59,180	109,052	60,261	56,739	122,000	117,000
	YoY	2.5%	-2.0%	0.2%	-13.8%	1.2%	-6.3%	20.8%	-4.1%	11.9%	7.3%
Gross profit		25,129	25,050	50,179	20,855	24,880	45,735	24,554	-	-	-
	YoY	0.9%	-2.8%	-1.0%	-17.0%	-0.7%	-8.9%	17.7%	-	-	-
	Gross profit margin	43.4%	42.8%	43.1%	41.8%	42.0%	41.9%	40.7%	-	-	-
SG&A expenses		21,586	21,132	42,718	19,384	20,504	39,888	21,774	-	-	-
	YoY	0.2%	-1.5%	-0.6%	-10.2%	-3.0%	-6.6%	12.3%	-	-	-
	SG&A ratio	37.3%	36.1%	36.7%	38.9%	34.6%	36.6%	36.1%	-	-	-
Operating profit		3,542	3,919	7,461	1,470	4,377	5,847	2,779	3,621	6,400	6,400
	YoY	6.0%	-9.6%	-2.8%	-58.5%	11.7%	-21.6%	89.0%	-17.3%	9.5%	9.5%
	Operating profit margin	6.1%	6.7%	6.4%	2.9%	7.4%	5.4%	4.6%	6.4%	5.2%	5.5%
Recurring profit		3,237	3,334	6,571	1,231	4,290	5,521	2,695	3,505	6,200	6,200
	YoY	1.5%	-24.7%	-13.7%	-62.0%	28.7%	-16.0%	118.9%	-18.3%	12.3%	12.3%
	Recurring profit margin	5.6%	5.7%	5.6%	2.5%	7.2%	5.1%	4.5%	6.2%	5.1%	5.3%
Net income		2,880	-4,762	-1,882	3,249	9,710	12,959	1,848	2,152	4,000	4,000
	YoY	50.1%	-	-	12.8%	-	-	-43.1%	-77.8%	-69.1%	-69.1%
	Net margin	5.0%	-8.1%	-1.6%	6.5%	16.4%	11.9%	3.1%	3.8%	3.3%	3.4%

Source: Shared Research based on company data

Company forecast

Factoring in 1H results, the company revised its full-year FY03/22 forecast. The revised forecast is as follows.

Sales: JPY122.0bn (+11.9% YoY, previous forecast was JPY117.0bn)
Operating profit: JPY6.4bn (+9.5% YoY, JPY6.4bn)
Recurring profit: JPY6.2bn (+12.3% YoY, JPY6.2bn)
Net income: JPY4.0bn (-69.1% YoY, JPY4.0bn)

The company forecasts EPS of JPY119.1. Management made no change to its interim dividend forecast of JPY35.0 per share, and still expects to pay an annual dividend of JPY70.0 per share.

Expecting a continuation of robust demand, especially overseas, the company lifted its full-year sales forecast by JPY5.0bn. On the other hand, it made no changes to its operating profit or other profit forecasts, as it expects risk factors that manifested in Q2 to remain in place in 2H (October 2021–March 2022). Management in particular is taking a cautious stance in regard to higher printer manufacturing costs and higher label raw material costs, which could have a sharp impact on 2H earnings. While the company believes these risk factors could put temporary downward pressure on gross profit, it still intends to move forward with the strategic initiatives outlined in its medium-term management plan.

On the same day it released Q2 FY3/22 results, the company announced a revision to its full-year FY3/22 sales forecast (the company made no other forecast revisions). The following section reflects the company's stance prior to this revision. Shared Research intends to provide an update following interviews with company representatives.

Summary of company forecast

FY03/22 forecast: SATO forecasts FY03/22 sales of JPY117.0bn (+7.3% YoY), operating profit of JPY6.4bn (+9.5% YoY), recurring profit of JPY6.2bn (+12.3% YoY), and net income attributable to owners of the parent of JPY4.0bn (-69.1% YoY). Net income is likely to fall sharply due to the absence of a gain on fixed asset sale recorded in FY03/21. While the company forecasts earnings recovery in Japan on a reduced impact from the COVID-19 pandemic and growth overseas, it has also factored into its profit forecast increases in solutions development and strategic marketing expenses. Although SATO expects operating profit to grow for the first time in three years, the company does not expect it to return to the pre-pandemic levels of JPY7.5bn in FY03/20 yet, in view of the current operating environment. The company expects to pay an annual dividend of JPY70.0 per share, unchanged from the forecast dividend for FY03/21 (forecast payout ratio: 58.8%). In light of Q1 results and changes to the earnings environment from Q2 onward, the company maintained its initial forecast.

Changes to the earnings environment from Q2 (Jul–Sep) onward

Versus its initial (unchanged) full-year forecast, Q1 progress was sales 25.8% and operating profit 26.7%; versus the 1H forecast, progress was sales 53.2% and operating profit 71.1%. Given that the forecast calls for most profit to be generated in 2H (the operating profit forecast of JPY6.4bn breaks down to JPY2.4bn in 1H and JPY4.0bn in 2H), the company sees Q1 progress as solid. However, from Q2 onward, it sees emerging business risks in the following: 1) a spike in procurement costs for semiconductors and paper (cost push), 2) constraints on operations at overseas factories due to shortages in components such as semiconductors and the pandemic, 3) extended lead time due to increased business dealings for more complex solutions, primarily in Japan, and constraints on sales activities because of the pandemic, 4) the dropping out of excess printer demand overseas that occurred in Q1. The company sees these factors coming into play from Q2 onward, and it has already seen the end of extraordinary printer demand, which is returning to its normal pace.

Of these, the company thinks that increased component procurement costs due to the semiconductor shortage will almost certainly affect operating profit from Q2 onward. It also sees a risk of inability to supply products due to delays in printer production. If factory operating rates decline at either of its main printer production sites in Malaysia or Vietnam, it would be difficult to make up supply shortfalls at the other as they produce different models. The company sees a lack of printer supply as a significant near-term risk.

However, SATO’s greatest strength is comprehensive solutions exemplified by its unique koto-uri (solution sales) approach, rather than simply selling individual products. Accordingly, if stock is not available temporarily, it thinks that there is little risk that a customer will defect entirely to competitors (who also face printer supply shortages). However, extended stock unavailability would pose considerable challenges in dealing with customers, so the company already has in place alternative strategies. The company said it left its full-year forecast unchanged partly because it needs to see the impact of such temporary measures on costs in Q2 and beyond.

Breakdown of initial company forecast

The following shows the company’s initial forecast and assumptions. Because SATO maintained its forecast at the time of the Q1 results announcement, the details are unchanged. However, it may review the forecast at the time of the Q2 results announcement to reflect changes in the earnings environment that have emerged since late Q1. The following commentary is retained for reference purposes until the Q2 results announcement.

Factors in operating profit variation; domestic/overseas breakdown

The company forecasts FY03/22 operating profit of JPY6.4bn, up JPY553mn YoY. The forecast growth is attributed to the following: 1) changes in sales and gross profit in Japan, +JPY2.3bn; 2) changes in sales and gross profit overseas, +JPY2.1bn; 3) changes in R&D expenses, -JPY853mn; 4) changes in SG&A expenses, -JPY3.1bn; and 5) factors related to IDP business exit, +JPY179mn. These all pertain to the auto-ID solutions business, except for 5).

Operating profit forecast of JPY6.4bn breaks down by region to JPY3.3bn in Japan (+JPY79mn or +2.5% YoY) and JPY3.1bn overseas (+JPY416mn or +15.5% YoY). The company forecasts an OPM of 4.6% (-0.1pp YoY) in Japan and 6.7% (no change) overseas. These all pertain to the auto-ID solutions business. There will be no earnings booked from the IDP business, from which the company exited in FY03/21. The main takeaways from the FY03/22 forecast are that the company expects continued growth overseas and the Japanese business to be roughly flat (slight increase) YoY after the significant slump in FY03/21.

Auto-ID Solutions (Japan)

SATO forecasts FY03/22 sales of JPY71.0bn (+3.5% YoY) and operating profit of JPY3.3bn (+2.5% YoY). While sales are recovering overall, this is not flowing through to aggressive capital expenditure in many industries, so the company does not expect sales to return to pre-pandemic levels of FY03/20. A rebound in sales, primarily in manufacturing, and an improved product mix through continued growth in mechatronics sales are positive for profit, but the company expects just a modest increase due to higher R&D and other SG&A expenses. The main element in increased R&D spending is the development of common printer platforms. The company also expects higher expenses as sales activities pick up and higher strategic spending on developing new solutions and IT. SATO forecasts lower OPM than FY03/21, when profit dropped sharply, which appears somewhat conservative.

Auto-ID Solutions (Overseas)

SATO forecasts FY03/22 sales of JPY46.0bn (+14.0% YoY) and operating profit of JPY3.1bn (+15.5% YoY). The company is apparently expecting sales growth in all regions: the Americas, Europe, and Asia and Oceania. However, considering that the impact of the pandemic (e.g., lockdowns) resulted in a bigger slump in Europe and the Americas than elsewhere, organic growth in Asia and Oceania is expected to be more prominent. In addition, growing sales of high-margin mechatronics due to the focus on solutions sales should offset increases in marketing and other SG&A expenses, leading to record operating profit for the second consecutive year. However, the company also expects increased strategic spending overseas, so forecasts an OPM of 6.7%, unchanged YoY.

The company reclassified some segments in FY03/18. In order to compare with historical results for the auto-ID solutions businesses in Japan and overseas prior to and in FY03/15, Shared Research has prepared reference figures based on retrospective data disclosed by the company.

In light of current conditions, the impact of the COVID-19 crisis has not entirely dissipated. It appears that this sort of uncertainty is reflected in the company forecast. Another risk factor is that production and supply of printers, which are currently in a tight supply-demand situation, may be affected by the global shortage of semiconductors. While it seems that these risk factors are factored into the company forecast to some extent, Shared Research thinks that the forecast is not excessively conservative as the company plans to increase strategic investments aimed at growth as indicated in its medium-term plan.

By segment				FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21	FY03/22
(JPYmn)				Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Est.
Total sales				87,257	96,774	99,831	105,505	106,302	113,383	116,179	116,372	109,052	117,000
	YoY			8.3%	10.9%	3.2%	5.7%	0.8%	6.7%	2.5%	0.2%	-6.3%	7.3%
	Auto-ID Solutions			87,257	96,774	99,831	105,505	106,209	113,067	115,751	116,008	108,915	117,000
		YoY		8.3%	10.9%	3.2%	5.7%	0.7%	6.5%	2.4%	0.2%	-6.1%	7.4%
		% of total sales		100.0%	100.0%	100.0%	100.0%	99.9%	99.7%	99.6%	99.7%	99.9%	100.0%
		Overseas		22,373	28,374	33,157	39,380	38,926	42,585	43,316	42,648	40,349	46,000
			YoY	20.6%	26.8%	16.9%	18.8%	-1.2%	9.4%	1.7%	-1.5%	-5.4%	14.0%
			% of total sales	25.6%	29.3%	33.2%	37.3%	36.6%	37.6%	37.3%	36.6%	37.0%	39.3%
		Japan		64,884	68,400	66,675	66,125	67,283	70,482	72,435	73,360	68,566	71,000
			YoY	4.7%	5.4%	-2.5%	-0.8%	1.8%	4.8%	2.8%	1.3%	-6.5%	3.5%
			% of total sales	74.4%	70.7%	66.8%	62.7%	63.3%	62.2%	62.3%	63.0%	62.9%	60.7%
	IDP							92	315	427	363	136	-
		YoY						-	242.4%	35.6%	-15.0%	-62.5%	-
		% of total sales						0.1%	0.3%	0.4%	0.3%	0.1%	-
Operating profit				5,453	6,759	7,444	6,455	6,104	6,249	7,679	7,461	5,847	6,400
	YoY			17.2%	23.9%	10.1%	-13.3%	-5.4%	2.4%	22.9%	-2.8%	-21.6%	9.5%
	Operating profit margin			6.2%	7.0%	7.5%	6.1%	5.7%	5.5%	6.6%	6.4%	5.4%	5.5%
	Auto-ID Solutions			5,436	6,927	7,828	6,416	6,221	7,696	9,221	8,756	5,905	6,400
		YoY		15.9%	27.4%	13.0%	-18.0%	-3.0%	23.7%	19.8%	-5.0%	-32.6%	8.4%
		Operating profit margin		6.2%	7.2%	7.8%	6.1%	5.9%	6.8%	8.0%	7.5%	5.4%	5.5%
		Overseas		698	1,813	2,524	2,610	1,650	1,865	2,239	2,277	2,684	3,100
			YoY	77.7%	159.6%	39.2%	3.4%	-36.8%	13.0%	20.1%	1.7%	17.9%	15.5%
			Operating profit margin	3.1%	6.4%	7.6%	6.6%	4.2%	4.4%	5.2%	5.3%	6.7%	6.7%
		Japan		4,737	5,114	5,304	3,806	4,571	5,831	6,982	6,479	3,221	3,300
			YoY	10.2%	8.0%	3.7%	-28.2%	20.1%	27.6%	19.7%	-7.2%	-50.3%	2.5%
			Operating profit margin	7.3%	7.5%	8.0%	5.8%	6.8%	8.3%	9.6%	8.8%	4.7%	4.6%
	IDP			-	-	-	-	-240	-1,426	-1,421	-1,317	-148	-
		YoY		-	-	-	-	-	-	-	-	-	-
		Operating profit margin		-	-	-	-	-260.9%	-452.7%	-332.8%	-362.8%	-108.8%	-
	Adjustments			17	-168	-384	39	123	-21	-121	22	90	-
R&D expenses				2,043	2,226	2,292	2,414	2,387	2,994	3,460	3,377	3,046	3,900
	YoY			9.9%	9.0%	3.0%	5.3%	-1.1%	25.4%	15.6%	-2.4%	-9.8%	28.0%
Capital expenditures				3,060	6,106	7,372	6,718	5,723	9,044	4,801	3,835	4,931	8,000
	YoY			66.8%	99.6%	20.7%	-8.9%	-14.8%	58.0%	-46.9%	-20.1%	28.6%	62.2%
Depreciation				1,941	2,179	2,501	3,941	3,996	4,307	4,489	5,043	4,092	4,150
	YoY			0.6%	12.3%	14.7%	57.6%	1.4%	7.8%	4.2%	12.3%	-18.9%	1.4%

Source: Shared Research based on company data

Forex sensitivity: Assuming that all currencies except the yen move in line with the US dollar, a JPY1/USD appreciation of the yen reduces yearly sales by JPY423mn and operating profit by JPY5mn (based on FY03/20 results).

Auto-ID Solutions (Japan) sales by market

Sales by market			FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21	FY03/22
(JPYmn)			Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Act.	Est.
Total sales			64,884	68,400	66,675	66,125	67,283	70,482	72,435	73,360	68,566	71,000
	YoY		4.7%	5.4%	-2.5%	-0.8%	1.8%	4.8%	2.8%	1.3%	-6.5%	3.5%
	Manufacturing		17,946	18,170	19,348	19,231	20,103	21,546	22,967	22,766	19,447	-
		YoY	-	1.2%	6.5%	-0.6%	4.5%	7.2%	6.6%	-0.9%	-14.6%	-
		% of total sales	27.7%	26.6%	29.0%	29.1%	29.9%	30.6%	31.7%	31.0%	28.4%	-
	Logistics		15,558	16,525	15,930	15,605	16,078	16,838	17,058	17,805	16,568	-
		YoY	-	6.2%	-3.6%	-2.0%	3.0%	4.7%	1.3%	4.4%	-6.9%	-
		% of total sales	24.0%	24.2%	23.9%	23.6%	23.9%	23.9%	23.5%	24.3%	24.2%	-
	Retail		8,495	9,922	8,532	8,435	7,772	7,883	8,261	8,066	8,866	-
		YoY	-	16.8%	-14.0%	-1.1%	-7.9%	1.4%	4.8%	-2.4%	9.9%	-
		% of total sales	13.1%	14.5%	12.8%	12.8%	11.6%	11.2%	11.4%	11.0%	12.9%	-
	Healthcare		7,201	7,404	7,318	7,319	7,547	7,801	7,981	8,553	7,658	-
		YoY	-	2.8%	-1.2%	0.0%	3.1%	3.4%	2.3%	7.2%	-10.5%	-
		% of total sales	11.1%	10.8%	11.0%	11.1%	11.2%	11.1%	11.0%	11.7%	11.2%	-
	Food & beverage		5,747	5,799	6,125	6,132	6,273	6,371	6,505	6,642	6,140	-
		YoY	-	0.9%	5.6%	0.1%	2.3%	1.6%	2.1%	2.1%	-7.6%	-
		% of total sales	8.9%	8.5%	9.2%	9.3%	9.3%	9.0%	9.0%	9.1%	9.0%	-
	Public		1,602	1,984	2,657	2,358	2,518	2,915	2,539	2,137	2,429	-
		YoY	-	23.8%	33.9%	-11.3%	6.8%	15.8%	-12.9%	-15.8%	13.7%	-
		% of total sales	2.5%	2.9%	4.0%	3.6%	3.7%	4.1%	3.5%	2.9%	3.5%	-

Source: Shared Research based on company data

Historical performance versus company estimates

Results vs. Initial Est.		FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
(JPYmn)		Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.
Total sales	Initial Est.	88,000	96,000	100,000	110,000	113,000	113,500	120,000	120,000	-
	Act.	87,257	96,774	99,831	105,505	106,302	113,383	116,179	116,372	109,052
	Results vs. Initial Est.	-0.8%	0.8%	-0.2%	-4.1%	-5.9%	-0.1%	-3.2%	-3.0%	-
Operating profit	Initial Est.	5,800	6,500	8,000	8,500	8,000	6,000	7,300	8,500	-
	Act.	5,453	6,759	7,444	6,455	6,104	6,249	7,679	7,461	5,847
	Results vs. Initial Est.	-6.0%	4.0%	-6.9%	-24.1%	-23.7%	4.2%	5.2%	-12.2%	-
Recurring profit	Initial Est.	5,600	6,300	7,900	8,400	7,900	5,900	7,100	7,300	-
	Act.	5,430	7,084	7,484	6,120	5,426	5,888	7,618	6,571	5,521
	Results vs. Initial Est.	-3.0%	12.4%	-5.3%	-27.1%	-31.3%	-0.2%	7.3%	-10.0%	-
Net income	Initial Est.	3,200	3,600	5,000	5,500	5,000	3,600	4,100	5,000	-
	Act.	2,726	4,295	3,763	3,688	3,221	4,074	3,773	-1,882	12,959
	Results vs. Initial Est.	-14.8%	19.3%	-24.7%	-33.0%	-35.6%	13.2%	-8.0%	-	-

Source: Share Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: FY03/21 initial estimate was undetermined due to the COVID-19 outbreak so is shown as “-”.

Medium-term business plan

Medium-term business plan targets (announced May 2021)

				FY03/20	FY03/21	FY03/22	FY03/23	FY03/24	3-yr	FY03/26	5-yr
(JPYmn)				Cons.	Cons.	Est.	Targets	Targets	CAGR	Targets	CAGR
Total sales				116,372	109,052	117,000	123,000	130,000	+6.0%		+6.0%
	YoY			0.2%	-6.3%	7.3%	5.1%	11.1%
		Auto-ID Solutions: Overseas		42,648	40,349	46,000	49,500	54,000	+10.2%
			YoY	-1.5%	-5.4%	14.0%	7.6%	17.4%
		Auto ID Solutions: Japan		73,360	68,566	71,000	73,500	76,000	+3.5%
			YoY	1.3%	-6.5%	3.5%	3.5%	7.0%
Operating profit				7,461	5,847	6,400	8,600	11,800	+26.4%
	YoY			-2.8%	-21.6%	9.5%	34.4%	84.4%
	Operating profit margin			6.4%	5.4%	5.5%	7.0%	9.1%		Over 10%
		Auto-ID Solutions: Overseas		2,277	2,684	3,100	3,600	4,500	+18.8%
			YoY	1.7%	17.9%	15.5%	16.1%	45.2%
			Operating profit margin	5.3%	6.7%	6.7%	7.3%	8.3%
		Auto ID Solutions: Japan		6,479	3,221	3,300	5,000	7,300	+31.4%
			YoY	-7.2%	-50.3%	2.5%	51.5%	121.2%
			Operating profit margin	8.8%	4.7%	4.6%	6.8%	9.6%		10.8%
ROIC				7.5%	5.8%			10.3%

Source: Share Research based on company data

Overview: In May 2021, SATO released a new three-year medium-term business plan in view of changes to the external environment, including the COVID-19 pandemic. It forecasts a new record operating profit of JPY8.6bn in FY03/23. It targets FY03/24 sales of JPY130.0bn, operating profit of JPY11.8bn, OPM of 9.1% (versus FY03/22 forecast of 5.5%), and ROIC of 10.3%. It appears that concentration of the company’s business resources in the auto-ID solutions business following its withdrawal from the IDP business will contribute to earnings. The company also plans strategic investments over the three years focusing on the shift to common printer platforms and the establishment of new IT infrastructure to boost productivity (planned operation from FY03/25) with a view to long-term growth. It targets an OPM of over 10% in FY03/26, when the results of the strategic investments start flowing through in earnest. Although SATO has not disclosed specific numerical targets for FY03/26, the plan calls for aggressive business expansion including significant sales growth.

The new medium-term plan adopts a clear long-term perspective, and talks about reaping the benefits from the penetration of solutions sales and investing strategically to achieve long-term goals. It also contains a brand statement: “We give every ‘thing’ its own ID so it connects with the world.” It has flagged “Tagging for Sustainability” as a growth direction (see figure below titled “Long-term outlook for auto-ID solutions”). The company plans to widen its coverage of supply chains in its target markets and to focus on upgrading technologies for tagging and solutions to support these efforts, with the aim of achieving sustainable growth.

Tagging: The process of physically attaching to things data that identify and/or locate the things. This involves digitizing information of the things it is tagged to so that the tagged data can be fed to and processed by core IT systems. This concept, connecting people and things with information, has remained central to SATO’s business since its days of pioneering in hand labelers that attached price and other information to products.

Brand statement: “We give every ‘thing’ its own ID so it connects with the world”
As businesses today search for how big data can benefit them, SATO focuses on the more immediate question of how it can make ‘things’ big data. In a world where most things have yet to be digitized, SATO’s auto-identification solutions provide the answer. The company tags IDs to anything, and everything, to track items and help businesses run smoothly, without stopping. A connected world of productivity, safety, reassurance, and sustainability starts with somebody physically seeing the real situation on site and handcrafting answers that work. SATO brings such change to the world starting from customer worksites.

With its DCS & Labeling offering, SATO has long been in the business of providing solutions to boost productivity revolving around objects’ ID information for independent, individual worksites in manufacturing, delivery (logistics), and sales (retail). The company is now tackling a new domain: source tagging. This tagging technology applies to the upstream of the supply chain starting with manufacturing, using tags incorporating cutting-edge technologies (see figure below titled “Contributing to realization of sustainable society”). Once source tagging enables the management of individual objects, the scope of the company’s business involvement in a product supply chain will start with the “source tagging” in the figure, and extend to downstream areas such as sorting, disassembly, and collection, as well as recycling. Attaching a tag made with advanced technology could enable real-time acquisition of data such as an object’s temperature, weight, and location. Such source tagging would enable the acquisition of tracing data; that is, knowledge of where an object is in the supply chain, what state it is in, how it is used by the customer after purchase, and subsequent downstream flows. The thinking behind the use of such tracing data is to optimize distribution inventories and reduce losses on disposal, boosting the value of solutions provided.

As outlined above, the company aims to contribute to the realization of a sustainable society by supporting the entire supply chain through attaching data to objects through tagging, while at the same time aiming at long-term growth.

Long-term perspective for auto-ID solutions

Source: Company data

Contributing to realization of sustainable society

Source: Company data

This is not the first time the company has set forth long-term targets. It previously announced FY03/26 targets with the release of results for FY03/18 and FY03/19. At the time of the FY03/18 results announcement, the company disclosed FY03/26 targets of JPY200.0bn for sales, JPY24.0bn for operating profit, and OPM of 12%, which it maintained at the FY03/19 results announcement. When the company released FY03/20 results, it was in the midst of the COVID-19 pandemic, so did not release FY03/26 targets and decided instead to assess the situation.

Long-term targets disclosed in the new medium-term plan are as follows:

CAGR of 6.0% for sales (in five years from FY03/21 to FY03/26)

OPM of over 10% in FY03/26

The company has not disclosed any other specific numerical targets. However, considering the major changes in the business environment due to the pandemic, the importance of the previously disclosed numerical targets appears to have diminished greatly. In that sense, the new medium-term plan is not just an update of the previous one but can be seen as a completely new plan. At the segment level, the company targets an OPM of 10.8% in the Japan business in FY03/26 (discussed later).

The most important point to note about the new medium-term plan is the clear positioning of growth investment aimed at achieving long-term targets. SATO expects the results of growth investment it undertakes over the three years of the medium-term plan to start flowing through in earnest from FY03/26. As new ways of life become entrenched in the wake of the pandemic, customers’ needs to increase productivity have become even more pressing and the pace of productivity growth will pick up. Furthermore, interest in the sustainability of society has reached unprecedented levels. The company has changed course in light of these circumstances to invest for the long term. It is of course important to reap earnings over the next three years, but it appears the company has further strengthened its stance toward the period beyond that. At the same time, Shared Research sees that the company’s OPM target of “over 10%” for FY03/26 suggests that if the growth investments over the next three years bear fruit, profitability may significantly exceed current expectations.

The company also aims to focus on crystallizing the results of previous initiatives over the three years of the new plan. In particular, it aims to capture earnings from its efforts to instill solutions sales overseas. There are also prospects of early contributions from moving to common printer platforms (discussed later).

In FY03/24, the last year of the plan, the company targets operating profit of JPY11.8bn (OPM of 9.1%), an increase of JPY6.0bn from the FY03/21 result of JPY5.8bn. Factors contributing to growth include: 1) changes in sales and gross profit in Japan, +JPY5.9bn; 2) changes in sales and gross profit overseas, +JPY5.4bn; 3) changes in R&D expenses, -JPY353mn; 4) changes in SG&A expenses, -JPY5.4bn; 5) other investments and measures, +JPY300mn; and 6) factors related to IDP business exit, +JPY179mn. These all pertain to the auto-ID solutions business, except for 6).

In addition to demand recovery, the main factors driving growth in 1) and 2) (the auto-ID solutions business in Japan and overseas) are sales activities narrowing in on targets by region, market, industry, and application, and aggressive sales of mechatronics products, which have high margins and easier to see results of various measures in. We also understand that the effects of the shift from selling products to solutions the company has focused on overseas since FY03/19 are included. On the negative side, a large increase in R&D spending in the first year of the plan (FY03/22) is expected to drag on operating profit by JPY853mn, but the company forecasts a decline in R&D spending from FY03/24 onward. This is because the biggest item, development of common printer platforms, will finish in FY03/23. Common platforms will streamline the printer development process, and its contribution to earnings is included in other investments and measures (5 above). Other investments and measures also include the impact of streamlining consumables workflows. The company appears to be expecting these effects to materialize toward FY03/26 and substantially contribute to earnings growth.

The development of common printer platforms in the latest medium-term plan is a key element in the company’s short-, medium-, and long-term performance. Put another way, if completion of the platforms is delayed for some reason, the earnings recovery may also be deferred.

Three pillars of growth

The company’s new medium-term plan sets forth the following three strategies.

Growth strategies per region and market
Technological innovation
Enhanced ESG performance

The company calls these its “three pillars of growth.” Incidentally, a famous proverb in Japan regards the “teaching of the three arrows.” Disregarding various views about the historical veracity, simply put, the teaching states that it is easy to break one arrow by itself, but difficult to break three bundled together, and has an underlying message of (clan) unity. It is unclear whether the company was referencing this, but it is keen for the three strategies to closely support each other and not be executed separately.

Growth strategies for individual regions and markets

This is not a new policy SATO is launching, but the strengthening of an existing one. In order for the company to develop the business of tagging broadly across a supply chain, it believes it needs to have a firm grip on how objects are handled at customer sites and through the supply chain, and how the operations at each site fit together by market and region. It also thinks it is important to determine how future social changes will alter these processes in the medium to long term. Shared Research understands that incorporating these changes into solutions it provides, leading to business growth, falls under the scenario of “Tagging for Sustainability” (giving every ‘thing’ its own ID so it connects with the world). From this perspective, the company plans to reinforce its ongoing strategy of providing solutions based on deep understanding of customer workplaces by country, market, industry, and application.

Even in the same market, different regions call for different solutions: case of manufacturing