Ricoh Looks to be Transforming Profitably

On May 9, Ricoh released consolidated financial results for their 4Q and total fiscal year 2018.

Compared to 4Q FY2017, Ricoh reported consolidated sales down 4.3%, gross profit dollars down by 2.7% (gross margin remained the same year over year at 36%), and operating profit was positive compared to an operating loss for the previous year’s fourth quarter.

* Ricoh reported an operating loss in 4Q FY2017 of $1.5 billion

For the fiscal year ending March 31, 2019 (FY2018), Ricoh consolidated sales revenues were down by 2.4% from FY2017 results. Gross profit dollars were 3% less than FY2017 (however, gross profit margin stayed the same at 38%). Operating profit was positive at $78 million against an operating loss of $1.23 billion during FY2017.

* Ricoh reported an operating loss in FY2017 of $1.23 billion

Ricoh referred to SG&A expenses being reduced by 9.6% from the year before as a major reason for the profitable results of FY2018. The company said these reductions were due to their successful progress in managing expenditures and making structural and business reforms. Ricoh noted that after excluding the structural reform expenses, some one-time income and short-term factors, the operating profit would have been $955 million.

Ricoh noted moderate growth in Japan and the U.S. (even though the Americas region as a whole declined 1.8%). Ricoh also said, despite uncertainty due to Brexit and the debt crisis in Turkey, Europe experienced “generally steady” growth. Ricoh stated that U.S. – China trade friction impacted China, which seems to have contributed to the 3.9% decline that EMEA experienced.

The company stated that the office equipment business was slightly down in developed countries with business expanding in emerging markets. While demand for A3 MFPs decreased, demand for A4 models increased in both developed and emerging regions. Ricoh explained that consumable revenue was down in developed countries but up in emerging markets due to expanding hardware demand there. Ricoh reported that IT services grew “solidly,” as there is increasing demand for IT systems worldwide.

Cash and cash equivalents on hand at the end of March 31, 2019, were $2.16 billion, up more than $700 million over March 31, 2018. Ricoh said this increase was aided by the transfer of Ricoh Logistics Systems shares.

Ricoh stressed that during FY2018 they reassessed MFP sales and maintenance structures along with those business processes. The company stated that its narrowed model development, process automation, and the closing or integrating of production sites were key reasons that drove profitability in FY2018. For the fiscal year ending March 31, 2020 (FY2019) Ricoh forecasted a slight decrease in sales revenue with continued growth in profits.

Ricoh was clear that the company’s aim is to make new growth businesses. They said, “Ricoh aims to transform its business structure and generate growth over the medium and long terms by bolstering the profitability of core businesses to produce cash, using that cash to invest extensively in new businesses.”

Office Printing

For the fourth quarter of FY2018, Ricoh experienced a decline in year-over-year revenue of 6% with the Office Printing business segment. Ricoh reported that in 4Q FY2018 operating expenses in this business segment were 41.7% lower than the same period as the last fiscal year. That produced a $250 million profit for the quarter. This is a $1.45 billion net improvement from the $1.2 billion operating profit loss Ricoh reported for this segment during 4Q FY2017.

For FY2018, the Office Printing segment reported a sales revenue decline of 5% from FY2017 to $9.79 billion for FY2018 ending March 31, 2019. Operating expense for the year was reduced by 18.5%, which resulted in an operating profit for Office Printing of $1.06 billion. Compared to the operating loss Ricoh reported for this business segment in FY2017 the net operating profit increased by $1.46 billion.

Ricoh noted that sales declined largely because of their strategic decision to focus on and prioritize profits rather than market share. This lowered hardware and consumable revenues, Ricoh explained, particularly in overseas markets. Ricoh expressed that the effects of structural reforms put in place and the significant SG&A expense reductions accounted for the increase in operating profit. The company also noted the absence of impairments taken last year as a factor in lowering operating expenses for FY2018.

Office Services

Ricoh reported that Office Services 4Q FY2018 sales revenue grew by 1.7% over 4Q FY2017 revenue. Operating expenses decreased by 16.8% which resulted in an operating profit of $50 million compared to over a $200 million operating loss Ricoh reported for this business segment during 4Q FY2017.

For the final fiscal year results of FY2018, Ricoh reported that Office Services revenues increased 7.5% over FY2017 to $4.34 billion. Operating expenses decreased 1.5% for FY2018 in this business segment. Operating profit for Office Services was $130 million for FY2018 compared to an operating loss of approximately $230 million reported for FY2017.

Ricoh stated that the performance of Office Services for the year was due to gains in Japan as IT equipment demand is expanding as that market undergoes work practice reforms. Outside of Japan, Ricoh said customer support business services expanded, especially around document management services in the Americas region.

Commercial Printing

Fourth quarter Commercial Printing revenue was up by 4.2% over 4Q FY2017, to $451 million. This growth helped offset some of the negative impact this business segment experienced from the first half of FY2018. Ricoh reported that operating expenses were up slightly during 4Q FY2018 by 0.5% over 4Q FY2017. However, 4Q FY2018 operating profit for Commercial Printing was up 34.8% from 4Q FY2017.

Final FY2018 sales revenue for Commercial Printing was reported at $1.67 billion, a .3% decline from FY2017 results. Ricoh showed operating expenses for this business segment down by 1.7% year-over-year resulting in operating profit growth of 8% over FY2017. Operating profit margin for this business segment increased from 13.5% in FY2017 to 14.7% in FY2018.

Ricoh stated that the release of the RICOH Pro C9210 series, which they have positioned as the “flagship commercial printing model,” and the RICOH Pro VC70000 series released earlier in the year resulted in product cycle transitions that affected revenue in the first half of FY2018. However, demand has grown since then in both product and consumables. Ricoh said this demand improvement and SG&A expense reductions were factors in the operating profit increase.

Industrial Printing, Thermal Media, and Other

Year-end results reported by Ricoh for Industrial Printing, Thermal Media and “Other” (this segment includes the Industrial Products business focusing on the automotive sector and Smart Vision business), business segments were as follows:

For Industrial Printing, Ricoh explained that while sales of inkjet heads to China declined, the sales of inkjet heads expanded in the U.S. and Europe. Ricoh also pointed out that industrial printers, as a new growth area, saw worldwide sales increases. Ricoh attributed the increase in sales revenue for this business segment to these factors. The company said higher product development expenses to support the business growth and expenses due to goodwill and non-current asset impairments resulted in the higher operating expenses and operating loss.=

Noting that e-commerce growth has driven demand for shipping labels, Ricoh said sales in the Thermal Media business saw steady growth worldwide. Ricoh cited cost increases in raw materials that drove up operating expenses as the reason for the lower operating profit for FY2018 in this segment.

Other Points

Saying “Ricoh recognizes the need to transform itself for tomorrow,” Ricoh once again reviewed the growth strategy they embarked upon in 2017, starting with Ricoh Resurgent aimed at changing cost structures and boosting profitability in the Office Printing business rather than concentrating on increasing market share and MIF. Beginning in 2018 through FY2019 Ricoh is in the Ricoh Ignite stage and has three key growth strategies:

• Growth Strategy #0 – focuses on customer value expansion in Office Printing and continue to streamline Ricoh operations to drive more profit.
• Growth Strategy #1 – combine optical, image processing, mechanical, electrical, chemical, control, and other technologies the core businesses have created to “broaden the value that printing can provide.”
• Growth Strategy #2 – Draw on their corporate customer base (1.4 million) to establish areas of new earnings.

Ricoh summarized their business transformation goals outlining their expectation of how the total Ricoh business contribution in each of the above growth strategies will change:

Ricoh declared they are investing ¥100 billion (approximately $1 billion) in Growth strategies #1 and #2 to make these transitions. For comparison purposes, below is the breakout of percentage of total FY2018 Ricoh sales by business segment:

Our Take

Ricoh’s cost and expense reductions – many as a result of the structural changes put in place – have returned the company to a profit from an approximate $1 billion loss in FY2017. Notwithstanding the major impairments Ricoh accounted for in FY2017, the company was able to reduce SG&A expenses by about $680 million. Ricoh has taken difficult, but significant steps in making much needed structural changes and aggressive expense management actions.

It is extremely interesting to see that the “core” business of Office Printing decreased SG&A costs almost $2 billion — about 20% of Office Printing sales. This business segment was a major focus of the recent structural and profitability philosophy changes, and Ricoh seems to have picked a ripe business unit target to find profit for the business. We should expect to see continued reductions in SG&A in the future for this business segment as well as reductions in R&D and in the cost of goods which should improve gross margin. Those sought-after reductions are foretold by Ricoh noting they have “eschewed the notion of doing everything in-house, narrowing down the number of models under development and outsourcing production  … .”

Ricoh also made it clear that its future is to reduce its reliance on Office Printing by investing in the “new business” segments outlined in their Growth Strategy #2 and #3 areas. Commercial, Industrial and Thermal will be the traditional print on media businesses with Ricoh saying Commercial Printing is vital to their profitability. Office Services, Industrial Products and Smart Vision business segments will be the developing new platforms for new earnings models – cloud services, professional services, AI, etc. Office Printing will contribute profit and cash for these investments, but we suspect the investment in Office Printing will continue to decrease as time goes on.

Though Ricoh expects revenue to decline in FY2019, the decline is not precipitous. The continued focus on profitable sales, optimizing business structures and operational costs is expected to grow both gross and operating profits. More importantly, a well-managed change to new businesses should mean profitability and revenue growth in the future.