THK Co Ltd

TSE:6481

Earnings Call Transcript 2021-Q2

[Akihiro Teramachi, executive]

Hi, I'm Akihiro Teramachi, President and CEO of THK. I would like to begin my presentation with the overview of the financial results for the first half of fiscal 2021 on Page 3. We Consolidated net sales grew by 46.6% year-on-year to JPY 151 billion. While we still feel the impact COVID-19, China, which has resumed economic activities ahead of other countries, has seen a recovery in demand since the second half of last year. Following the recovery in China, developed countries and other regions also entered a phase of full-scale recovery.

Against this backdrop, we have been augmenting our production capability by enhancing productivity through automation and robotization in addition to capacity ramp-ups. As a result, we were able to capture the demand to steadily increase sales.

Although the fixed costs composed mainly of labor and employment costs rose due to higher sales, quantity effect overrode the cost element and contributed to higher profit with operating income reaching JPY 11 billion.

As production rapidly ramped up following the sharp recovery in demand, revenue and operating income diverged from the initial first half guidance due to the state of global distribution and other such factors. Having said that, both sales and profit increased significantly compared to the same period last year.

Next, let me highlight the sales breakdown by region on Page 4. Due to the factors mentioned in the previous slide, in each region, sales increased significantly year-on-year. It's worth noting that the growth in China was particularly strong.

Now let's move on to the operating income on Page 5. For the first 6 months of the year, we recorded an operating income of JPY 11 billion.

Let me walk you through the factors behind the increase and decrease in operating income in the Industrial Machinery segment compared to the first half of the previous fiscal year.

The profit decline was caused by the following factors: an increase of JPY 4.5 billion in fixed costs, such as labor and personnel expenses due to higher sales; negative JPY 3 billion stemming from change in the variable cost ratio, which includes JPY 1.9 billion as an impact of eliminating the unrealized gains on inventories in the consolidating accounting process; and JPY 700 million due to expensing the operational costs for which last year because during the operational shutdown was recorded as other expenses.

On the other hand, factors contributing to the increase in profit included JPY 16.3 billion effect due to higher sales; JPY 700 million impact due to foreign exchange rates; and JPY 900 million due to reclassification of other income and other expense.

Next, let me explain the changes behind the operating income in the Automotive and Transportation business. The profit drop was caused by the negative JPY 400 million due to the change in the variable cost ratio, including factors such as higher steel price, and JPY 2 billion for expensing the operational costs, which was booked as other expenses last year during the operational shutdown.

On the other hand, factors contributing to the profit growth were JPY 3.9 billion impact due to the increase in sales, lower fixed cost of JPY 300 million and JPY 900 million due to the reclassification of other income and expenses. There was no impact from the foreign exchange rate.

For the second half of the year, we will strive for improvement by measures such as passing on the price increase of steel products, among others, as well as continuing with the recovery plan.

Now please turn to Page 7. Looking at our balance sheet, total assets increased by JPY 42.5 billion from the previous fiscal year to JPY 502.7 billion. Given the interest of time, I will not go into details. So please have a closer look at the figures in the presentation at your convenient time.

Now let me highlight key measures that we are implementing on Page 9. The pillars of our growth strategy remain unchanged. They are full-scale globalization, development of new business areas and achieving change in business style. We will strive to proceed further with this strategy and expand the business domains.

Please turn to Page 10. As I have been explaining for some time, the key words of change arising from the major trends in the world are seeking THK solutions. Therefore, there is no doubt that demand will grow over the long term. And as our growth potential presents greater opportunities, we will continue to push forward with the growth strategy even more vigorously.

Page 11, please. Now I would like to share with you various initiatives underway in the Industrial Machinery segment and the Automotive and Transportation business.

Let me start with what we are doing to achieve digital transformation by Omni THK in the Industrial Machinery segment. This is a high level of overview of Omni THK that we have been advocating under the THK DX project. We will continue our work to realize this overall vision. The DX project incorporates RPA and Salesforce software analyzes the sales activities to help enhance inside sales.

We also use Tableau, a data analytics software, and with all these measures, we aim to truly enhance the efficiency to maximize the benefit of DX.

In addition, Omni THK will provide various services such as quotation, delivery response and during download and will elevate the quality level of our customer response by improving internal productivity. By achieving these goals, we aim to maximize customer satisfaction.

Next, using Page 13, I would like to explain OMNIedge, our IoT service for the manufacturing industry. As you can see, OMNIedge has been steadily expanding its solution services with customers by broadening the products covered in the range of services.

Here's how OMNIedge has been rolled out to date. In January 2020, we launched the service for LM Guide. In November 2020, the service was expanded to cover ball screws and we also started the free trial service for rotary components.

In February 2021, global service was launched by achieving compatibility with global SIM. In February 2021, OMNIedge was linked to FANUC's FIELD system. In March 2021, the service was expanded to cover the actuators. And in November this year, the free trial service with the rotary components that was started from last November is slated to be launched on a commercial basis.

Please turn to Page 14. In China, where demand is expected to grow further in the future, THK has begun full-scale operation of services utilizing the infrastructure of China Mobile, a major Chinese vendor with a reliable and proven track record, and has also begun utilizing Alibaba Cloud for the cloud service.

In addition to distributors that have traditionally handled THK products, we have also added sales partners that have been certified to handle OMNIedge to create a sales network that covers all of China, enabling us to smoothly introduce detailed proposals and support systems to assist our customers.

We have also aligned our service to the Chinese business practices and customers will have choices such as the subscription model or the hardware purchase model. We will be flexible with the contracts so that customers can choose the arrangement that best suits their needs and style.

Now please turn to Page 15. While the challenges faced by the customers cannot be solved with predictive failure detection alone, we have added the non-weight manufacturing ticket and IoT risk compensation as new benefits to alleviate their concerns about the availability of parts to quickly repay the machine and return it to a normal state as well as the financial burden of repair in case the sensor does not respond and that failure occurs. With these additional benefits, we will accelerate the rollout of OMNIedge to our customers. We are collaborating with the Tokio Marine & Nichido Fire Insurance for the IoT risk compensation service.

Page 16, please. So far, I have presented our new services such as Omni THK and OMNIedge. In terms of products in existing business domains, we will be introducing high-precision products for semiconductor manufacturing equipment for which more precision is required. Since even the slightest vibration can affect the product, the product will not only be highly precise, but will also be highly rigid.

In the new business areas, on top of medical equipment, seismic isolation and dumping devices, renewable energy, train and aircraft, we will target demand from the entire service industry including distribution center, especially for automation of work in the warehouses and shops and restaurants for automating and reducing the labor burden of their ancillary operations. We will be adding new products for these demands in our lineup.

Next, please turn to Page 17. As shown in the slide, we are enhancing our global manufacturing structure in anticipation of demand growth over the medium to long term in the Industrial Machinery business.

Leading companies such as Samsung, the top company in the semiconductor industry, have started to consolidate their operations. To firmly capture these amounts, the SAMICK-THK Daegu Technopolis plant started operation in November 2020 and the full transition has been completed in April of this year. The new plant is dedicated to the production of LM Guides, while the existing plant will be converted to the production of ball screws.

In addition, the new THK India plant is slated to start operation in the fall of 2021. The plant was originally scheduled to be up and running in April this year. But due to the spread of COVID-19 from early spring to summer, we had to send our Japanese expats back to Japan for a while, which caused a delay in the construction schedule. We believe that the plant will be ready for operation in September or later in the year.

The total site area for the plant is 205,000 square meters, and the first phase will take up a total space of 37,000 square meters.

In addition, construction is underway for a new plant extension at THK Changzhou, which is scheduled for completion in March 2022. The groundbreaking ceremony has already taken place and construction has already started. The floor space is approximately 15,000 square meters.

Furthermore, THK Liaoning is also undergoing expansion work. The scheduled completion date will be in December 2022, with a total floor area of 25,000 square meters.

Let's proceed to Page 18. Please note that we cannot mention the names of the auto OEMs for whom we will be supplying the new linear motion products mentioned on the slide.

In the Automotive and Transportation business, we will continue our efforts to improve profitability, while strengthening our existing Linkage and Suspension business as well as adding and proposing new products to meet the accelerating needs of CASE en masse.

We also expect that the structure of Linkage and Suspension components will change in the future due to vehicle electrification. We believe that we will be able to develop a Linkage and Suspension business fit for the new era by converting our current capabilities in these new products, and we intend to make these proposals ourselves.

Please turn to Page 19. I capitalizing on the key measures that I have presented so far, our goal is to transform from a manufacturing company to a manufacturing and innovative services company. While the core of our business is manufacturing products, we also provide related services such as our OMNIedge predictive maintenance service as a means to deliver greater value, increased customer satisfaction and thereby, achieve significant business growth.

Next, let me cover the full year guidance for fiscal 2021, starting with the current trend of orders on Page 21. This graph shows the trend of orders by region in the Industrial Machinery business. In each region, orders have entered a full-fledged recovery phase, and we expect auto level to remain at a high level in the future. Although some have pointed out that demand in China is declining, orders in China during the January to March period were about 2.5x the level of the past peak. The rapid growth was due to exploiting opportunities with new customers and new business fields, where there had been no previous transactions and due to buildup of inventories as well.

We view that this spike in orders is returning to a more normalized level. Orders for the April to June quarter were also strong, almost double the previous peak, and we expect the business in China to grow at a stable pace.

Please turn to Page 22. With strong demand in all regions, we have decided to maintain the guidance that was revised at the time of the announcement of the first quarter financial results. For the current fiscal year, we will certainly capture demand, which has entered a full-fledged recovery phase and convert the opportunity to steady sales and profits, while promoting various measures to realize the growth potential that I explained earlier.

That will be all. And now I would like to conclude my presentation. Thank you very much for your attention.