THK Co Ltd

TSE:6481

Earnings Call Transcript 2022-Q2

[Akihiro Teramachi, executive]

I am Akihiro Teramachi, President and CEO of THK. I would like to share with you the overview of the financial results for the first half of fiscal 2022. Please turn to Page 3. Consolidated sales revenue increased 23.6% year-on-year to JPY 186.6 billion. In the Industrial Machinery business, demand was strong in all regions, mainly driven by growing semiconductor-related demand, progress on automation and robotization and EV related demand. Against such backdrop, we were able to steadily translate this demand into sales as a result of our ongoing efforts to increase production capacity.

On the other hand, the Automotive and Transportation Equipment business was impacted by the decline in vehicle production caused by the shortage of semiconductors and other parts as well as lockdowns in China and the situation in Ukraine. Despite the operating loss in the Automotive and Transportation Equipment business, stemming from the auto production cutbacks and rising steel prices, the consolidated operating income increased 88.9% year-on-year to JPY 20.9 billion. Thanks to the revenue growth in the industrial machinery business contributing to a significant increase in profit.

As a result, both sales revenue and operating income exceeded the first half projection, achieving a significant revenue and profit growth year-on-year.

Next, I would like to explain the sales breakdown by region on Page 4. Due to the factors mentioned in the previous slide, sales increased significantly in each region compared to the same period last year.

Let me now explain the factors behind the increase and decrease in operating income using Page 5. Consolidated operating income was JPY [ 20.9 ] billion. Let me elaborate on the different factors that impacted the profit. First, with the Industrial Machinery segment compared to the first half last year. The factors that pushed down the operating income included JPY 3.8 billion of fixed cost increase, such as labor costs and personnel expenses stemming from higher sales.

On the other hand, following other factors contributing to the increase in profit. JPY 11.4 billion from higher sales and higher volume, JPY 0.4 billion from variable cost ratio, JPY 2.6 billion from ForEx and JPY 0.3 billion from the reclassification of other income and other expenses.

Next, let me explain the factors that led to change in the operating income in the Automotive and Transportation Equipment business using Page 6. The Automotive and Transportation Equipment business reported a profit decline. The profit decline was caused by the negative JPY 1.9 billion impact from the change in variable cost ratio due to price hike of steel among others.

On the other hand, we enjoy the following positive impact, JPY 300 million profit contribution from sales and volume growth, JPY 200 million from lower fixed cost, JPY 300 million due to currency and JPY 100 million from other income and expenses. I will explain the matures for profit improvement in the second half and beyond later in the presentation.

I will now go through the balance sheet items on Page 7. Total assets increased by JPY 34.5 billion year-on-year to JPY 550.5 billion. I will skip the details given the interest of time, so please have a closer look at the figures at your convenient time.

Next, I would like to explain our key measures. Please turn to Page 9. There is no change in our pillars of growth strategy, namely full-scale globalization, development of new business areas, and change in business style, and we will further expand our business domains under our vision of becoming a manufacturing and innovation services company. In addition, we are strengthening sustainability and ESG further, which are the basic prerequisites for advancing these strategies.

Next, on Page 10, I'd like to share our key initiatives in both businesses under the growth strategy mentioned in the previous slide. First, let me explain how Omni THK is realizing DX on Page 11. As you can see, we are promoting the THK DX project, so that personnel freed up by reducing the person hours spent on routine tasks can be redeployed to higher value-added operations to expand sales. To advocate these initiatives, we continue to work on further advancement of Omni THK, introduction of various ICT tools in structures and development of digital human assets, the third point being the fundamental basis of the other 2 measures.

Next, on Page 12, let me present OMNIedge, our IoT service for the manufacturing industry. When customers who have implemented OMNIedge consider large-scale deployment within their company, they may be some obvious issues such as more robust security as well as the impact on the existing internal network.

We have started to support private clouds in order to solve these challenges. This enables scaling from test operations with a small number of units, the large-scale deployment to multiple production lines. We hope to be more OMNIedge project with this new feature.

Next, please turn to Page 13. I have presented our new services such as Omni THK and OMNIedge. In terms of products in existing areas, we are introducing high-precision products for semiconductor manufacturing equipment and others, which requires increasingly higher precision.

In the new business areas, the application is expanding into the service industry, including distribution, retail shops and restaurants. In addition to medical equipment, seismic isolation, renewable energy, train and aircraft. The photo on the slide is a robot that cooks noodles and is an example of how our product is being used. Just as exemplified by this case, the range of our product application is steadily expanding.

Please turn to Page 14. As demand for service robots increases against the backdrop of the growing need for labor saving in so many domains, we have newly established a service robot business division in the service robot research laboratory. We will further expand our service drop business, which we have been working on to date.

Page 15, please. On August 2, we opened a solution center in Fukuoka. In addition to our mainstream products and OMNIedge solution, we have on permanent display demonstration machines for service robots, as mentioned on the previous page as well as collaborative robots and transport robots. The center will serve as a core location where customers can experience state-of-the-art automation technology of course to find solutions to their problems. We also hope that the center will be a place where many SIs can come together and spend time. When we go down our success here, we would like to gradually expand the program to other locations.

Next, please turn to Page 16. As shown in this slide, we are expanding our global production capacity in anticipation of medium- to long-term demand growth in the Industrial Machinery business. In June, the plant expansion was completed in THK Changzhou and the new capacity became operational. The plant is approximately 15,000 square meters in size. It mainly supplies manufacturing equipment for THK's other plants in China as well as actuators, materials and units, among others, for our customers.

In December this year, expansion work of approximately 25,000 square meters of THK Liaoning is scheduled to be completed. We plan to ramp up the production of LM Guides actuators and [ cross roller wings ] for robots to respond to the rapidly growing Chinese market. On the back of expanding applications for both plants such as chip nontransit medical equipment, among others, we are currently adding 7,500 square meters to the existing capacity in Japan. The work is scheduled for November completion, and the new capacity will be in operation before the end of the year.

Furthermore, the LM Guide plant in Korea, which was completed in 2020, is making good progress in its operation. The original factory now manufactures both screws for the Korean market. THK India, which was completed in November last year and is now in full production is expanding while increasing the number of production items. Please refer to the slide for the scale of the plant.

The plant in India has been performing better than expected with the employees delivering extremely high quality, and the plant is steadily manufacturing products of global standards. In order to expand further, we will ship to the India market and to ASEAN, which are showing good momentum. We also hope to ship some of our products to Europe as well.

Next is the progress in implementing automotive and transportation equipment business recovery plan. Please turn to Page 17. Although we continue to face a very difficult business environment in the Automotive and Transportation Equipment business. The effect of the recovery plans for in FY '20 are being realized as planned.

In addition, the product portfolio review undertaken in FY '21 is gradually beginning to deliver positive impact. However, we are not content with the current situation, given that adverse factors in the external environment are outpacing our internal efforts. We will take further steps to reorganize our operations and improve profits.

Next, please turn to Page 18. As mentioned in the previous page, we have decided to reorganize our Automotive And Transportation Equipment business as shown on this slide because we believe that we need to take further actions amidst the dramatic changes in the environment surrounding the automotive industry.

First, we will continue and augment our existing recovery plan. In addition, we will continue to focus on profit-oriented management, and we are willing to accept sales decline for low-margin products. Under such circumstances, we will seek to improve profitability by allocating fixed costs to the production of Industrial Machinery products.

In addition, we will strive to achieve a shift from existing products into next-generation products and accelerate development of next-generation products such as unit for integrated brake systems, active suspension systems and mechanical level control units, which we have introduced so far to increase new orders.

Through these efforts, we will strive to establish a profitable structure in the automotive and transportation equipment business.

Next, I would like to talk about ESG and sustainability on Page 19. Based on the concept shown on this page, we are pushing forward various initiatives to realize a sustainable society. The list outlines the most recent initiatives we have undertaken.

So let me share just some of these initiatives. Please turn to Page 20. The Sustainability Preparation Office, which was established last year, took the lead to reidentify the company's materiality. The following are the revised materiality. Solving issues of society through creation of an affluent society and innovation, realizing decarbonization in the recycling oriented society, realizing a diverse and rewarding working environment, and strengthening the base for sustainable value creation.

With the reidentified materiality as we're guiding principles, we will continue to endeavor towards sustainable growth.

Now let me turn to the full year earnings guidance for FY '22. Page 22 illustrates the current order trends in the industrial machinery business by region. Orders have been brisk in all regions, and this momentum is expected to continue going forward.

Next, please turn to Page 23. As I have explained earlier, although the Automotive and Transportation Equipment business continues to face a tough environment. Demand in the Industrial Machinery business has been strong. And overall, the company is making good progress. Therefore, we decided to reiterate the full year guidance that was announced at the beginning of the year.

That will conclude my presentation on the financial results. We will continue to steadily capture the strong demand and convert that to sales. And at the same time, we will implement first measures explained earlier to realize our growth potential. Thank you very much for your attention.