THK Co Ltd

TSE:6481

Earnings Call Analysis

THK Reports Mixed H1 Financials, Strategic Focus

THK experienced a slight dip of 0.6% in consolidated revenue to JPY 185.5 billion, while operating income fell by 21.2% to JPY 16.4 billion, comparing year-on-year first-half results. The industrial machinery business, specifically the electronics sector, confronted declining demand, whereas the automotive and transportation equipment business is recovering from the parts shortage. Regionally, sales decreased in Japan, China, Asia, and others but increased in the Americas and Europe. The company is actively rolling out new IoT solutions like OMNIedge and expanding product lines for automation and labor-saving. Further, THK is growing globally, including notable progress in India, and strategically discontinuing unprofitable products.

Strategic Expansion in Consumer and Commercial Fields

The company is advancing its product offerings, focusing on new areas where demand is increasing. They are launching consumer and commercial products that emphasize features like high rigidity and durability while being reasonably priced. A growing portfolio includes products for various applications, from railway carriage doors to medical beds and office fixtures. The Robotics division, established last year, is gaining traction with innovative offerings like the SEED series for service robots and transport robots that navigate using visual cues instead of preprogrammed routes.

Growth and Optimization in Production

The company is extending its global footprint, with plant expansions starting in South Korea and stretching to Changzhou, Liaoning, India, and Niigata in Japan. In India particularly, the completion of the initial phase of a new plant signifies impressive progress. These developments underpin the company's push towards increasing automation and improving production capabilities to meet rising demand.

Profitability Turnaround in Automotive and Transportation

The Automotive and Transportation Business has seen a significant recovery, with cost reductions of JPY 800 million in the first half of FY '23. By discontinuing unprofitable products and pursuing profit-focused management, the company expects to see escalating profits, setting the full year operating income guidance for this segment at JPY 1 billion.

Next-Generation Product Focus and Corporate Value Improvement

Anticipating an increase to 4 million units for medium-term annual shipments, the company is developing various new products such as active suspension systems to bolster its next-generation offering. Corporate value enhancement is a strategic goal, with a target ROE of 17% by FY '26 and an emphasis on increasing ROIC across all business lines. The primary drivers will be top-line growth in the Industrial Machinery Business and profitability improvement in the Automotive and Transportation Equipment Business.

Investment in Human Capital and Maintained Dividend Policy

The company intends to invest in human capital through wage increases and stock-based compensation to incentivize employees. They plan to maintain a dividend payout ratio of 30%, while remaining open to the possibility of share buybacks if surplus funds are available.

Commitment to ESG and Sustainability

There's a strong commitment to ESG, with the establishment of a sustainability committee and the promotion of initiatives to support a sustainable society. This includes advocating TCFD recommendations and enhancing disclosures. An emphasis is also placed on human capital development, with educational outreach programs to inspire future generations of creative developers.

Revised Full Year Earnings Guidance for FY '23

With a slog in the industrial machinery business and no recovery in sight, the company has revised its consolidated revenue projection downward to JPY 345 billion, a 12.4% year-on-year decline. They anticipate an operating income of JPY 21 billion, an income before income taxes of JPY 22.5 billion, and a net income of JPY 16 billion. These projections are based on the current order trend and the assumption that the market's condition will not change significantly in the second half.

Earnings Call Transcript 2023-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 6 months of the current fiscal year ending in December 2023.

Please turn to Page 3. Consolidated revenue was down by 0.6% year-on-year to JPY 185.5 billion. Overall demand slowed in the Industrial Machinery Business, especially for electronics, and despite the conversion of backlog that was previously trending high into actual sales, revenue was down.

On the other hand, other vehicle production cuts caused by the shortage of parts supply still had impact in the automotive and transportation equipment business. Sales trends started to recover. Consolidated operating income declined 21.2% year-on-year to JPY 16.4 billion. Automotive and Transportation Equipment Business [ turning to Black Inc., ] owing to a positive impact from sales growth in various efforts aimed at improving the profitability.

On the other hand, the industrial machinery business was negatively impacted by the volume factor stemming from sales decline as well as full-scale launch of various activities aimed at future growth was reopening and increased investment for human capital. As such, the first half performance resulted in decline in top line profit, but both the revenue and operating income be the initial target set forth at the outset of the 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 were down in Japan, China and Asia and other, but sales in the Americas and Europe grew, thanks to the recovery of the Automotive and Transportation Equipment Business as well as the weaker yen.

Let me go through the operating income on Page 5. First, I will explain the factors behind the increase and decrease in operating income in the Industrial Machinery Business compared to the previous fiscal year. The factors that pushed down the operating income included JPY 10.4 billion from lower sales and volume, JPY 1.3 billion increase in fixed costs such as higher investment aim for future growth and JPY 0.3 billion from the reclassification of other income and other expense.

On the other hand, following other factors contributing to the increase in profit, JPY 2.8 billion from change in the variable cost ratio and JPY 1.5 billion from foreign exchange.

Next, I would like to explain the changes behind the operating income for the Automotive and Transportation Equipment Business on Page 6. The profit decline was caused by the JPY 0.6 billion fixed cost increase for human capital investment and others, and a negative JPY 0.4 billion impact from the change in variable cost ratio. On the other hand, profit was higher, thanks to the JPY 3.4 billion volume impact from higher sales and JPY 0.6 billion impact from FX and JPY 0.3 billion from a reclassification of other income and other expense.

Page 7 is a snapshot of our balance sheet. Total assets increased by JPY 9.1 billion year-on-year to JPY 569.4 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, let's move on to the 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 innovative services company. In addition, we are strengthening sustainability and ESG measures further as basic prerequisites for advancing these strategies.

Using Page 10, I'd like to share the key initiatives taken in their respective businesses. For the Industrial Machinery Business, in particular, we expect a short-term adjustment in demand for FY '23. Having said that, there is no doubt that demand will grow over the medium to long term due to the progress of automation and robotization and the growing investment related to semiconductors and EVs, and we anticipate an unprecedented level of demand in FY '24 and beyond. In order to firmly capture such demand and achieve further growth, we have initiatives underway in both businesses aligned with the growth strategy described on the previous page.

Let me start with the Industrial Machinery Business on Page 11. As you can see, we are promoting the THK DX project, so that personal 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 and structures and development of digital human assets, the third point being the fundamental basis of the other 2 measures.

Please turn to Page 12. OMNIedge is capable of going beyond simply detecting predictive failure size of parts. It is an IoT service providing solutions that can contribute to improving the overall equipment effectiveness, or OEE, by reducing various losses that occur at manufacturing sites. To date, we have developed a predictive failure detection AI solution for linear motion and rotary components as well as the tool monitoring AI solution. They both contribute to the efficiency gains of customers' equipment by helping to reduce various losses as illustrated on this page.

Furthermore, from July this year, we started providing the AI diagnostic service, which completely frees up customers from the cumbersome process of setting the threshold values for sensors to detect the abnormality. With the new service rollout explained on the previous page, OMNIedge has been adopted by many customers across a broad range of industries. We will continue to develop and introduce new solutions that lead to the reduction of various losses to maximize the customers' OEE as well as to promote the deployment of OMNIedge in a prompt and steady manner.

So far, I have presented our new services such as Omni THK and OMNIedge. In terms of products in existing areas, we are introducing high precision and highly rigid products for semiconductor manufacturing equipment and others, which requires increasingly higher precision. At the same time, in new fields, demand is steadily expanding in areas such as those shown on the slide. We will continue to launch new products, particularly in the consumer and commercial field, they will further enhance our lineup with products that do not require high-precision and they're reasonably priced, but still maintain the characteristics of high rigidity, smooth movement and high durability.

We have also been launching a variety of new products that contribute to further automation and labor saving. Utility slide ATG and ARG suitable for sliding parts such as for Railway carriage doors and carriage seats, and this business is now growing. The Rod actuator CRES6000 is optimal to be used in various applications, such as for medical and nursing care beds, electric flyers and office fixtures. Utility slide UGR is in use for kitchen lifting mechanisms and assistive vehicles, among other applications. Customers [indiscernible] equipment with their own specifications that utilize our modules that contributes to automation and labor saving. We are providing modules and software that make it easy for the customers to be fit the parts according to their unique specifications in the most optimal way and create the robots that they need. Cylindrical Coordinate Module MLS offers a simple mechanism for automation of linear movement and rotation.

Rotation module RMR is ideal for robotic joints. Aside from the robotic application, it is an essential module that can be used for various automation needs. Picking Robot Hand System Model PRS, automates a picking task in distribution centers. In addition, we are also introducing a variety of robots to support labor saving efforts in the service industry. As you are already aware, we have formed the Robotics division last year and are now promoting the provision of service robots. As we have been presenting from the past, we have the SEED series for the service robot offering, and R7 and R8 are now gradually starting to be used in the market.

In the AGV category, the brand for our transport robot is SIGNAS. Viewing function is embedded in the vehicle and the vehicle can move around by actually seeing the signpost through the grade. So drawing lines on the floor or preprogramming using the virtual grade is not necessary. The robot will confirm very visual and move around powering the command. Route tapes were not necessary. And when the machine is relocated at a different place or if the vehicle has to work on a different equipment, simply relocating a signpost will enable the vehicle to operate in the new setting. If higher accuracy is required for the vehicle to operate closer to the equipment, additional cameras or eyes can be installed for movements with higher precision.

Signage robots were also deployed in the market, and we see many types of robots operating in our daily lives. We will actively expand into the consumer and commercial market. In response to the growing demand in the future, we have been expanding our plant starting in South Korea and more recently in Changzhou, Liaoning, India and Niigata in Japan. We will also augment the equipment installed and promote automation. We are making a very good progress, particularly in India. The total land size of the site in India is 205,000 square meters, and the first phase of the plant construction was completed on a site of 37,000 square meters. We are making steady progress in our business development, leveraging on such a location.

Next, I will explain the progress of the reorganization of the Automotive and Transportation Business. First, by executing the recovery slide shown in the upper left-hand corner, we reduced cost by JPY 800 million in the first half of FY '23. In pursuing the profit-oriented management, we discontinued the unprofitable products and the effort is starting to bear fruit in the magnitude of JPY 40 million. Negotiations for further price hikes are also underway. Under such circumstances, we allocated the fixed cost for the production of industrial machinery products. And in the first half, achieved production of JPY 1.2 billion worth of Industrial Machinery products. This month will be further enlarged in FY '24.

As a result of all of the efforts, we managed to turn the business into profitability in the first half of FY '23 and revised at the full year operating income guidance for the automotive and transportation business to JPY 1 billion. From FY '24 onward, we aim to achieve profit growth by expanding the launch of next-generation products and other initiatives as described on the slide.

Let me elaborate on the next-generation products on Page 20. The volume for integrated brake system unit is steadily increasing, projected at 2 million units for the current fiscal year and 4 million units annual shipment over the medium term. In addition, various new products, including unit per active suspension system and mechanical level control have been developed and are being adopted. We will continue to expand our product line up to promote the case over the medium to long term.

As I mentioned earlier, we believe that working on industrial machinery products within the automotive and transportation business will be very effective for the next-generation products. Since the conventional technologies for industrial machinery are now being incorporated into our transportation business. Switching a topic to one that's getting traction these days, I would like to explain our approach to the enhancement of our corporate value in the perspective of improving PBR.

First and foremost, we believe that the most important way to improve [ PDR ] is to increase ROE in this formula. And we have set a target of 17% for FY '26. To achieve this, we believe it's critical to increase ROIC in each business, specifically focusing on growing our profit, which is the numerator of ROIC. In order to enhance ROIC, the critical driver in the Industrial Machinery Business will be top line growth, which will be achieved by steadily capturing the enormous growth in demand.

In the Automotive and Transportation Equipment Business, the Q2 improving profitability will be the profitability enhancement initiatives that we have implemented to date as well as the launch of various new products. In order to accelerate these efforts, Capita will be deployed for future growth, including spending on CapEx and human capital.

As part of investment into human capital, we will consider wage increases and stock-based compensation programs designed to service incentives for the employees. Considering these funding needs, we believe it is appropriate to maintain a dividend payout ratio of 30% for the time being. However, if surplus funds arise while proceeding with this policy, it will actually consider share buybacks. We also record share buybacks as a means of communicating our message to the market. As part of our efforts to strengthen communication with stakeholders, we are also striving to enhance information disclosure. As indicated on the slide, this year, we renewed our website published integrated report and issued annual securities report in English.

Next, I'd like to explain our activities related to ESG and Sustainability. Based on the policy illustrated on the slide, we are promoting various initiatives to realize a sustainable society. In addition to supplying the linear motion products that bring many benefits, including energy saving, we believe that services such as Omni THK and OMNIedge, which help our customers improve their productivity, but also make a significant contribution to sustainability. We established a sustainability committee in October last year to further promote activities related to sustainability.

Most recently, the Sustainability Promotion Subcommittee structured under the committee has been working to contemplate on the KPIs and KGIs for respective materiality and to support company-wide efforts. We also declared our advocacy to TCFD recommendations and many disclosures aligned with those recommendations.

In addition, I believe that one of the most important aspect of sustainability is human capital development. We are promoting the THK Education Outreach Program with the aim of conveying the joy of monozukuri where manufacturing to children. And through the education of monozukuri, we are striving to develop creative developers who can address various challenges with their peers and lead a way to come up with solutions.

The THK Monozukuri Training Kit was developed as part of this program, and we are now inviting schools that are interested in using the kit for technology classes and research activities, among others, and the kit is provided free of charge. Furthermore, as part of these efforts, THK participated in the Kids Day Event hosted by the Ministry of Economy, Trade and Industry. [indiscernible] was also present. We will continue such activities in the future to nurture human capital who will lead the future.

Next, let me turn to the full year earnings guidance for FY '23. The graphs on Page 27 illustrate the current order trend in the industrial machinery business by region. As you can see, the order flow is hovering at the bottom. Against the initial assumption that orders recovered by the middle of the year, as you can see, the current orders have yet to see a recovery trend. Based on what we have presented as well as our outlook, we revised down our consolidated revenue projection for the fiscal year ending in December 2023 to JPY 345 billion, which will be a year-on-year decline of 12.4%, -- specifically in the Industrial Machinery Business, we built the guidance based on the assumption that the current order inflow will remain unchanged in the second half. The projection is based on the scenario that the market will remain at the bottom range.

Against such environment, we will step up first cost control measures. But due to the large drop in sales, we project operating income of JPY 21 billion, income before income taxes of JPY 22.5 billion and net income of JPY 16 billion, respectively. For the current fiscal year, while augmenting cost control to prepare for a short-term market correction, we will be ready to steadily capture demand in the subsequent recovery phase, [indiscernible] first measures to achieve medium- to long-term growth.

This concludes the financial results briefing for the first 6 months of the fiscal year ending in December 2023. Thank you very much for your attention.