THK Co Ltd

TSE:6481

Earnings Call Analysis

Financial Results Decline, But Future Growth Initiatives in Place

In the first half of the fiscal year ending December 2024, THK's consolidated sales revenue fell by 3.1% to JPY 179.8 billion. The decline in the Industrial Machinery business affected operating income, which dropped 49% to JPY 8.3 billion, despite a profit increase in the Automotive and Transportation business. Regional sales saw widespread decreases except in the Americas, where the weaker yen contributed to growth. Total assets rose by JPY 30.4 billion to JPY 586.7 billion. Maintaining its growth strategy, THK focuses on global expansion, innovation, and sustainability, with plans to leverage investments in upcoming technologies and ESG initiatives to drive medium to long-term growth.

A Snapshot of Financial Performance

In the first half of FY '24, THK reported a consolidated sales revenue of JPY 179.8 billion, down 3.1% from the previous year. This decline was primarily attributed to the industrial machinery segment, which saw orders recover slowly after a previous downturn. Operating income, however, saw a dramatic decline of 49%, dropping to JPY 8.3 billion. Gains in the Automotive and Transportation sector helped, as it improved due to fewer production cutbacks, yet overall profitability suffered due to high fixed costs and continued investments in growth.

Regional Insights

The geographical breakdown of revenue highlighted a decrease across several regions, including Japan and Europe, while the Americas showed an increase, positively influenced by a weaker yen. Overall, while demand is showing signs of life, it remains uneven across different markets.

Drivers of Profitability

A detailed analysis of operating income revealed a JPY 10 billion decline due to lower sales volumes. Meanwhile, foreign exchange fluctuations added JPY 1.7 billion to the bottom line, showcasing the importance of currency in their overall financial health. Strategic decisions to increase the value ratio and control costs were essential components in managing profitability.

Strategic Growth Measures

THK reiterated its commitment to its growth strategy focused on globalization and innovation. They have plans to continue capital investment in human resources and technological expansion, while maintaining a conservative dividend payout ratio of 30%. They also intend to actively consider share buybacks when cash allows, suggesting a focus on returning value to shareholders.

Future Outlook

Looking ahead, THK expects further recovery in industrial machinery demand as sectors such as automation and robotics advance. They aim to capture growth particularly in semiconductor and electric vehicle investments. The company is committed to enhancing its product offerings, including next-generation ball screw products, which have seen rising order volumes in applications such as e-axles and autonomous vehicle components.

Sustainability and ESG Initiatives

The company is placing a strong emphasis on its sustainability agenda, aiming for carbon neutrality at manufacturing stops through the installation of solar energy systems and LED lighting. Their commitment to cutting energy consumption complements their product lines that inherently promote energy savings.

Conclusion and Investor Takeaway

Overall, despite facing declines in sales and profitability, THK demonstrates a resilient recovery strategy with its focus areas targeting robust future growth avenues. With their strong commitment to innovation, sustainability, and shareholder value, THK continues to navigate the challenging manufacturing landscape while positioning itself for long-term success.

Earnings Call Transcript 2024-Q2

[Takashi Teramachi, executive]

I am Takashi Teramachi, President and COO of THK. I would now like to provide an overview of the financial results for the first 6 months of the current fiscal year ending in December 2024.

Consolidated sales revenue declined 3.1% year-on-year to JPY 179.8 billion. In the Industrial Machinery business, orders bottomed out in the second half of the previous fiscal year and demand began to show gradual recovery. However, sales declined compared to the same period last year when the order backlog was high. The Automotive and Transportation business continued to improve in light of the easing impact of automotive production cutbacks caused by parts supply shortages and other factors.

Consolidated operating income was down 49% year-on-year to JPY 8.3 billion. The Automotive and Transportation business posted an increase in operating income, thanks to various efforts aimed at improving profitability. On the other hand, operating income for the Industrial Machinery business declined due to the negative impact of volume effects resulting from the decline in sales revenue as well as the impact of various investments intended for future growth, including investment in human capital. However, both sales revenue and operating income exceeded the initial target as the gradual demand recovery in the Industrial Machinery business was effectively turned into sales as well as the depreciation of the yen.

Next, I will explain the trend of revenue by region. Due to the factors mentioned on the previous page, sales in Japan, Europe, China and other Asian regions decreased year-on-year, while sales in the Americas increased due to the impact of the weaker yen and other factors.

Next, I will explain the factors behind the change in operating income. In the Industrial Machinery business, the drop in operating income was due to the volume effect of JPY 10 billion stemming from lower sales, JPY 0.3 billion increase in fixed costs and JPY 0.4 billion impact caused by the change in variable cost ratio. On the other hand, factors contributing to profit growth included JPY 1.7 billion boost from foreign exchange and JPY 0.4 billion impact stemming from other income and expense.

In the Automotive and Transportation business, the profit declined due to an increase in fixed cost of JPY 0.8 billion, including onetime expense of JPY 0.7 billion incurred in the first quarter and other income and loss of JPY 0.6 billion due to the absence of a onetime subsidy effect booked in the first quarter of the previous fiscal year.

On the other hand, the factors positively contributing to the profit included the following: a volume effect of JPY 0.2 billion due to higher sales, a variable cost ratio effect of JPY 1.2 billion stemming from the profitability improvement efforts and price hike initiatives and FX impact of JPY 0.5 billion.

Now moving on to the balance sheet. Total assets increased by JPY 30.4 billion from the previous year to JPY 586.7 billion. Due to time constraints, I will skip the details, but please refer to the figures in the material at your convenient time.

Next, I will explain our key measures. There is no change in the pillars of our growth strategy, which are full-scale globalization, development of new business areas and change in business style, and we will further expand our business domain under our vision of becoming a manufacturing and innovative services company.

In addition, we will further strengthen sustainability and ESG initiatives, which are key prerequisites for pursuing these strategies. With customized production becoming more decentralized globally as a result of the supply chain disruption caused by the pandemic and the geopolitical risks, the locations for equipment design, component procurement and MRO are becoming more decentralized as well in the Industrial Machinery and Automotive and Transportation business.

In order to thoroughly follow up these customized activities, we are strongly promoting Glocal Support globally. This is achieved by strengthening the business for global customers through global coordination for sales, development and production, while growing the local businesses as we have done to date. In pursuing this concept, the global manufacturing structure for both businesses have been extremely effective, and we will continue to augment this structure.

This slide illustrates our view on how we'd like to enhance the corporate value over the medium to long term based on such management policy. We believe that the most important way in improving the corporate value is to raise the ROE. And for that, we believe it is extremely vital to raise ROIC in each business, especially focusing on the profit, the numerator of ROIC. To improve the return, we believe that top line growth in the Industrial Machinery business and efforts to improve profitability and the introduction of various new products in the Automotive and Transportation business are the key factors.

In order to achieve these goals, we will allocate capital for future growth investments, including CapEx, R&D and human capital investment. In consideration of these investment needs, the dividend payout ratio is currently set at 30%, and we will actively consider share buybacks when capital is in excess.

Now I would like to go over the key initiatives in respective business lines. When we think about the demand outlook over the medium to longer term, there is no doubt, especially for the industrial machinery business on the demand growth as we anticipate progress on automation and robotization and growth for semiconductor and EV-related CapEx.

In order to capture such demand and achieve further growth, we are promoting various initiatives in both businesses based on the growth strategy described on the next page. First, I will explain the future direction of our Industrial Machinery business. Various social challenges such as shift to automation, labor shortage and consideration to sustainability are making the challenges at the production sites more complicated.

Traditionally, we have developed our business by selling machine component parts to solve the problems of machine builders who make machines. Going forward, we will also strive to solve problems for machine users who are the end customers of the machine builders actually using the machines as part of our FA solution business. In particular, from the viewpoint of the evolution of machine component parts, we will develop good products that will help solve issues for both machine builders and machine users by increasing our contact points with machine users.

Furthermore, in terms of business management, we will share the various information collected from different layers of customers with other teams, including the development team and the production team to strengthen development in growth areas and reinforce our business foundation. In order to accelerate this effort, in March of this year, we set up 2 dedicated groups, machine component parts business and the FA solution business, clarifying responsibilities for sales activities in particular by dividing them into 2 teams.

First, in the machine component parts business, we will continue to focus on introducing new products to meet customer needs in existing areas and expand applications in new business areas. In order to steadily capture demand in 7 priority areas, including semiconductor sector, where extremely strong growth is expected in the future, we have formed a global task force and are actively engaged while also incorporating the Glocal approach mentioned earlier.

As you can see on this slide, we have a number of new products and products under development as our Linear Motion and Rotary Motion Components offering. In the FA solution business, as I explained at the outset, we will develop the business by offering services such as OMNIedge, motion control and mobile robot for machine users. We'll continue to provide comprehensive solutions that encompass hardware and software to solve customers' productivity improvement challenges with a focus on addressing the customers' flexible manufacturing structure.

As you can see on this slide, we are quickly evolving OMNIedge so that we can provide services tailored to various customer needs. The services enhanced with respective functions, namely the basic package, AI diagnostic service and cloud storage and file data transmission being set up into blocks, allowing the customers to flexibly combine the functions and deploy a large number of units.

Today, I'd like to share 3 specific examples. Our customers have been very pleased, in particular, with their predictive failure detection service, which combines our unique AI with the insights of our data scientists. The fact that we offer a wide range of services in various patterns is the reason why the number of use cases of our service is growing rapidly. We will continue to develop and introduce new solutions to maximize our customers' overall equipment effectiveness and expand the adoption of our services quickly and steadily.

In the field of mobile robots, we are currently marketing SIGNAS, a next-generation transport robot and evolving its functions. With the installation of access points, the communication capability on SIGNAS makes multiunit operation possible. In addition, a wide range of options is available to solve issues that arise when a large number of units are deployed. SIGNAS has been highly acclaimed, winning the 2023 JSME Excellent Product Award. We will accelerate these efforts to realize synergies between the machine component parts business and the FA Solutions business.

Next, I will explain the progress of the reorganization of the Automotive and Transportation business. First, I will go over the recovery plan shown at the upper left of the slide. In the first half of FY '24, we achieved a cost reduction of JPY 1.1 billion. With respect to profit-oriented management, we continue to reduce the number of unprofitable products while continuing to negotiate for further price hikes to pass on the cost increase. With these initiatives, we deployed fixed costs for the manufacturing of industrial machinery products and achieved production value of JPY 1 billion in the first half of this fiscal year.

We will further increase the production in the second half as well as in FY '25. As a result, profits grew in the first half of FY '24. As shown on the bottom of the page, we will grow the profit by expanding next-generation products, especially the ball screw products. The details of the next-generation products are shown here. The sales volume of ball screws for electric integrated brake control and ball screws for active suspension units is steadily increasing.

In addition, we have received orders for ball screws for e-axles and are expanding applications. We exhibited the products marked by the yellow line at the Japan Mobility Show last year, and we are currently accelerating product development of new actuators with an anticipation of further progress in autonomous driving.

As you are aware, the automotive industry is currently undergoing very drastic changes, but we'd like to be aligned with the shift to electrification and autonomous driving and are committed to improving our current profitability and launching new products that take advantage of our linear motion technology to capture good future opportunities. With first initiatives in place, we would like to contribute to our shareholders through the delivery of solid earnings.

Next, on ESG and sustainability. We are promoting various initiatives for the realization of a sustainable society based on the policy shown on the slide. Our products themselves have energy saving effects, so we will continue to supply the linear motion products to our customers. Not only that, we will also continue to expand our services that contribute to improving the customers' productivity, such as OMNIedge and Omni THK, both leveraging on digital technology.

We, as a manufacturing company, also consume energy and leave carbon footprint. So we plan to quantify and reduce the amount of energy consumption and carbon emissions generated at the manufacturing sites. First, in our efforts to become carbon neutral, we are actively promoting the installation of new solar power generation equipment at each of our production sites, switching to LED lighting and introducing green electricity at some production sites.

At the same time, we received third-party verification that the calculation of Scope 1 and Scope 2 GHG emissions in FY '23 complies with the calculation rules stipulated in ISO 14064 by the Japan Quality Assurance Organization. In fiscal 2024, we plan to expand the scope of certification to our production sites across Japan. We will continue to contribute to the realization of a sustainable society by promoting more environmentally friendly business activities.

Next, I'd like to go over our financial forecast for FY 2024. First, I will explain the current order trends. These graphs indicate the trend of orders received by region in the Industrial Machinery business. As you can see, orders have bottomed out in the second half of last year, more evidently in the July-September quarter and have been on a gradual recovery trend.

Leading up to June, we were able to confirm order expansion in U.S. and China. Our observation for Japan is that it is yet to indicate a full recovery, and we expect the inventory and order adjustment to be completed in the July to September quarter and start to see a normalized level of order trend backed by fundamental demand. Against such backdrop, orders are steadily and gradually recovering, and we expect a full-fledged recovery going forward.

In summary, the first half performance has exceeded the initial plan and demand in the Industrial Machinery business has continued to recover moderately so far. That said, we decided to keep the initial earnings guidance unchanged. We are prepared to steadily capture the demand that is expected to recover in the future, and we will vigorously promote various measures to achieve medium- to long-term growth. With that, I would like to conclude my presentation. Thank you very much for your attention.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]