Rohm Co Ltd

TSE:6963

Earnings Call Analysis

Current Financial Performance and Revision of Earnings Guidance

The company's financial performance in the first half of fiscal 2024 shows a decline in net sales, which were recorded at JPY 232 billion, down by 3% year-on-year. This decline has prompted a significant revision of the earnings guidance, with expected net sales now reduced from JPY 480 billion to JPY 450 billion, marking a 6.3% decrease. The operating profit forecast has also shifted dramatically, changing from a positive JPY 14 billion to an anticipated loss of JPY 15 billion, underlining the substantial impact of inventory adjustments and increased fixed costs that were not sufficiently mitigated by cost-cutting measures.

Market Segment Performance Analysis

Performance across various market segments has been mixed. The automotive sector remained largely flat, with a slight increase of 2.1%. However, this fell short of growth expectations. The industrial market segment experienced the most severe setback, dropping by 28.1% as customers continue to face inventory adjustments and the energy domains are slow to recover. The consumer and communications sectors exhibited some recovery, but they still face challenges that could worsen, especially looking towards the second half of the fiscal year.

Impact of External Conditions and Future Trends

The company is grappling with external pressures that affect performance across multiple sectors. A notable slowdown in battery electric vehicle (EV) penetration is limiting growth within the power devices category. Additionally, complications arising from production cutbacks and weak sales by Japanese OEMs in the Chinese market are further constraining growth potential. While the consumer markets are expected to encounter issues, slight growth is forecasted in the computer and storage markets, albeit at minimal absolute values.

Strategic Initiatives and Cost Reduction Plans

In light of these challenges, the company is implementing strategic changes aimed at improving operating efficiency. A plan to reduce fixed costs by approximately JPY 5 billion is underway, although it remains insufficient to fully counterbalance the inventory impacts and declining revenue. Furthermore, the capital expenditure (CapEx) plan for the current fiscal year is being adjusted from JPY 165 billion down to JPY 150 billion, illustrating a cautious approach to investment amid fluctuating market conditions.

Long-term Outlook and Investments in Technology

Despite current turbulence, the company remains focused on long-term goals, particularly in the silicon carbide (SiC) market associated with battery EVs and other technological advancements. Although anticipated sales growth in SiC has been delayed until fiscal 2025, the company aims to maintain robust design wins in the automotive segment, accounting for about 80% of SiC engagements. Future production capacity increases will be closely monitored and adjusted according to ongoing demand trends.

Commitment to Shareholder Returns

In a proactive move to reassure investors, the company has committed to maintaining its dividend payouts, projecting an interim dividend of JPY 25 per share, which is also expected to apply to year-end dividends. This decision reflects a belief in the continuity and stability of the dividend framework despite the underlying financial pressures.

Organizational Shifts and Customer-Centric Approach

To enhance competitiveness and responsiveness to market demands, the company is restructuring its sales and marketing approaches. By integrating customer needs into the development process and focusing on high-value products, particularly in the automotive sector, the company aims to boost its market share. This initiative includes shifting from custom-made products to more standardized solutions, while also dealing with the challenges presented by changing market conditions in the consumer segment.

Earnings Call Transcript 2025-Q2

[Isao Matsumoto, executive]

[Interpreted] Good morning, everyone. I, Matsumoto, would like to walk you through the materials. Topics will be covered in this order.

Starting from our first half results. As shown on the left hand, our fiscal '24 first half net sales were JPY 232 billion, down by 3% year-on-year, up by 3.1% versus our term beginning target. Exchange rates have changed slightly as described below.

Following that, operating profit was a negative JPY 900 million, ending with an operating loss.

Due to gain on sales of investment securities, net income ended with a positive figure, yet our figures turned out to be severe. Unlike our initial plan for the first half, we ended with an operating loss, although our top line grew. I will explain more about this later.

Looking into the first half sales by market segments, automotive ended more or less flat. It did increase by 2.1% but still a tough result since our initial plan was to grow the segment steadily, but we couldn't.

To your right, the industrials market segment declined last year and this year, too. Our customers are still in inventory adjustment. The FA and energy domains are still not recovering. Overall, it dropped by 28.1%, which is the biggest decline amongst other market segments.

Talking about consumer, communication and computers & storage. Communication and part of the computers & storage saw a growth in the first half, but after all, the automotive and industrial market segments impacted the overall result, one declining and the other ending almost flat.

Here is the sales trend by customer nationality. Our business activities are mainly centered in the automotive industry. We were able to grow our auto business strongly in Europe and China, but industrial-related businesses declined worldwide.

The biggest issues are in Japan with a year-on-year decline in automotive, industrial and consumer segments. The automotive industry faced various issues. Thus our business went down by JPY 4.7 billion, a big decline. Industrial saw an even bigger drop. These largely pulled down the figures. In relation to that, our sales ratio outside of Japan increased to 49.3%. This is simply because the domestic business dipped.

This shows our year-on-year comparison of our operating profit for the first half. Last fiscal's first half OP was JPY 29.8 billion. Sales declined by JPY 7.3 billion. The issue here is the inventory. This also includes the material costs, but the impact from the inventories accounted for a big portion of the drop.

Due to the inventory impact as well as the incremental fixed expenses, our operating profit ended like this. We have been working on JPY 3.5 billion fixed cost reduction initiatives. But this was not big enough to fill up the gap of the decline caused by the inventory impact. The effect from inventories were the biggest factor this time.

This is a breakdown by segment. LSI or the ICs and discretes saw a large decline in net sales and profit year-on-year. Segment profit of ICs went down from JPY 12.2 billion to JPY 5.5 billion. We have been able to cut fixed expenses, but since we destocked largely, our operating profit dropped likewise.

Discretes segment profit ended negative. This is mainly due to an increase in fixed expenses of SiC and other power devices. On top of that, our general purpose device sales dipped. We destocked the general purpose devices, too, which has been pulling down the figures. Our inventory level has been creating a big impact.

Amid such situation, we revised our guidance from the initial plan. Net sales down from JPY 480 billion to JPY 450 billion, a downward revision of 6.3%. In line with that, we dropped our operating profit from JPY 14 billion positive to a negative JPY 15 billion. Ordinary profit and net income, too, have been revised accordingly. As I reiterate, the inventory adjustment in the first half has been a big factor. Fixed expenses reduction has not been able to catch up.

This is our market forecast. As you can see, the weather forecast marks show the trend for the first and second half. With automotive market segment we are seeing the battery EV penetration to be slowing down day by day. This is limiting the growth of power devices. Other factors include Japanese OEMs having weak sales in China and production cutbacks due to certification issues. These started emerging in the first half also to be impacting the second half.

Industrial market segment continues to see inventory adjustment. We were expecting this to recover in the second half. But so far, it seems it will take place in the next fiscal year or later, leaving this market segment to be in a tough situation.

Consumer & communications saw some recovery in the first half but the market will still be in a tough situation in the second half. Therefore, we set our forecast to be in a negative trend.

Computers & storage market segments recovery is a bit weak with PCs. Yet, since it increased slightly in the first half, we expect to see growth in full year but not so big on absolute value basis.

Full year perspective by market segments. Automotive is more or less flat year-on-year. Our initial plan was to grow this segment by over 10% but it seems like that is not going to be the case.

We were expecting the industrial to be declining, but it's now at a level of a 19.4% dip. Still the trend is ongoing in FA and energy domains. Impact from inventory adjustment has been big here.

For consumer, communication and computers & storage, we have a severe perspective. Given this situation, we have revised down our full year sales guidance to JPY 450 billion.

Looking at the customer nationality breakdown. Both Europe and China saw a year-on-year positive growth with the automotive market segment. Actually, our initial plan with China was to have an even bigger growth. The slowdown of the battery EVs are affecting the growth. Yet still, it has increased year-on-year. The biggest gap we saw was in Japan with the automotive and industrial market segments. It will be a big decline even on a full year basis.

Because of this situation, our sales ratio outside of Japan is to be 48.4%. We recognize that the automotive and industrial segments are still facing a tough time.

This shows the operating profit trend from the last fiscal. Last year, OP was JPY 43.3 billion. Decrease in sales pulled down the figures by JPY 17.7 billion, although we have had some positive ForEx impact. On top of that, we destocked and that has impacted the numbers by JPY 8.5 billion. Fixed costs increased by JPY 32.1 billion, leaving the full year OP to be at a loss of JPY 15 billion.

We will continuously work on reducing our fixed expenses. Our current plan is to cut it down by roughly JPY 5 billion. But this has not been enough to respond to inventory adjustments and the decline in sales.

Given this situation, we revised our CapEx plan. Our initial investment plan for the current fiscal was JPY 165 billion. We have decided to delay some of our investment, making the full year CapEx plan for this fiscal to be JPY 150 billion. For the next fiscal, our CapEx plan was around JPY 140 billion, but we are currently modifying this to keep it below JPY 100 billion level. Our original 5-year cumulative investment plan from fiscal '21 to '25 was JPY 700 billion. We will be cutting this down to below JPY 650 billion.

Moving forward, we will monitor the market conditions and adjust our plans flexibly. Further details will be given later when I talk more about SiC.

Talking about inventories. The bar chart on the left shows the consolidated total. It's a bit complicated, so let's look at the other 2 charts, the power devices and non-power devices. The majority of the power devices inventory is SiC inventory. We are not having enough amount of finished goods inventory yet. So this will still be increasing slightly, along with the WIP.

We will take responses in line with the demand trends. Since the demand is growing, turnover months will be dropping. So we will adjust the inventory accordingly. For the raw material inventory, we will be careful and make sure it wouldn't become higher. For nonpower devices, which are mainly the general purpose products and the ICs, from the first to the second quarters in fiscal '24, we have been destocking mainly the finished goods and WIP by lowering the utilization to bring down the inventory to an optimized level. As of the end of the first half, we have brought down the finished goods inventory to an optimized level.

In the second half, we will maintain the current utilization to control the finished goods inventory. The issue is with the raw materials. We will work on destocking it in the second half.

Because of this situation and our plan of not increasing the utilization, it will be difficult for us to make profit from higher utilization. Some of the processes will have an enhanced utilization. But overall, it will be as I have explained.

Despite the current situation, we will maintain the dividend payout levels. An interim dividend payout of JPY 25 per share is what we are planning to achieve. We intend to pay the same amount for the year-end dividend, too. This is based on our intention on a stable dividend policy.

Let me elaborate on each of our businesses. Starting from the power device business. This shows the sales trend of power devices. The lower part of the bars represent silicon; and the upper blue part shows SiC, silicon carbide; and on top of that, we have begun gallium nitride, which barely has sales.

Our plan for fiscal '24 was to have a bigger growth with SiC. But now that the battery EVs are slowing down, especially in China, we wouldn't be expecting a large growth this fiscal year.

In the following fiscal, the net sales will be dropping slightly from the plan. Our original plan was to achieve JPY 110 billion plus of sales in fiscal '25 from silicon carbide. This will be delayed by a year. That is our current estimation. In any case, we have a strong intention to achieve a sales of over JPY 110 billion.

This is the basis of our forecast. The chart on the left shows the battery EV volume in the market. There are many lines and amongst those, the line at the very bottom shows the outlook which was made back in 2020, the production volume of battery EVs. And on top of that, we see the 2021 outlook, 2022 and 2023.

Every year, the forecast showed that the battery EV volume will be growing. And in line with that, we expected that the SiC volume will be increasing. Our thoughts were to grow the SiC business together with the expansion of battery EVs and that is why we were making up-front investments.

Up to 2023, we were seeing a growth, but now in 2024, we started to see a sudden market slowdown. Growth is stagnant today. So far for the upcoming forecast, there will still be growth. We will have to make decisions by observing the trend as we believe that the SiC will grow in tandem with the battery EVs. Yet, there still could be a slowdown in the growth rate, so we will keep our eyes on the market to make decisions for investments and increase of production capacity.

Although having said so, we are getting worldwide SiC design wins for fiscal '27, especially for the automotive business segment. In fact, 80% is automotive related. Over 50 companies have already inquired about our products, and we have achieved design wins. But the car production volume is to be slowing, so we will have to have a close look at it.

The industrial market segment is now weak and is facing a tough phase. But we do already have over 90 design wins for the future. We will flexibly respond to the situation to decide whether or not to increase our production capacity so that we can supply our products to our customers in a stable manner.

Due to the current market conditions, we will slightly postpone our SiC production capacity increase plans. The chart on the left shows our production capacity. The lower part shows the 6-inch and the upper part shows the 8-inch production capacity. The dotted line shows our previous capacity enhancement plans.

Now that the market has slowed down suddenly, we will delay our plans accordingly and postpone our investment and time line to increase capacity.

We do already have the plant building completed. And now we are at a stage to install the equipment. We will do that in line with the demand.

The No. 2 Plant in Miyazaki that we acquired last year is about to have the clean room construction to be done. All we have to do is to implement the equipment and increase the capacity. Again, we will see how things would be like and proceed with it. Now that the delivery dates of the equipment are pretty stable, we will make investments on a timely basis.

The 8-inch production phase, which I will explain later, is becoming quite stable. Production capacity will be increased so that we can be cost competitive. The start of shipment of the 8-inch will be in the next fiscal year at the Chikugo Plant. No. 2 Miyazaki Plant was planned to start production of the substrates this year, but we have delayed this slightly to 2025.

This is an update of the 8-inch. We are now in the development phase of the 8-inch line. We will start production at the Chikugo Plant next year. Currently, the 8-inch production yield rate is better than that of the 6-inch production.

The chips produced per area is usually 1.78x bigger, but since the yield rate has been improving, we have seen a double production efficiency. That is why we would like to further accelerate this to enhance our cost competitiveness. At the same time, we would like to further upgrade the performance to deliver benefits for our customers.

This is what we believe to be the SiC road map under a winning scenario and we are wanting to accomplish it. Currently, we are in mass production of the fourth generation. The fifth gen is under development. We will be able to mass produce this on our 8-inch production line next year. This is of a high probability.

For Gen 6 and 7, in the past, our development phase cadence was like 3 to 4 years. This time, we will accomplish this within a 2-year period. By accelerating the development, we can offer more beneficial products to our customers. And this is how we want to gain steady share in the SiC market. However, the production capacity increase will be carried out depending on the market situation.

For us to respond to our customer needs, we have been covering both the SiC substrates and modules. We have the molded modules called the TRCDRIVE pack which is new and is highly received so far. We will be in a mass production phase next year.

Moving forward, we will be working on the power box to put more highly added value. We manufacture the ICs and discrete too. Our intention is to further accelerate our businesses by making solution-based proposals. We do handle power devices and ICs, but currently, the scope of solutions that we offer are limited. We would like to make a breakthrough to further grow our top line. We do have the global top share with the isolated gate drivers. By combining these with SiC, we can enhance our strengths.

Let's look into the ICs. As you can see on the top, we have the strategic top 10 fields. These are products with highly added value with a firm market growth. Our intention is to further grow these businesses.

The CAGR of the strategic top 10 fields has been 14.1% in the past 5 years. As pointed out on the bar chart on the right, we at ROHM have grown our sales for this business much bigger than the market growth as we have been concentrating on this area. This is thanks to the highly value-added ASSP products. But the challenge we have is that we are too dependent on the automotive business.

The other issue is, as you can see below, saying other fields in ICs. The market grew at a rate of 5.3%, but our products that are not in the strategic top 10 fields ended with a negative growth. This shows that in markets like the industrial equipment, which is strong, we have not been able to offer enough products and to grow. This is our big challenge. We haven't been able to absorb the decline we saw in the consumer market segment. We will be working on these pain points. to make things better.

We have come up with a new structure to improve the situation. In our IC business, in the past at ROHM, we were making proposals for individual products, mainly customizing it for our customers with a high mix for the consumer market segment. We were able to grow our IC business in this manner. But now that we are shifting gears to cover more of the overseas market, we have the PMEs, the product marketing engineers, assigned nationwide and worldwide to enhance the product competitiveness.

We are now switching from heavily custom-made products to an ASSP and general purpose products and focusing more on the automotive industry. This has helped us to see a certain level of success, including solution-based proposals. Our FAEs, the field application engineers, have been proposing solutions for the existing products. But they were not able to make offerings with new developments in mind.

The PMEs too were assigned to each different development division. So they were only able to focus on the products that they were engaged into. Our proposals were biased towards some of our major customers and these were our issues.

We needed to make a breakthrough to enable ourselves in making proposals for ICs and LSI solutions. That is why we decided to change our organizational structure as shown on the following page.

First of all, we must fully understand our customers' systems and applications and at the same time, enhance our marketing capabilities. We will be strengthening our marketing while centering on the systems.

Within the framework -- frame of marketing, we will involve the automotive, industrial, consumer marketing members as well as the PMEs and SAEs so that they can cover the entire IC business. This will allow us to make proposals to our customers mainly on ICs, while dedicating to systems and applications. The team will also suggest what kind of products should be developed and what will make our customers happy. And this will help the development team to figure out and understand what should be developed.

As described on the right side, we cover microcontrollers, power management ICs, gate drivers, discrete and more. We make sure that the development team will come up with recommendations and new development projects by making use of these solutions that we have. We will speak and hear from the customers and then share that with the development team.

In the past, our ICs and power devices teams were split but this new structure will enable us to be one united ROHM and make comprehensive proposals. This is the big change of our structure.

In response to that, we have changed our sales structure too. The left side shows the current structure. They are split into Japan team and overseas team, each of them being close to our regional customers.

Given this structure, we ended up making proposals for individual products. On top of that, since the communication is limited to a certain set of customers, we weren't able to find out what other customers were needing. We must investigate the situation from the application perspective, and that is why, as shown on the right, we have combined the Japan and overseas marketing teams and instead split it into the automotive sales headquarters and the industrial consumer sales headquarters. Having our teams created by application will help us understand what the customers are wanting and what kind of solutions we should offer.

Together with the marketing team, the sales team can find out the customer needs and share that to the development division members. And this is how we have changed our sales structure.

We have learnt our lessons, so what we want to do now is to make essential solution proposals which correspond to the application and bring it to the next level. We can't expect to grow unless we enhance our revenues in this way.

But if we only focus on the top line, our profitability will suffer when revenue levels drop. That is why we will have to thoroughly work on establishing a business foundation, which will steadily generate profit.

Currently, we are reducing our investment, curbing our depreciation costs and optimizing our prices. But from the mid- to long-term perspective, it is not good to keep on spending a large amount of fixed cost.

Over the next 3 years, we plan to reduce our annual fixed cost by around JPY 20 billion and JPY 30 billion. We are committed to this, and we'll start from reorganizing the manufacturing sites. We have many plants both in and out of Japan. By consolidating them, we can benefit from the economies of scale and improve productivity. We will partially shift from IDM.

Before the pandemic, we were working to be an IDM. We got involved into the foundry business and increased the OSAT production ratio to 30%. During the 2-year pandemic, the supply chain was in chaos and we were not in a situation to outsource to the OSAT in foundries and that is why at ROHM, we increased the production capacity for both domestic and overseas manufacturing sites and this has been leading to an increasing fixed expenses.

We would like to go back to the basics and make use of the foundries and OSAT. We were outsourcing some of the digital products to the foundry, yet, we are mainly dealing with analog. And actually, it is quite difficult to use the foundry's processes. So what we did was to transfer our analog process line to the foundry. And the transfer has been accomplished and from this September, we have started outsourcing the mass production. This is what we had been doing, although it took time. In this way, we would like to increase the proportion of outsourcing it to the foundries.

We will shrink the CapEx spend, too. Just like with the SIC, moving forward, we will be shifting from the up-front investment phase to a phase where investments will be made in accordance with the demand trends. The plant buildings are ready, and we will steadily grow our business in line with the demand in our production capacity.

Talking about investment efficiency, we still think we are not doing well enough. We will continue our production while enhancing the production efficiency as well as the investment in efficiency.

The other is to optimize our head count. There will be times that we will have to add resources, but we will keep a good control over it while working on operational improvements.

Last but not least, is the price optimization. There are nonprofitable products and some of those are just for the sake of maintaining the plant utilization. These will be considered while we work on the consolidation of manufacturing sites and revise the prices. And at the same time, we will replace these products to new products. In this way, we would like to improve the profitability.

Even in case the top line will not be growing in the future, we make sure to form a robust business platform to improve our profitability.

This is about DENSO. On September 30, we made this announcement. We have been in a good collaborative relationship with DENSO for a long time. DENSO is one of the most critical customers for us. In the past, we collaborated on the joint development of isolated gauge driver. We were always discussing the potential of doing something together.

This time, we decided to strengthen our corporation as a strategic partner, thus made an announcement. We are wanting to consider various partnerships in the semi field moving forward. By stable supply and quality products, we would like to respond to DENSO's expectations.

Finally, about Toshiba. In July, Toshiba, Japan Industrial Partners and we started negotiating to strengthen our alliance. Those discussions are ongoing and our intention is to come up with a conclusion within the year, which means by June next year and to make announcements. We hope to speak to you as early as possible, although the dialogue is still being carried out.

This concludes my presentation. Thank you.

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