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Edited Transcript of 6481.T earnings conference call or presentation 14-Feb-20 10:59am GMT

Full Year 2019 THK Co Ltd Earnings Presentation

Tokyo Mar 20, 2020 (Thomson StreetEvents) -- Edited Transcript of THK Co Ltd earnings conference call or presentation Friday, February 14, 2020 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Akihiro Teramachi

THK Co., Ltd. - CEO, President & Director

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Presentation

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Akihiro Teramachi, THK Co., Ltd. - CEO, President & Director [1]

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I am Akihiro Teramachi, President and CEO of THK. Let me first share with you the overview of the results for the fiscal year ended in December 2019. Consolidated net sales was down by 21.4% year-on-year to JPY 277.9 billion. The U.S.-China trade friction prompted companies to curb their investment worldwide, particularly in China. Amid the general trend of order and inventory adjustments, orders remained at low level across different regions.

The previous CapEx growth in the semiconductor-related industry and accelerating trend for automation and robotization led to significant growth in our order backlog, which was steadily converted to sales. However, given the more recent weakness in the market, net sales were down. Subsequently, the level of order backlog is nearly close to the normal level, due mainly to the sales decline.

Operating income was down by 65.4% year-on-year to JPY 17.2 billion, despite our measures to control the cost to moderate the degree of profit decline with the market demand going through a correction phase. Having said that, net sales and operating income both over achieved the business plan revised in November 2019 by JPY 1.9 billion and JPY 400 million, respectively.

Next, let me highlight the sales breakdown by regions. The general demand was low across respective markets. We endeavor to explore a new target market like medical device, aircraft, railroad and food, but the demand decline for the existing business fields was so significant that in all the regions, revenue was down on a year-on-year basis.

Now let's move on to the operating income. This slide shows the factors behind the change in operating income for the Industrial Machinery business compared to the previous year. The factors that pushed down the profit included JPY 31.6 billion negative impact from lower sales and volume, JPY 2 billion due to the impact of change in the variable cost ratio as well as JPY 1.1 billion stemming from currency fluctuation. On the other hand, we curbed down various expenses despite a rising depreciation cost and fixed cost reduction pushed up the operating income by JPY 5.4 billion.

Next, let me explain about the Automotive & Transportation business. The profit decline was caused by the negative JPY 1.8 billion impact from lower sales and volume minus JPY 800 million due to change in the variable cost ratio and higher fixed cost of JPY 700 million. The impact on the variable cost ratio was partly due to increase in the raw material prices at TRA Canada as well as higher-than-expected costs stemming from the new product launch that is manufactured in a vertically integrated style from aluminum forging, processing and final assembly. This cost was mostly incurred in the first half. The fixed cost increased mainly due to upfront investment, among other costs for THK RHYTHM's investment associated with the large contracts secured. And going forward, we will implement more measures to improve the profitability.

I will now go through the balance sheet items. Total assets declined by JPY 3 billion year-on-year to JPY 459.9 billion. In current assets, cash and cash in account increased by JPY 14.5 billion due to the following breakdown: the operating cash flow was positive JPY 27.1 billion; investment cash flow was negative JPY 30 billion due to CapEx, among other factors; financial cash flow was positive JPY 19.4 billion due to the issuance of corporate bonds; and there were also some foreign currency translation adjustments. With lower sales, accounts receivables declined by JPY 28.8 billion, and the inventories were down by JPY 1.9 billion. In fixed assets, due to CapEx and other factors, property, plant and equipment was up by JPY 13.5 billion.

Liabilities went down by JPY 2.5 billion year-on-year to JPY 165.6 billion, mainly due to the following factors: there was an increase of JPY 20 billion and JPY 7.8 billion, respectively, for corporate bond and long-term bank loans; and a decrease of JPY 14.9 billion and JPY 11.5 billion, respectively, for account payables and income taxes payables. Net assets were down by JPY 0.4 billion year-on-year to JPY 294.2 billion. The main factors were a dividend payment of JPY 7.9 billion, and negative JPY 3.3 billion in foreign currency translation adjustments as well as net income of JPY 9.6 billion.

Now let me share with you our key initiatives aimed at achieving our management targets. The pillars of our growth strategy remain unchanged. They are full-scale globalization, development of new businesses and achieving change in business style. We will strive to proceed further with this strategy and expand the business domains. Short term, we will face change in the economic cycle and geopolitical risks. But as the slide illustrates, these key words would change arising from the major trend happening in the market. These keywords require THK's solution, and I believe that there is no room for doubt when it comes to the expansion of demand over the medium to longer term.

Let me quickly cover the key initiatives in each of the business lines. Over the short term, market will face correction phase from time to time. But we believe the addressable market for our products will grow over the medium to longer term. I'd like to explain our initiatives in the Industrial Machinery business, including marketing and selling to a broad customer base. This has also been presented a number of times. One of the pillars for the growth strategy is changing the business style. As part of Omni edge which is our IoT service for the manufacturing sector, we started to take order for LM Guide from December 18, 2019. At the same time, we have started to offer a free trial for the ball screw.

We will continue various measures for ramping up our service. We also want to incorporate the edge mechanism onto the overall system, such as on Fanuc's Field system, Siemens MindSphere or Edgecross. In terms of time line, we plan to complete the work during fiscal year 2020. Furthermore, we plan to incorporate this mechanism, not just on the LM Guide, but also on ball screw, cross roller ring and other linear motion products as well as onto our other services. The beauty of our service that it can be installed onto the machines under operation and not just on the newly installed machines. That is an important key point.

To make use of the edge function, analysis on the machines that broke down will be conducted or the operating status of the components will be monitored. From the customers' perspective, there is less concern over the -- these machines compared to the older machines that are up and running.

On top of that, partial adoption of Omni edge cannot achieve full leverage unless the whole production line incorporates edge. So as we start offering this new service, we are installing Omni edge on the existing machineries first and offer Omni edge on to the new machines as well.

As we explained last year, more than 50 companies have adopted the idea and are using the product. And we plan to charge fee from this year in the domestic market. Previously, we mentioned that this is an initiative by 3 companies jointly working together. THK, NTT Docomo and Cisco.

CTC, who has a technological capability on building large-scale infrastructure, is joining force. And the initiative will be led by 4 companies offering expertise in their strong field. Simple, secure, zero initial cost are the key words in promoting this service. And as we grow the data that we collect going forward, we would like to make our service more robust.

Our product offering should see increased demand with the advent of 5G communication and more robust environment with Industry 4.0. With further shift to automation and robotization, and where everything gets connected, it will be critical to have data that enables you to detect breakdowns and to take preventive measures as quickly as possible. In that context, it will be indispensable to have mechanism in place to collect information on the component level. To augment our capability in this area, we newly set up the IoT Innovation Division.

We are carrying out internal reform on the south front under the concept of Omni THK, and we are putting this idea together with Omni edge to create services using IoT, AI and digital technology. In order to deliver innovation for our customers in the society, we have brought together the talents in the research and development division as well as engineers with technological expertise.

As we have explained before, Omni THK is a concept to improve our fund capability, including delivery on short lead time. Our catalog is not genuinely created for the convenience of our customers. It's something that enables us to look for particular products in a simple way, although customers can also navigate themselves to search for their desired product. With Omni THK, customers can create what is called Your Catalog. And they get access to our network to check the status of their orders and deliveries as well as when they will be receiving their orders. We will not be able to offer all of this unless we conduct internal reform. One of our policies this year is to double the customer satisfaction.

In a time of rapid change, it is critical in the eyes of the customers for us to be able to respond to these changes with agility and deliver the products on short lead time. QCD had always been addressed by companies, but now the D components, the delivery component is the important key element. Therefore, we have been working to date to eliminate human intervention in our internal administrative process as much as possible to really speed up the internal procedures. To achieve our intention, we have rolled out various digital transformation project. Our digital transformation initiative has been making steady progress, and we have introduced RPA widely in our organization.

Young employees have been actively involved in the digital transmission project, and when I had conversation with them at the end of the year, they told me that projects have been making steady progress. Of course, you can never be 100% complete with this kind of initiative, so they also mentioned that their task going forward is to further sophisticate the level of digital transformation. I was very happy and encouraged to hear those comments. Currently, we are at a stage of moving from Stage 1 to Stage 2. Personnel that were freed up from manual work with Stage 1 were redeployed to assignments and jobs that can generate higher value to our customers, including those who were reassigned to the IoT Innovation Division. We will continue our transformation so that we can be a company that can offer high-value to our customers.

I would also like to touch upon how we have been enhancing the global manufacturing structure. We have been transforming our manufacturing capability with an assumption to expand our business over the medium to long term. As we have showed you last year, we had the construction completion ceremony in June last year for the Yamagata Plant. For the LM Guide, we are using a lot of robotics, and are transforming the way we manufacture to a level that even surprises our customers when they come see our factory. The floor space of the plant is about 32,000 square meters, and we have adopted the cutting-edge technology in the space that was newly expanded. The existing section of the plant will also be upgraded to enhance the capability.

Our plant in Vietnam was completed in spring last year, and the ceremony was held in November. It is now up and running as a manufacturing base for a miniature LM Guide. The construction started in August 2018 for our plant in India, and it is slated for completion in April 2020. The size of the acquired land is approximately 205,000 square meters, out of which we are building a factory with a floor space of 37,000 square meters. There will be Phase 1 and Phase 2. The whole factory building is fully constructed, but the machine installation will be just for the Phase 1 part, and we will go into production.

South Korea is a market with strong semiconductor industry with the likes of Samsung. In order to augment localization, we are also building a plant there. Close to that, where we have our office, there is a Technopolis, an industrial park inviting many non-Korean companies. We acquired land of roughly 50,000 square meters and are now building a factory with a floor space of 43,000 square meters. We will shift the production of the LM Guide-related products to the new plant at the appropriate timing to have an integrated production structure.

Next, let me talk about how we are exploiting the new market domain in the Industrial Machinery business. There are no major changes to our initiatives. We continue to leverage the core linear motion technology, so that it is applied not just on the capital goods, but also on consumer goods and labor-saving related applications. This is how we are expanding into the new business areas. In December last year, we announced at the Robotics Trade Show that we are not going to limit the product application to the production-related area, but have augmented our sales channel to reach the service sector.

We will also carry out initiatives so that we can serve as a system integrator to propose the whole system to our customers. Nowadays, many companies are offering SUVs. We have a proprietary autonomous motion control system called SIGNAS. Basically, you put a sign board in a place designated as a destination of the SUV and it will move to that spot. It can also overcome difference in the level of the floor. So we are proposing the usage of our offering at the construction site as it can also be supported. Going forward, we would like to expand our proposals as much as possible for the adoption of robotics in the service industry.

Next, let me highlight our key initiative for the Automotive & Transportation business. Net sales for this business in fiscal '19 declined by 12.9% year-on-year to JPY 100 billion. The sales decline reflected the change in the accounting treatment under U.S. GAAP for THK RHYTHM's North American business, which had an impact of negative JPY 5.5 billion as we took out ourselves that was previously generated with the buy/sell transactions of raw materials. In that sense, the like-for-like sales compared to fiscal '18 would have been JPY 105.5 billion, so the year-on-year decline in effect would have been 8.1%. This did not have an impact over the operating income.

Now let me dive into the contents of the key initiatives. We have been enjoying large-scale orders for the Linkage and Suspension or L&S business. However, the automobile sales is declining in the market, and the production associated with new model launches have been pushed back by more than 6 months.

We have been executing our CapEx plan in conjunction with the automakers plan to commence the production of the new models. So I must admit that our upfront investment has been a big drag on the business. In Europe, the production was slated to start in 2021. And if everything goes as planned, we should be able to commence at that timing. In that sense, we will have to spend on CapEx this year. We have also secured large orders from automakers for fiscal '21 and fiscal '22, which calls for a sizable spending on CapEx this year for this business. As indicated at the bottom, what was originally scheduled to start this year is most likely going to be pushed back by roughly 1 year. Having said that, we have finished the preparation in terms of the factory space and the machine installment. The Automotive & Transportation business have been posting a large loss, and for this year, that just ended. The loss was JPY 4.1 billion. In fiscal '20, as I explained earlier, fixed costs will go up as people will be spending on CapEx to accommodate for orders secured for the coming years. Yet, the auto sales numbers are weak, and new model launches have been postponed. So the market environment continues to be challenging. However, we have rolled out some measures last year.

We still expect a loss of JPY 3.5 billion for fiscal 2020. But in fiscal 2021, we aim to generate some profit from this business. Main measures include manufacturing restructuring, organizational reform and measures to improve the productivity and workflow process. By implementing these measures, we would like to overcome the challenging situation. Originally, in our 5-year midterm business plan targeting fiscal 2022, we were aiming for an operating margin of 10%. At this point, it seems that it will be difficult to achieve the target, but we will endeavor to be close to that level as much as possible.

In summary, we are steadily stepping up our measures to expand the top line in the Automotive & Transportation business. With the global supply capability, we have received many orders. Furthermore, due to the recent issue over quality, we have received many inquiries from customers who appreciate the reliability of our products. Having said that, it is a challenging environment with dramatic changes happening in the market. So we will continue to augment our efforts to grow the bottom line as well.

THK applauds the company principle that states providing innovative products in the world and generating new trend to contribute to the creation of an affluent society. In order to realize the management principle, we will prepare ourselves for any type of risk we may confront by taking measures to build out global production capability, increase global procurement ratio and further augment BCP whilst making contribution to the society through our core business operations.

With the global environment undergoing changes, such as climate change, it is paramount for companies to take the lead in realizing a sustainable society. We will always embrace this part and endeavor to realize this.

Now let me share with you the earnings guidance for fiscal '20, based on what I have explained. Let me start with the recent order trend. This graph illustrates the orders received by region for the Industrial Machinery business the order level is still weak across all the regions. But the order hit the bottom in the July to September quarter, in our view. It took another 6 months than what we had originally anticipated for the trend to turn around. But we believe that now the market is on a recovery trend.

Next, I also would like to mention about the adoption of IFRS. This is a supplementary information for us to provide more clarity about our financial outlook. With the adoption of IFRS, we aim to enhance the international comparability of our financial reporting and strengthen our global business management with an integrated accounting practice. Based on our business plan for this year, we are projecting net sales of JPY 264 billion, operating income of JPY 11.4 billion and net income of JPY 7 billion for fiscal '20.

For your reference, based on the JGAAP reporting that we had been using, net sales would be JPY 267.5 billion with an operating income of JPY 10.4 billion and net income of JPY 6.2 billion.

This slide shows you the factors behind the change in operating income, both in terms of how it would look like if we did a like-for-like comparison between fiscal '20 and fiscal '19 on JGAAP basis as well as the impact from the adoption of IFRS.

This will conclude my presentation on the financial results. This year, we will continue to exert control over cost, while preparing ourselves for a full-fledged recovery on the demand side. We will also steadily execute initiatives to realize the medium to long-term growth opportunities that I explained in the presentation. Thank you very much for your attention.

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