Earnings Call: Q2 2024

Nov 2, 2023

Good morning, everyone. We would now like to start ROHM Co., Ltd. 2023 First Half Earnings Call. I will serve as emcee for this session. My name is Shimizu from the IR team. From ROHM, we have our Representative Director, President, and CEO, Isao Matsumoto, Board Member and Senior Managing Executive Officer, COO, Katsumi Azuma, and Board Member and Managing Executive Officer, CFO, Kazuhide Ino. We will have our president, Matsumoto, to explain our financial performance and business strategy for approximately 25 minutes, followed by a Q&A session. We are expecting to end the call at 10:00 A.M. Please understand that ordinary participants are limited to listening and would not be able to speak during the presentation. We will let you know separately on how to make questions for the Q&A session. Without further ado, I would like to give the floor to our president, Matsumoto. Good morning, everyone. I, Matsumoto, would like to share with you the financial results for the first half. We will follow the agenda as shown here. Fiscal 2023 first-half financial results can be seen on the left side of the chart. On the right side, we have the fiscal 2022 first-half results. I would like to proceed further based on a year-on-year comparison. Net sales ended with a shortfall of 7.9% at JPY 239.3 billion. Operating profit declined by 40%, ending at JPY 29.8 billion. Both net sales and OP dipped year on year. For ordinary profit and net income, our initial plan was calculated at a dollar to yen rate of JPY 130, whereas the exchange rate during the term turned out to be JPY 141, which gave us a Forex gain. Thus, both the ordinary profit and net income ended positive year on year. This shows the sales trend by market segments. Overall net sales dipped by 7.9%, ending at JPY 239.3 billion. With the automotive market, we saw an increase by 9.5%. Areas in which we intend to further expand with our power and analog products are growing steadily. Moving to the right, the industrial machinery market is another sector we are trying to concentrate on. This year, the FA, Factory Automation, industry ended with a decline. Energy fields did grow, but the drop in other areas remained, and the net sales from this market segment ended 11.1% down. For consumer communication, computers and storage markets, especially the PCs and servers sub-segment, saw a big drop. Thus, these markets ended with a negative year-on-year sales. The shortfall from these markets couldn't be absorbed by the automotive market, and we ended with a lower net sale level overall. This is the sales breakdown by our customer nationality. Looking at each market, in almost all of the regions, sales from the automotive market grew except for the Americas. Even in Asia and in Japan, sales from the automotive grew, yet sales from the consumer market declined, which led many of the regions with a negative trend. Only in Europe, thanks to the growth with the automotive and industrial, mainly from the energy sector-related industrial market, our sales ended positive year on year. Results of other regions are shown here. In line with the trend, although our previous year's sales ratio outside Japan was 44.3%, this fiscal year, it dropped to 42.5%. This shows the operating profit trend. The left end bar shows fiscal 2022 first half. The right bar shows this fiscal's first half results. The major factors of changes are decline in net sales and increase in fixed costs, mainly from the increasing depreciation. These are the key reasons of lower sales and lower operating profit. These are the net sales and operating profit by each segment. We have the LSI or ICs and discretes. Power semis belong to the discrete segment. We also have the module segment and others. Resistors and tantalum capacitors are included in the others. In all the segments of FY 2023 first half, net sales and operating profit ended lower versus that of FY 2022 first half. In line with what I have mentioned, we have revised our full-year outlook. Our initial plan for FY 2023 net sales was JPY 540 billion. This has been revised down to JPY 500 billion. We have applied the JPY 140 dollar to yen rate in the second half. Initial plan for the OP was JPY 75 billion, and this has been revised to JPY 53 billion. Likewise, the ordinary profit and net profit have been revised. As per the full-year net sales plan by market segment, we estimate that our sales will grow by 14.2% year-on-year with the automotive. We believe that our business with the automotive will grow stronger in the second half too. On the other hand, the industrial segment will remain with a negative growth. Yet we assume that the energy sector under the industrial market will grow positive and steadily. For consumer, communication, and computer and storage sectors, our outlook is that they will remain still tough in the second half and have a negative year-on-year growth. But we do estimate that there will be a gradual recovery in the second half, and that is being factored in partially. Yet our net sales growth in the second half will mainly be from the automotive market segment. This is the breakdown by area. In Europe and China, our net sales from the automotive will grow even on a full year scale. In Japan, we estimate that our sales from the automotive will grow, but overall net sales in Japan is expected to end lower year-on-year. In the Americas, we have a lot of businesses with the IT industry, especially with the computer and storages. These will pull down the figures. Thus, our full year plan in the region is to end with a year-on-year negative growth. Overall, the automotive grows steadily whilst the other market segments will still face a tough situation. Our full year outlook of our overseas sales ratio is 44.7%. This shows our full year operating profit outlook. The left end bar shows the fiscal 2022 full year OP, which was JPY 92.3 billion. This year's operating profit outlook is JPY 53 billion, down by JPY 39.3 billion. This mainly comes from the decline in net sales and increase of fixed costs. Looking into the fixed expenses, depreciation cost from our upfront investment is accounting for a large portion. Increase in the R&D spend and related expenses are to be mentioned here. As we have started the silicon carbide eight-inch development. These investments are required for our future businesses, which are adding up to our fixed costs. On top of that, our top line is decreasing, which leads us to have a lower OP. The dotted line here shows our second half sales forecast as part of our plan. The automotive industry is showing a recovery trend, not specifically the vehicle production volume. Rather, the recovery is seen with the projects that we are winning from these customers. With the ICs in the first half, we did not receive so much of a high order due to their customers' inventory level. In the second half, we expect to see a recovery with the ICs. Further, in the second half, demand for the power devices, especially those including silicon carbide for EVs, are now growing. Therefore, in the second half, we believe our net sales will grow mainly in the automotive market, although there are some seasonality factors. Consumer and computer and storage markets will not be growing drastically, yet our plans are to grow our business mainly from the automotive sector. Having said that, our CapEx initial plan was JPY 160 billion. So far, we have used JPY 63.9 billion. The JPY 160 billion plan is something we already have arranged for. Thus, we keep this plan unchanged. Our intention is to spend up the JPY 160 billion CapEx as planned. After all, these are mainly investments we are making for our future. Now about the inventories. In the first half, both in the first and second quarters, the turnover months increased slightly. We did this with an intention to stock up our inventories to mitigate our future investments. Since we are currently having a slightly high level of inventories, we will start to destock mainly from the general purpose products. We do also have some inventories of ICs, which will be subject to destocking. We will be in an inventory adjustment phase overall. This will help us shorten the inventory turnover. For power devices and some of the strategic IC products, we still are facing a tough operation rate. These are something we will continue to stock up. Yet overall, we are in an inventory adjustment phase, especially for the general purpose products, we are proactively destocking them. Let me touch on the shareholder return. As you can see on the right end, we indicate our shareholder return plans here. So far, we performed a JPY 20 billion buyback. We have this portion here planned for dividend payout. This remains unchanged as per our current plan for dividends. From this part, I would like to share with you our business strategies. Starting from the LSI or IC businesses, we focus on the strategic top 10 ASSP products. These are the ones with high gross profit margins, so by growing the sales of these products and increasing its mix in our portfolio, we will be able to improve our overall profitability. This is our FY 2023 full year plan. The strategic products sales did grow, but the other IC products did not grow so much, consequently not being able to pull up the overall figures. Yet again, the strategic products, including those for automotive application, is growing. This is something we will continuously grow. Towards FY 2024 and 2025, we will further grow the top 10 strategic products to boost up our gross profit margins and at the same time grow our top line. This strategy remains the same. Amongst the various solutions we offer, from the left, we have the LED drivers, isolated gate drivers, and the ADAS solutions. Our plan is to further grow these products. The pale colored bars in FY 2023 shows the figures we announced previously. Compared to our previous outlook, the actual top line is not growing as expected, but the sales of our target set of products are in fact growing, and we do not see these to be slowing down. For ADAS solutions, we did see a slight dip with some of the SerDes products from our Chinese customers when compared to the plan, but they do continuously grow, and that is why we will keep on working to win more businesses. This is an area where we intend to further pursue as we believe that what we offer meets our customer needs. From this slide, I would like to cover the power devices. The bar chart on the left shows the overall power device net sales actual results and plan. Figures up to FY 2022 shows actual results. For fiscal 2023 and onwards, our plans are based on a dollar to yen rate of JPY 130. The lower part of the bars show silicon including IGBT. The upper shows SiC. Silicon carbide will steadily grow moving forward. So far, the business is growing in line with our plans, and that is why we will continuously invest proactively to achieve our targets. So far, there are no negative factors with silicon carbide. But for silicon devices, although the IGBT and IPMs are growing, sales of products like the power transistors and power diodes have dropped slightly, making the overall growth to be a bit slow. These have been factored in, and we will see a temporal decline in our sales, but we believe the figures will be growing after that. We intend to grow our IGBT businesses too. We will not slow down our development for GaN, gallium nitride, and this is a completely different set of devices from the current silicon carbide products that we have. We will concentrate on developing these power devices to further expand our portfolio. These are some updates from our SiC, silicon carbide business. Previously, we announced about our pipeline from FY 2025 up to FY 2027. This time we have our pipeline up to fiscal 2030. Our pipeline good for FY 2024 till FY 2030 is increasing. Currently, our pipeline adds up to JPY 5 trillion. Our sales target for FY 2025 and FY 2027 remains same at JPY 130 billion and JPY 270 billion, respectively. Out of the target we have, the businesses and projects that we have already won are expressed in the design win field. This includes the existing business that we have. Going back to the bar chart, the lower parts of the bars in dark color show the design wins. For fiscal 2025, the design win is very close to our FY 2025 sales target of JPY 130 billion. That is why we will keep on working to further enhance our production capacity. We will focus on boosting up our capacity so that we can definitely offer our products to our customers. The design win absolute value will continue to grow, and we need to fully secure these businesses. The current design wins we have for between FY 2024 and FY 2030 adds up to JPY 1 trillion. We need to further expand our production capacity and particularly work on the eight-inch substrate production to fully achieve our targets. Let me give you some updates we have for our pipeline. These are the pipelines for FY 2025, 2026, and 2027. In fiscal 2025, we would not be seeing an aggressive acceleration of EVs in Japan. Japan's portion will be small, while we slightly depend on our customers in China. We cannot be simply relying on China, rather, we must have a better global region mix. In FY 2027, our worldwide SiC business will appear to have a good regional balance, and that is why we need to keep on working to convert these pipelines into confirmed businesses. To that end, we have to further expand our production capacity. Quality and performance of the products are being well received by our customers, and on top of that, we need to boost up our capacity to respond to our customer needs. Our current production capacity is as described on the right side, comes from the Miyazaki plant and Chikugo plant manufacturing the six-inch wafers. This is as of FY 2023. We have the eight-inch production line in our Chikugo plant. With this, both plants in Miyazaki and Chikugo will cover the blue part of the production in the left-hand chart, but the production capacity will be full by fiscal 2025 and 2026. That is why we have acquired a land and building in Kunitomi, Miyazaki Prefecture for an additional plant. This will be addressed as our Miyazaki Plant Number 2 moving forward. This plant boasts a vast space, and we are committed to start its operation and ramp up to meet our 2030 capacity targets. At the end of the day, our plan is to make our production capacity in FY 2030 to be 35 times of our capacity in FY 2021. We believe that through these initiatives, we will be able to win more businesses from the pipeline. In our current Miyazaki and Chikugo plants, we have our processes for silicon carbide devices. In the Miyazaki Plant Number 2, we are planning to deal with SiC substrates in addition to the devices. Further details are to be worked on, but this will be for our BCP and further production capacity increase. Last but not least, this is about our participation in Toshiba's privatization. The purpose of investment, as you can see on the right side, is that we will be able to help Toshiba to solve their issues. We assess that through the investment, Toshiba's corporate value can be improved significantly, meaning that we can expect an equivalent return from this investment. Moving to the left side, the type of investment is JPY 100 billion LP investment and JPY 200 billion of preferred stocks. For the preferred stocks, plans for the dividend interest rate are as stated below. Financing of the JPY 300 billion is a bridge loan from five financial institutions. As described in the center, we see a potential in creating a synergy with Toshiba through various products that we commonly have, including the power devices, small signal devices, analog ICs, microcontrollers, and more. We recognize that there is high affinity among the products that both sides have. Once Toshiba's privatization has been completed, we will be entering into detailed discussions with them. We believe that the privatization itself will be accomplished before the end of 2023 calendar year, then we can have more concrete conversations with them. This concludes my presentation. Thank you.