Earnings Call: Q4 2024

May 9, 2024

Good morning, everyone. We would now like to start ROHM Co., Ltd. FY 2023 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 Chief Executive Officer, Isao Matsumoto. Board Member and Managing Executive Officer in charge of Power Device Business, Kazuhide Ino. And Corporate Officer in charge of Finance and Director of Corporate Strategy Headquarters, Motohiro Ando. 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 in the Q&A session. Without further ado, I would like to give the floor to our President Matsumoto. Hello. I would like to take over and start the presentation. Starting from our fiscal 2023 full-year results, net sales ended at JPY 467.7 billion, a shortfall of 7.9% year-over-year. Operating profit was JPY 43.3 billion, down by 53.1% year-over-year. Ordinary profit and net profit are as described here. Average dollar to yen rate applied is JPY 144.4. Japanese yen depreciated farther from the previous fiscal year, but we still faced a tough situation with our net sales level. Looking at our sales trend by market segments, we were able to steadily grow in the automotive market up by 7.7%. But with the other four markets, namely industrial equipment, consumer, communication, and computer storage, we saw a big decline. Especially the industrial market segment ended with a dip of 17% as the FA field was going through a harsh time. And the computer storage market declined largely mainly with the PCs and servers. These are why our net sales ended weak. This chart shows our sales growth trend by customer nationality. Since our business grew mainly in the automotive market, our business grew in Europe and China. Markets with a slightly higher proportion of industrial equipment, consumer, and computer, and storage markets, like in Japan and the Americas, saw a dip. In total, our sales ratio outside of Japan marked 44.1%. Looking at the operating profit year-over-year comparison, we hit JPY 92.3 billion in fiscal 2022, whereas in fiscal 2023, we ended at JPY 43.3 billion. This is due to a declined net sales, and we had a slightly positive impact from the material cost and inventories, but our fixed cost increased mainly in line with the growing depreciation, and these pulled down the figures, and thus we ended with an OP of JPY 43.3 billion. Focusing on the performance by segment, we have the LSI or ICs, the discretes, including the power semis, modules, and others. Others include resistors. All the segments ended lower year-over-year, which shows how harsh the market was. As I pointed out earlier, we saw a growth in the automotive, yet that was not big enough to absorb the negative growth from the industrial and consumer market segments. Amid such situation, let's look at our fiscal 2024 full-year plan. Net sales plan is JPY 480 billion, operating profit JPY 14 billion, which is an OP margin of 2.9%, a truly severe figure. Net sales target is higher by 2.6% year-over-year, whereas operating profit is lower by 67.7%, and ordinary profit and net profit too are as indicated here. Our planned average dollar to yen rate is JPY 145. This shows how ROHM sees the market. Starting from automotive, we see that the battery EV growth rate will slow down. Yet, we still believe that the market will maintain steadily in fiscal 2024 and vehicle production volume will increase. Electrification will progress and inventory adjustments will settle down. Thus, we expect a stable growth mainly in power and analog products. We foresee strong sales of power devices that are mainly used for environmentally sound xEVs, powertrain, and auto body-related products. This leads us to an expected growth of 10.8% in the automotive. For the industrial equipment market segment, we estimate a continued sluggish demand due to inventory adjustments, thus expect to see an overall downward trend of the demand. We believe that in the second half, both energy and FA to recover, yet the degree of recovery to be weak. Not enough to cover the slow trend in the first half. Therefore, our plans for this market is at 12.1% decline year-over-year. For consumer and communication markets, we expect a slight recovery, but still believe that the environment would be tough, and that is why our plans are as shown here. The computer and storage market is now seeing a recovery with the generative AI and PC renewal demand, which gives us a higher expectation for recovery in these sectors. That is why we have planned the segment sales growth to be up by 1.2% year-over-year. What I have explained is illustrated here, and our plans for the automotive is up by 10.8% year-over-year. We expect that all of these submarket segments from infotainment down to xEVs will grow overall. On the other hand, the industrial equipment and communication market segments still end with a large decline. For consumer, more or less flat. Computer and storage will see a slight recovery, but overall a recovery of 1.2%. These are our plans. Investigating into how we can grow our business in different countries, we can expand it mainly in the automotive industry, meaning we can grow in Europe and China. But in countries with high proportion of industrial equipment, consumer and computer and storage, we cannot expect high. That is why our plan for Japan shows a dip of 5.7%. We believe that the computer and storage market will largely recover in the U.S., thus our plan is up by 13.5%. In total, we believe that our overseas sales ratio will increase up to 48.6%. Moving to the operating profit, we recently ended our fiscal 2023 at JPY 43.3 billion. Our plans for fiscal 2024 is JPY 14 billion, which will be a big drop in our OP. Majority of the decline comes from the fixed cost. As it is too big, it will offset the increase we expect in our net sales. We are expecting an increase of JPY 36.8 billion of the fixed expenses. This is mainly coming from the depreciation from the investment into our SiC, silicon carbide business, along with the increase in our R&D spend. We have been making an immense upfront investment, and that is impacting the rising fixed costs. Looking at our investments, we spent 186.7 billion JPY in fiscal 2023. Our plans for fiscal 2024 is 165 billion JPY, and in fact, 70% plus of our CapEx is for SiC. Investment for other segments are at a normalized level. For SiC, I would like to elaborate in the growth strategy topic part. This shows our inventories. The left end chart shows the consolidated base inventories by each quarter in fiscal 2023, as well as our plan for the end of fiscal 2024. It is easier to understand the situation by referring to the charts on the right, showing each different segments. Power devices include SiC, silicon carbide. Power devices are growing, so we are having high levels of inventories, including the WIP. We are not being able to stock up the finished goods inventory, and that is why we are increasing our WIP. Since our sales are growing, the turnover months are getting shorter. That is our plan. The non-power devices, such as ICs and general purpose devices, are showing a flat trend in terms of the inventory level. But our plan for the end of fiscal 2024 is to largely reduce the level, including the WIP and raw materials. As of the end of the fourth quarter of fiscal 2023, the inventory level looks flat, from the absolute value perspective. But if we look at the volume of the finished goods, then it is down to the level of the first half of fiscal 2021. Since we have the increasing fixed expenses, the absolute value of the inventory looks high, but our plan is to further lower the levels by reducing the materials and WIP. Amid such situation, we intend to lower our inventory level to improve our profitability. Let me now talk about our growth strategies. Starting from LSIs or ICs, we have our strategic top 10 areas, and by enhancing the sales proportion of these top 10, we have been improving our gross profit and making our profitability better. In fiscal 2023, we have increased the mix of the top 10 areas, and we are planning to do the same in fiscal 2024 and moving forward, too. But the overall net sales are not growing, and that is why we haven't been able to drastically improve our profitability. Yet, since we have been increasing the strategic top 10 area mix and improving our overall portfolio, our average gross profit and gross profit margin have been increasing, and that is what you can read from this chart. Looking into the breakdown by product, you can find out what is growing. We have the LED drivers, isolated gate drivers, and ADAS solutions. Products of our focused area have boosted in fiscal 2023, and our plans for fiscal 2024 is to grow farther. This shows that we are seeing a positive output from our focused business areas. I would also like to touch on some areas that we intend to further enhance the added value other than the strategic top 10 areas. We have recently executed an absorption-type merger of LAPIS Technology. We had been affiliates in the past, but our businesses were operated under a different entity. Just with an individual optimization, it was hard to achieve a large synergy. Now that we are under the same entity, we can make use of LAPIS Technology's control and microcontroller or MCU technology. They have strong capabilities in this area, and at the same time, we at ROHM have outstanding technology with the control and power device areas. By offering solutions together, we further would be able to generate highly value-added products. This is just an example citing the motor control solutions. The chart on the left shows the electric current horizontally and the voltage vertically. Product with smaller current and voltage stay on the left side of the graph. So far, we have been increasing our sales in this area with our dedicated motor drivers. The TAM on the left side of the area is around JPY 640 billion. Now, if added value here by including the control or MCU technology, we will be able to cover the mid and high power band range. This will allow the TAM to increase up to JPY 1.61 trillion. We would like to work in an area with a bigger TAM and offer different solutions, including the power devices. The pink hatched part shows the area that we have been working with LAPIS and showing some synergy. Our intention is to step into the higher power band area, and this is our strategy to enhance the added value. Now this is about our power devices, mainly on SiC, silicon carbide. Up to fiscal 2023 shows the actual sales results of our power device business. In fiscal 2023, we have achieved roughly a net sales of JPY 40 billion with SiC. For fiscal 2024 and onwards, we have our plans as shown here. Now we acknowledge our big fixed cost, including depreciation, but this is an important phase for our further growth. Thus, we intend to achieve this and boost up our sales. The plans here haven't changed at all, although the numbers have changed slightly. You might be wondering if we can harvest all the output from SiC. This shows our SiC business pipeline. The darker color of the bar shows the design wins we have obtained. Even in fiscal 2025 and beyond, we have a big pipeline along with the design wins. As the pie chart indicates, our design wins for fiscal 2027 on absolute value basis show that we have from various regions, including Europe, Japan, U.S., and China. We have a well-balanced distribution, and our intention is to convert these into actual sales. The number of customers we have got the design wins in each country add up to over 130. The point here is that we are not relying or depending on a certain customer. This is something we would like to continuously work on. But the fact here is that battery EVs play a major role, whereas the market itself is getting a bit slow. Having that factored in, our fiscal 2025 sales target is JPY 110 billion plus, and our target for fiscal 2027 is to achieve JPY 220 billion or higher. We will keep on increasing our sales and at the same time expand our pipeline towards fiscal 2030. We believe that more growth can be expected from SiC, silicon carbide. So how are we going to deal with SiC going forward? We are seeing more competition, and that is why we always want to be the top leader in performance. In fiscal 2025, our plan is to have the Gen 5 following Gen 4 and continue to boast the top performance. In terms of mass production of the eight-inch substrate, we are currently preparing our production line. At our Chikugo plant in Fukuoka Prefecture, we are working to start supply using our eight-inch production line from fiscal 2025. Due to its related development and preparation, we are having high levels of depreciation, and we want to thoroughly achieve this to have a higher cost competitiveness and gain more sales. This is how we want to move forward. In fiscal 2026 and onwards, our number 2 plant in Miyazaki will start operation of the eight-inch substrate. In fiscal 2024, we will begin production of the eight-inch substrate. The chart on the right shows our device production capacity for the substrates. We will start operation and supply in our number 2 plant in Miyazaki from 2024. So far, I've been talking mainly about the SiC chips. We are also taking an approach to modularization. We started mass production of the case type modules back in 2015. This year, in 2024, we are starting mass production of the molded modules called the TRCDRIVE pack™. This has a drastically improved power density compared to the case type modules and the competitors' molded modules. It is a pretty aggressive module and has been highly received by our customers. So far, we have got three design wins and 21 design-ins, and our intention is to make this business a de facto and achieve a sales target of JPY 60 billion-plus by fiscal 2027. We are wanting to increasing the added value to our module products. Again, our plan is to start mass production in 2024. Another topic here, different from SiC, is, in the previous and this fiscal year, we are expanding our business in the industrial equipment market segment, mainly in the FA factory automation domain. We are having a high proportion of business with our domestic customers, but on the other hand, because we are depending on these businesses, we were impacted by the sluggish trend. We have many customers in this area, and that is why we must be able to reach out to the broad market and raise our potential in the industrial equipment market segment. In the broad market, the long tail accounts for around 40% of the demand, and that's where we want to tap into. This is an area we can't apply our individual sales activities, and that is why we will be making use of our e-commerce website and create technical touchpoints. Our plan is to launch our unique engineer website this year in July and make approaches to our long tail. This is the kind of platform we will be releasing, and through these initiatives, we intend to achieve over 20% of sales from the industrial equipment market segment by 2030. We do want to increase our business proportion in the automotive and consumer markets, too, in a balanced manner. Yet, we believe we should be taking these initiatives to hit a 20% higher mix in the industrial equipment market segment. Now about the shareholder return. Dividend for fiscal 2023 year-end is JPY 25. Together with the interim dividend, it adds up to JPY 50, same as the previous fiscal year. For this fiscal year, we have a similar plan. Due to our tough profit levels, dividend payout ratio will go up to 138%, but we are committed to achieve our shareholder return plans. Talking about our midterm plan, we do not have major changes in the figures. We have several more slides about our midterm plan, but I will not touch on the details in the interest of time, so kindly refer to these slides later on. Both financial and non-financial policies are included, and for the non-financial targets, we have been progressing steadily with all of the items in fiscal 2023, including the use of renewable energies. Let's go back to the previous slide and going to our financial policy. Due to the deteriorating market conditions, our operating cash flow is shrinking. But since we have the government subsidies, we will increase our growth investment from JPY 600 billion up to JPY 700 billion. This is a five-year cumulative amount up to fiscal 2025. We financed JPY 300 billion, which was for participating in Toshiba's privatization. We did this to enhance our corporate value by strengthening our collaboration in the semi businesses. We also issued convertible bonds, which is used to partially repay the bridge loan in relation to engaging in Toshiba's privatization. For the redemption of the remaining bridge loan and the CB at par value, which will be maturing in December this year, we will be applying our cash on hand or go for a debt financing. As I pointed out earlier, we have no changes in our shareholder return policy. Our initial plan to use our cash on hand was at a level of not more than half of our annual net sales, but we have revised it to a level of one-third or less. These are our financial plans up to fiscal 2025. Last but not least, talking about our partnership with Toshiba. We see their semiconductor business to have a high affinity with ROHM's business. We see a potential in creating various synergies with them. That is why we made a proposal to them to start negotiations to further strengthen our alliance. We will be starting our negotiations with them in June. Let me talk about what kind of synergies we can expect. The pie chart on the left shows the product categories that we at ROHM have and what Toshiba Electronic Devices & Storage have. As it says here, products such as power devices, analog, logic and MCUs, small signal discrete are those in which both companies have a similar portfolio, which means we can most likely generate a huge synergy together. The bar chart on the right shows the degree of sales. For example, with the power devices, both ROHM and Toshiba have high sales, and when it comes to analog, we at ROHM have higher sales, whereas with the logic and MCU, Toshiba has a higher sales level. With the discrete, ROHM has a slightly higher sales, but Toshiba does have business in this area too, and we have a high affinity with these product groups, which makes us believe and expect to create a big synergy through this alliance. This is the proposal we have. In the production area for the power devices, we at ROHM will be in charge of the SiC, whereas the silicon power device is to be manufactured at Toshiba. We have already started this with the subsidy from the Ministry of Economy, Trade and Industry. This is something we will keep on working on, and at the same time, we will look into areas where we can benefit from each other in reducing our investment. We also expect to reduce cost in procurement, logistics and sales activities. In the areas of R&D and designing, we believe that we can offer various solutions together and come up with new products that allow us to enter into new industries. These are the synergies we can create with Toshiba, and that is why we have come up with these proposals. Starting in June, we will be spending around a year for the negotiations so we can generate some positive outputs together. This concludes my presentation. Thank you.