ROHM Co., Ltd. (6963) Earnings Call Transcript & Summary

Good morning, Azuma speaking. Starting from the structural reform that we've been working on since last year, let me give you some updates. We have been working on it steadily and the reform is progressing well. There are changes in the market, yet we are starting to see visibility in improving our profitability. Under the new organizational structure, today, we will announce our new 3-year midterm plan. We are determined to accomplish this as a team. Let us move to the earnings starting from our recent results. The first half net sales ended up 5.3% year-over-year at JPY 244.2 billion. Operating profit was JPY 7.6 billion. We have turned it positive from the previous year's loss. In line with that, net profit resulted at JPY 10.3 billion, largely improving from the previous fiscal. To your right, you can find our revised full year guidance. Net sales have been revised up from JPY 440 billion to JPY 460 billion, up JPY 20 billion. We revised up the operating profit to JPY 5 billion and net profit to a level of JPY 9 billion. Numbers are positive versus the plan, but comparing it to our first half results, the forecast we made is slightly negative. These are results from the first half. Looking into the market mix, Automotive accounts for 46.7% and Industrial 12.6%. The table below shows the year-over-year variance. Consumer market grew the most, mainly from amusement, which was up 23.6%, a large jump. Automotive was more or less flat with a slight dip of 0.3%. For markets like industrial and computers and storage, our sales increased slightly. Above all, the first half figures were largely driven by the amusement industry. By segment, ICs account for 46.8% and discrete semi devices 40.9%. Year-over-year growth of ICs were close to double digit, which was big. By customer nationality, Japan was around 53.1%. Since our amusement customer is Japanese, our sales grew 10.2% year-over-year in Japan. This is the operating profit waterfall chart. Last fiscal first half ended at an operating loss of JPY 900 million. Our OP improved by JPY 8.5 billion, resulting at JPY 7.6 billion. Our organic increase was JPY 17.6 billion. Since the exchange rates changed, there was a negative Forex impact of JPY 5.4 billion. Despite that, our sales increased by JPY 12.2 billion. Negative factors to the OP are the increased material costs and the impact from inventory as we had to destock. Inventory impact was negative JPY 11.6 billion. Adding the increase in material costs, we saw a negative impact of JPY 19.1 billion. Now some positive factors. We reduced our fixed expenses by JPY 15.5 billion with a positive ForEx impact of JPY 200 million. Anyway, it was JPY 15.5 billion. And in total, we converted our JPY 900 million operating loss to JPY 7.6 billion of operating profit. Here, we have ROHM's full year sales forecast with first half and second half weather forecast icons. For automotive, we ended with a slight dip in the first half, and we believe it will turn to a slight positive growth in the second half, leading to a full year growth too. The strong SiC devices in Europe contributed to this. Industrial market for a long time was in an inventory adjustment phase, but these have mostly been solved. In the first half, some growth, but the second half is expected to be plus 1.5%, more or less flat. The SiC devices for energy applications were strong. Consumer and others were extremely strong in the first half with 2 contributing factors. One was home appliances, mainly air conditioners and the amusement. Amusement peaked out between July and September. So we wouldn't be able to expect the same kind of growth in the second half. Air conditioners too are to be slowing down from October. Although it was pretty strong in the first half, full year expected growth will be at a level of 6%. This is the full year figures. We have guided up our full year sales from JPY 440 billion to JPY 460 billion. Automotive was slightly negative in the first half, but we will be able to bring it to a year-over-year positive in full year. Consumer market is to be plus 14%. Looking to the segment breakdown, ICs were strong in the first half. But with the adjustment of the amusement, we keep it at 4% plus. On the other hand, we believe that discrete semi devices will be growing in the second half so around 4% plus here, too. Now to the customer nationality breakdown. What will be outstanding here is that Europe will increase by around 10%. This is due to the strong SiC business in automotive and solar panel sectors. This shows the full year operating profit ups and downs. We ended with a loss of JPY 40 billion, but this fiscal, we plan to end with an OP of JPY 5 billion. Let's look into the factors behind this. Sales increased JPY 11.6 billion. Since there is a minus JPY 17 billion of ForEx impact, the actual contribution from sales will be about JPY 30 billion. Moving to the material costs and inventory impact. We have a reversal impact from the previous fiscal's inventory write-down. This contributes to a positive JPY 14.7 billion. As described on top, the gold price hike has been bigger than expected. That is why the materials, which are mainly gold wires is to cause a negative material cost impact of JPY 13.3 billion. Looking at the fixed cost impact. Depreciation is to shrink by JPY 20.4 billion. And talking about the R&D cost, up to the previous year, we were using the Green Innovation Fund to do our research. We completed the research and we'll be entering into the next phase, which is to submit the samples to our customers. This helps us to mitigate R&D spend. In total, we will be shrinking our fixed cost by JPY 32 billion and achieve a JPY 5 billion OP this fiscal. This shows our CapEx trend. It was on an increased trend in the past. This fiscal, we brought it down to JPY 85 billion in our initial plan. From fiscal '26 and onwards, since we have finished making upfront investments, investments to be made will be in line with the probability of order intakes. CapEx will be on a decreased trend. Now our inventory. The left-hand chart indicates the finished goods. We have been destocking gradually and the absolute value will remain same. But since we view our second half sales negatively, turnover months will increase slightly, but overall, we are controlling the levels. For the work in progress inventory, we see the necessity to adjust further, mainly the power devices. The WIP will be destocked further. In terms of the raw material inventory, there are some excess inventories due to the LTA. These will be continuously adjusted. Raw material levels will be controlled moving forward. This is about shareholder returns. The far right shows the fiscal -- this fiscal, and we paid out a JPY 25 per share interim dividend. We plan to pay out JPY 25 for the year-end 2, which will make it JPY 50 annually, a total of JPY 19.2 billion. Dividend payout ratio will be over 200% and same with the total return ratio. From this part, we will talk about the midterm management plan. ROHM's company mission remains the same. So let me skip this. Fiscal 2025 is the final year of our first midterm plan. We were expecting to expand our corporate scale. Towards 2028, spending 3 years, we want to shift to a company that generates profit. Rather than increasing the top line, we will focus on improving our profitability. This is the background of our new midterm plan. What we have for our 2035 company vision is to become a company which will be highly recognized globally for its semi technology, both for power and analog. This is something that remains same. Looking at our management goals, 2028 net sales target is over JPY 500 billion, OP margin of over 20% and an ROE of over 9%. We have our nonfinancial target simplified. Our target is to reduce GHG by 50.5% from the base year 2018 to 2030. We continuously work on this as well as to achieve 100% usage of renewables by fiscal 2050. The zero waste emission target is another thing we keep on working for. For the human resources strategy and sustainable growth, we target to achieve a 300% succession plan fulfillment. That means to each division, we will assign 3 next-gen young staff, educate and train them so that they can improve their skills and career. That's what we mean by 300%. We currently are implementing the transformative execution training. We aim to have 100% of the core personnel to participate in these trainings. Today, our stock-based compensation is for the directors and executives, but we plan to expand the scope to ordinary employees. What are ROHM's strengths? This is something we have covered too before. We will evolve and deepen the strengths we have cultivated since the beginning of our business and continue to grow them. We are customer-oriented and have the cutting-edge technology. The advancing technology does not only refer to our products, it also refers to our monozukuri manufacturing technology, which is unique to ROHM. These are areas that we will further enhance. As the foundation to uphold these, we have the IDM, which is our strength to the integral technologies that we align with our customers. We have our specialists that are growing and the integrator personnel who have different sets of skills and technology who will discuss with our customers to design and adjust the products. Again, the core will be the power and analog technology. With this supporting foundation, we will make ROHM stronger. This shows our growth strategy, things to grow, evolve and to create. We have 3 categories from top to bottom. And horizontally, we have automotive, industrial and consumer market segments. I will not touch on each detail. But just to pick up what is new, we have included VCSEL, laser diode, photonic crystal and the optoelectronic device technologies to make them as a new growth pillar. This page shows our sales composition. Our fiscal '28 target is JPY 500 billion. This fiscal's plan is JPY 460 billion. Thus, the growth we intend to make might appear small. It is because in between the period to respond to the loss-making businesses, we will downsize or continue them. That means we expect the top line to decrease temporarily yet the power device sales is planned to grow from JPY 127.8 billion to JPY 175 billion, which will grow largely. The bar chart on right is same, but showing the market split by automotive and industrial, consumer others. Automotive mix will be 55%, which is a bit too much. That is why we are now strengthening our development for industrial and consumer market segments. Here's our road map to achieve JPY 100 billion operating profit. We are currently driving a company-wide change with cross-functional teams to drastically improve our revenue structure. With these changes, we aim to achieve JPY 100 billion operating profit. The biggest improvement we will make is listed on the top, which is to improve our SiC business profitability. This includes improving our yield and transitioning to 8-inch. On top of that, we will increase our net sales. This is the biggest theme on our road map. The second one is to reorganize our manufacturing sites and to shrink and discontinue the loss-making businesses. This is the second biggest initiative in improving our profit. The third is to reduce manufacturing and procurement costs. This is something we always work on. The point here is that we will put more effort to bring a bigger impact. The fourth is something we at ROHM had not been able to do in the past. It is to optimize the prices and revisit our pricing strategy. We will implement DX to optimize our fixed costs. At the bottom, we have our sales growth initiative. Earlier, I mentioned about our intention to improve our SiC profitability. For other areas, not only for automotive, but for the AI servers and consumers, we will put focus to grow more and increase our sales to fulfill or fill up the gap from shrinking and stopping the loss-making businesses. Kenevan would like to explain about our capital policy.

Mr. Azuma earlier mentioned about how we plan to improve our business and operating profit. In line with that, we aim to achieve an ROE of over 9%. For us to fulfill this, we must work on our capital policy and maintain a healthy balance sheet. Our concept is to efficiently make use of the cash we need for our business growth. We will not retain unnecessary cash instead try to return this to our shareholders. Key points are listed above. First is cash generation. Together with the recovery of our business performance, we are improving the cash conversion cycle and reducing the working capital. Further, we are optimizing the nonoperational assets and selling investment securities. In terms of shareholder returns, we will pay stable dividends and do share buybacks to achieve a dividend payout ratio of over 30% and a total return ratio of over 100%. For CapEx, we will control this to an appropriate level. As mentioned earlier, for reorganizing the manufacturing sites and for our R&D, we will spend as needed. But the CapEx spend will be much smaller than the past 3 years. Moving to the financial discipline. We believe that D/E ratio should be at 0.5 level. We will optimize the assets to reduce liabilities and pay back our debt accordingly. Last part about cash on hand. We benchmarked our peers in the industry and believe that the cash on hand should be at a level equivalent to a 3-month sale. Our current cash level is a bit too high, thus, we will be reducing it. You can see the cash in and cash out details. Our cash in will be over JPY 300 billion of operating cash flow as a 3-year cumulative figure. For investment cash flow, part of the investment securities will be redeemed and sold. And with that, it will be at around JPY 120 billion. Further, the current cash on hand is approximately JPY 310 billion. Moving to the cash outside. Our plan is around JPY 50 billion of CapEx every year on average and a total of JPY 150 billion. We assume around JPY 100 billion of debt payment. Shareholder return will be roughly JPY 200 billion during the midterm plan period. This is how we will control the cash on hand to a level of JPY 150 billion. As needed for any possible M&As, we might temporarily have a high amount of cash on hand. This will depend on the M&A situation. Otherwise, it could be used for shareholder return. Capital structure is described on the right hand. Both shareholder equity and liabilities will be reduced. And in this way, by the end of fiscal '28, we believe that our balance sheet will be pretty much optimized to achieve an ROE of over 9%. These are our nonfinancial goals. Since our President explained it earlier, I'll be brief. Starting from the environment initiatives, we have committed to reduce GHG by 50.5% from 2018 to 2030. There will be some ups and downs on its way to accomplish the target. Considering our current business environment, we will reduce the GHG emission in the most appropriate manner. Moving to the human resource initiatives. Our plan is to achieve a 300% succession plan fulfillment rate. Talking about the stock-based compensation system. This is currently available for the management, but we plan to expand it to our employees, too. So it will be expanded both horizontally and vertically. They are being planned currently. That was it for me.

We will move to the business strategies. IC business. Our fiscal '28 net sales target is over JPY 215 billion with an OP margin of over 23%. We will largely improve our profitability and convert it to drive the company's overall profit margin. Key initiatives for the midterm plan are indicated on the right side. We will optimize the portfolio, secure competitiveness through innovative tech development and improve our development efficiency. We will see how quickly we can make sales and offer attractive products. On top of that, we will work on productivity, consolidate the manufacturing sites, improve the yield and reduce both the variables and fixed costs. The key IC products. In the upcoming 3-year period, we will grow the isolated gate drivers for automotive, ICs for image processing and the IPD. All of these will be around 1.5x each bigger compared to the current fiscal year. The right half shows part of the cutting-edge technology I've been mentioning. One of the ICs technology is the Solist-AI. It is capable of learning without a network. This is a smart AI, and we won the MONODZUKURI Innovative Parts and Component Awards. We think this can be rolled out to various areas. The other is the LASCA. The chiplet technology is used to economically integrate the analog and power. Talking about power devices, this includes both SiC and silicon. Our net sales target is JPY 175 billion plus, OP margin of over 14% -- we intend to expand mainly the IC -- excuse me, the SiC -- for xEV inverters. Expansion of modules and discrete is another thing. In the past, we were mainly selling the wafers alone. But this time, we will add value and increase the product lineup. The third row from top says to accelerate the development. We will be mass producing the Gen 5 products from the next fiscal. We intend to move up the schedule of the Gen 6 product release and make proposals. SiC cost can be reduced through the shift to 8-inch. Yield can be improved, too. These are what we continuously work on. The 2 rows below refer to silicon power. These are now used for AI service so we will focus on that. We will secure enough sales from the automotive market, too. Diodes are included at the bottom row. We will revisit the product portfolio and consolidate these sites to further improve our business profit. This is part of the SiC business for the traction inverters. This will be our future business pillar. Looking at the inverter order volume compared to fiscal '25, we expect this to be triple in fiscal '28. That is one thing. And the other is that currently, over half of the business is for Chinese OEMs. But in fiscal '28, European customers will be the majority, followed by Japan and South Korea. China might appear to be reduced largely, but this is because the customers haven't shown us their order volume for 3 years ahead. But if there are orders from China, we will continuously respond to them. We expect to have inverters equivalent to approximately 3 million cars in 2028. So far, we have got confirmed orders from 16 different OEMs. For the SiC bare chips, as it says in the last bullet, we will advance the launch of Gen 5 products. And as I mentioned previously, we are working to have these to be adopted in plug-in hybrids, PHEVs and hybrid vehicles, too. As introduced before, the TRCDRIVE pack is being highly received. We already started delivering them to our customers, and our intention is to increase the mix of these products. Just for SiC, we came up with a profitability road map. We aim to hit the breakeven point in fiscal '28 and generate a full year profit. And the enablers are to improve the SiC substrate business, which mainly refers to shifting from 6-inch to 8-inch. At the same time, we will enhance the quality of 8-inch. The big contributor factor will be to improve the device. This includes the epi. And as described on the right top, the current epi make and buy ratio is around 1 against 1. We will shift to increase the in-house production ratio to reduce cost drastically. As you can see, it says Gen 4, Gen 5 on the right side. Gen 5 products will have a better yield. We will keep on working to improve the discrete yield. The last contributing factor is to increase both the modules and the device sales. Through these levers, we make it a must achieve to generate profit in fiscal '28. Last part covers general purpose device and other businesses. These are areas where we maintain high market share to support the company as it serves as a cash cow. Our target is over JPY 110 billion of net sales over 22% of OP margin. The 2 rows at the bottom show our existing initiatives. What is new here is to evolve the optoelectronic technology for sensing and make it as our next-gen pillar. We didn't mention this so much before, but our intention is to further advance the Opto technology. Last but not least, we understand that there is a high level of interest in AI service. Our current business scale here is around JPY 10 billion. We want to step up further. JPY 30 billion in fiscal '30 might be appearing negative. The market is asking us if we can accelerate. And in fact, we are planning to do that. We are not going to focus only on power supply, but we'll expose ourselves to the main board area from the power supply to main board and others, we make sure to expand our businesses. That was all from us. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]