SMC : Transcript - Presentation of Financial Results for the Second Quarter ended September 30, 2023 (FY2023)（3MB）

SMC Corporation

Q2 Financial Results Briefing for the Fiscal Year Ending March 2024

November 15, 2023

Event Summary

[Company Name]	SMC Corporation
[Company ID]	6273-QCODE
[Event Language]	JPN
[Event Type]	Earnings Announcement
[Event Name]	Q2 Financial Results Briefing for the Fiscal Year Ending March 2024
[Fiscal Period]	FY2023 Q2
[Date]	November 15, 2023
[Number of Pages]	35
[Time]	10:00 - 11:32
	(Total: 92 minutes, Presentation: 35 minutes, Q&A: 57 minutes)
[Venue]	Dial-in
[Venue Size]
[Participants]
[Number of Speakers]	2
	Yoshiki Takada	President
	Masahiro Ota	Director and Executive Officer, General
		Manager of Finance and Accounting Division
[Analyst Names]*	Hirosuke Tai	Daiwa Securities
	Tomohiko Sano	JPMorgan Securities
	Hikaru Mizuno	UBS Securities
	Yuichiro Isayama	Goldman Sachs
	Kentaro Maekawa	Nomura Securities
	Yoshinao Ibara	Morgan Stanley MUFG Securities
	Masayasu Noguchi	SBI Securities

*Analysts that SCRIPTS Asia was able to identify from the audio who spoke during Q&A or whose questions were read by moderator/company representatives.

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Presentation

Moderator: Good morning, everyone. Please join us now for a presentation of SMC Corporation's financial results for Q2 of the fiscal year ending March 31, 2024. Thank you very much for taking time out of your busy schedule to join us today.

Today, we are live-streaming the meeting on the web and using a teleconferencing system for the audio feed. The presentation materials were posted on TDnet at exactly 10:00 AM. Please see the presentation materials there.

First, Mr. Yoshiki Takada, President and Representative Director, will provide an overview of the Company's business performance and management strategies. Mr. Masahiro Ota, Director, Executive Officer, and General Manager of the Accounting Department, will then provide a detailed explanation of the Q2 financial results. We will then move on to the question-and-answer session. Please note, we will call your name in order if you indicate in advance that you have questions to ask. The meeting is scheduled to end at 11:30 AM.

President Takada, please go ahead.

Takada: Good morning. Thank you, analysts and everyone, for your continued support. I am Takada, President of SMC.

I will begin with an overview of the Q2 results and our company's measures.

In Q2, demand for automation and labor saving in the manufacturing industry showed a certain degree of resilience and the depreciation of the Japanese yen was a plus, but demand for semiconductors and for Greater China was sluggish, resulting in lower sales, an operating profit, and a net profit of JPY393.5 billion, JPY105.1 billion, and JPY94.7 billion, respectively, compared with the same period last year.

As for trends by industry sector, demand for semiconductors and electrical machinery remained stagnant, particularly for memory and other semiconductors, smartphones, and PC-related products. In the automobile industry, the parts shortage that existed until last year has been resolved, and the production volume of each

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automaker has recovered, but investment in plant and equipment has been sluggish. Investment in EVs, especially battery-related investments, was active, especially in Europe and the United States.

By area, Japan, North America, and Asian countries remained at low levels due to a drop in semiconductor demand. In Greater China, some industries, such as solar, grew, but overall, the region was sluggish. Europe experienced some decline due to the summer vacation but was stronger than other areas.

Regarding shareholder returns, the Board of Directors yesterday resolved to pay an interim dividend of JPY450 per share, totaling JPY29 billion, and to repurchase up to JPY35 billion of stocks.

Guidance for the fiscal year ending March 31, 2024.

Although the full-year forecast remains unchanged, we have revised our foreign exchange assumptions because the Japanese yen has weakened more than we assumed at the beginning of the fiscal year. The forecast for the average annual rate for the US dollar has been revised from JPY130 to JPY145.

Regarding the demand outlook by the industry sector, we had expected a recovery in H2 for semiconductor- related demand, but the recovery has been slower than initially expected and is now expected to be in the middle of 2024 or later. In the automotive sector, EV-related investments are active in all areas.

As for trends by area, in Japan, some semiconductor-related sectors are showing signs of bottoming out, but a full-fledged recovery is not expected until the next fiscal year or later. In the automotive and machine tools sectors, capital investment has been sluggish overall, partly due to the slowdown in the Chinese economy.

In North America, as in Japan, recovery in semiconductors has been slow and is expected to be delayed until the next fiscal year or later. EV- and battery-related investments remain active.

Some industries in Greater China, such as solar, are growing, but rechargeable batteries, automobiles, and machine tools are expected to remain sluggish. In China, there is a move to prioritize domestically produced goods, such as semiconductor-related products, as a risk aversion against export restrictions in Europe and the US.

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In Asian countries, Thailand, India, and Indonesia, which are mainly automobile-related industries, are performing well, while Singapore and Malaysia, which are mainly semiconductor-related industries, have been slow to recover.

In Europe, EV-related and energy-saving investments are intensifying, partly due to environmental regulations.

I will discuss the measures and progress in FY2023.

On page four are the six measures discussed at the May financial results meeting.

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On page five is the progress made in Q2.

First, regarding the increase in sales volume, unfortunately, sales volume is decreasing due to sluggish demand in the short term, especially for semiconductors, but our view remains that the pneumatic market will grow over the medium to long term. Regarding market share, the current status is somewhat difficult and growth is sluggish. The supply chain problems that persisted due to the pandemic have been partially resolved, and delivery times are normalizing.

Next, in terms of sales strategy, we are proposing solutions to reduce electricity and CO2 emissions, expanding sales of non-pneumatic products, developing untapped business sectors, and developing and launching new products.

With regard to the establishment of a BCP system, we are promoting the establishment of multiple production sites, centering on Vietnam, the expansion of functions at development sites, and the development of new suppliers. The Kashiwanoha Campus New Technology Center will be discussed later.

Lastly, in terms of utilizing global human resources, this year we began operating a new global internal transfer system. I will discuss this later.

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This is about the proposal for energy savings in the sales strategy.

Three examples of the power reduction effects of pneumatics are described.

The first is the low energy consumption of production facilities. This means visualizing how pneumatic equipment is used in production facilities and eliminating air leaks.

The second is to switch to energy-efficient equipment. Power savings can be expected by replacing them with products that can conserve power and air.

The third is to reduce air pressure in the plant. I will discuss this more later.

These energy-saving measures are expected to result in a significant power reduction of 29%, according to our estimates.

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This section describes the embodiment of low energy consumption for production facilities.

Wasteful air consumption occurs everywhere in factory production facilities. It is the one that often makes a sizzling sound when you go to a factory. It is consumption due to blows during production stoppages, or air leaks due to poor piping installation or packing wear.

The air management system and air leakage visualization technology were developed to improve such air waste.

Air management systems, as we have discussed before, are products that recognize equipment standby conditions and automatically switch to lower pressure to reduce air consumption. The product was launched simultaneously around the world a year ago and has received high acclaim.

Newly introduced this time is the air leakage visualization technology. This is a technology that allows the identification of the location of leaks, even in small amounts, by atomizing and filling the pneumatic piping with a fluorescent agent and shining a black light on it.

During piping work at the time of plant construction, leaks are confirmed by water pressure and air pressure tests, but it takes time to identify them, so I believe this technology can also be used in the construction field. However, at present, it cannot be used due to regulations.

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This section talks about how to reduce air pressure in the plant.

Compressors account for a large percentage of the power consumption of production equipment in factories. We estimate that it is approximately 20%.

Therefore, we propose a solution to reduce the load on compressors and reduce power consumption by lowering the air pressure throughout the plant and increasing pressure in areas where greater force is required.

This is an example of reducing the main line air pressure from 0.8 megapascals to 0.4 megapascals and increasing pressure only where necessary.

For areas where increased pressure is required, pressure-increasing valves are installed, and air that was previously discarded is reused to drive the machine, which is expected to achieve a significant energy-saving effect of 40% compared to the conventional system.

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Next is one of the new products. It may not make much sense at first sight, but it is a rubber pad.

This tool allows users to hold an object of different shapes by wrapping the pad around it. Conventionally, users needed to select appropriate types of fingers to hold different shapes of objects. This new approach makes it possible to pick up and hold objects of almost any shape.

This is a revolutionary technology that can handle a variety of objects without switching jigs.

This is about diversification and linkage.

Diversification is an activity to develop new customers by approaching various users and manufacturers of industrial manufacturing equipment using every network and opportunity.

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