SMC : Transcript - Presentation of Financial Results for the Fiscal Year ended March 31, 2024 (FY2023)（4MB）

SMC Corporation

Financial Results Briefing for the Fiscal Year Ended March 2024

May 15, 2024

Event Summary

[Company Name]	SMC Corporation
[Company ID]	6273-QCODe
[Event Language]	JPN
[Event Type]	Earnings Announcement
[Event Name]	Financial Results Briefing for the Fiscal Year Ended March 2024
[Fiscal Period]	FY2023 Annual
[Date]	May 15, 2024
[Number of Pages]	37
[Time]	10:00 - 11:35
	(Total: 95 minutes, Presentation: 35 minutes, Q&A: 60 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]*	Yuichiro Isayama	Goldman Sachs
	Hirosuke Tai	Daiwa Securities
	Yoshinao Ibara	Morgan Stanley MUFG Securities
	Tomohiko Sano	JPMorgan Securities
	Satoshi Taninaka	SMBC Nikko Securities
	Kentaro Maekawa	Nomura Securities
	Sho Fukuhara	Jefferies

*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. The meeting of SMC Corporation for the financial results briefing for the fiscal year ended March 31, 2024, is to begin. Thank you very much for taking time out of your busy schedules to join us today.

Today, we will be using a web-based system for video and a teleconference system for audio. The presentation materials we will use today was posted on the TDnet of the Tokyo Stock Exchange at 10:00 AM.

President Yoshiki Takada will first provide an overview of our business performance for FY2023 and management strategy, followed by Masahiro Ota, Director and Executive Officer, General Manager of Finance and Accounting Division, who will explain our financial results for FY2023 and our financial forecast for FY2024. A question-and-answer session will be held after the presentation. The briefing is scheduled to end at 11:30 AM. So, President, please go ahead.

Takada: Good morning. I am Takada, President. First, I will give a brief overview of our business performance for FY2023, and how to achieve our FY2024 plan where we expect record-high sales. Here is FY2023 summary. As you all know, there was a very strong trend to curb capital investment, and although the yen's depreciation was a positive factor, lower sales volume resulted in sales of JPY776.8 billion, operating profit of JPY196.2 billion, and net profit of JPY178.3 billion. All decreased compared to FY2022.

As for trends by industry and other factors, the recovery of the semiconductor cycle was delayed, and sales to electrical and semiconductor-related industries were sluggish.

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In the automotive sector, capital investment in EV battery production in China, which had been strong the year before last, declined significantly, and although EV-related investment is on the rise, mainly in Europe and the United States, overall investment was sluggish.

Similarly, the machine tool-related sector continued to be in an adjustment phase due to slump in the semiconductor and automobile industries, as well as the economic slowdown in China.

Capital investment totaled JPY105.5 billion, exceeding the JPY100 billion benchmark for the first time, as the Company expanded its production system to prepare for future sales growth.

Regarding shareholder returns, the Board of Directors yesterday increased the year-end dividend by JPY50 to JPY500 per share. Together with the interim dividend, the annual dividend is JPY950 per share, and together with the share buyback, the total return ratio exceeded 50%.

Next is FY2024 guidance. With regard to sales, the current environment is challenging due to semiconductor- related slump, inflation and concerns on Chinese economic recession, but we recognize that we saw the bottom and expect a full-fledged recovery in semiconductors from mid-year to H2.

In addition, we expect an increase in labor-saving demand due to labor shortages mainly in Europe and the United States. We forecast an 8.1% YoY increase in sales to JPY840 billion.

Operating profit is also expected to increase by 19.3% to JPY234 billion due to an increase in sales volume, improved utilization ratio, and a decrease in inventory devaluation.

Capital expenditure of JPY120 billion is planned to ensure production capacity and stable supply, as we have a target of JPY1 trillion in sales in FY2026.

With regard to dividends, we plan to pay an interim dividend of JPY500 and a full-year dividend of JPY1,000 to achieve both business growth and shareholder returns.

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Next, we will discuss our FY2024 strategy. Regarding sales expansion, I will discuss four points: semiconductors, automobiles, 4 BAR FACTORY, and sales diversification; regarding manufacturing, I will discuss three points: positioning of Chinese plants, capital and production facility investment expansion, and development capability improvement; and two other points: human capital and sustainability.

This slide shows a recent topic. This photo was taken in March this year when we received the Supplier Excellence Awards 2024 from Applied Materials, the largest manufacturer of semiconductor equipment. Applied Materials executives visited Japan for a tour of our plant and a small ceremony at our headquarters.

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As you know, Applied Materials' sales reach trillions in yen, and there are, I believe, seven or eight divisions, and we supply products to all of them, and it was a very valuable award for us to be selected for Supplier Excellence in all of them.

We will continue to develop and market new products that meet the demands of our customers in the semiconductor industry. First is our chillers. It is mainly used in the etching process. As we all know, environmental regulations have become stricter in recent years, and it is expected that the manufacture and import of chillers that use refrigerants with high global warming potential (GWP) will be banned within a few years.

In response, last year SMC launched a chiller for semiconductors with high environmental performance using CO2 refrigerant. The product is designed to be compact and space-efficient in a clean room with a high tsubo unit price, and its power-saving performance is overwhelmingly 60% lower than that of some competing manufacturers.

As you know, fabs consume a great deal of electricity, and Samsung has told us that they want to do whatever they can to reduce power consumption, since building one fab will consume the same amount of electricity as the city of Seoul. We would like to grow through supporting such areas.

Next is our slit valves. As I may have mentioned this to you several times, our slit valves are used for chamber partitioning and have been evaluated to generate very few particles in this process.

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In the semiconductor cycle, SMC originally focused on equipment manufacturers. So, it had considerable penetration among US equipment manufacturers and Japanese manufacturers, led by Tokyo Electron.

However, until now, direct sales activities have not been particularly active with TSMC in Taiwan and Samsung in Korea, and from this year we aim to increase sales by promoting large-scale sales activities to these major users.

For this purpose, for example, it is necessary to expand the local service system for chillers and slit valves, and we expect to invest JPY6 billion in our Czech plant in Europe, JPY7 billion in our Taiwan plant in Taiwan, and JPY9 billion in a new plant in Korea.

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I believe that the EV market will probably grow in a long term through various technological innovations, such as solid-state batteries, but in a short term it is quite uncertain, partly because of geopolitical context. We would like to create a system that allows us to fully follow up on our current projects.

Concerning 4 BAR FACTORY. As we have talked about, most factories have been operating at 7 to 8 atmospheres of air pressure, but we will further promote the approach of taking the overall factory air pressure demand by helping to reduce it by about half to 4 atmospheres. This project is related to environment. In Japan, we would like to meet the governors of Iwate, Chiba, and Aichi prefectures, as well as

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other public offices, and work with them to see what SMC can do for the society and, likewise, for the environment.

This slide is about sales diversification through distributors. We have about 7,000 salespeople worldwide and would like to further utilize our distributors to improve their productivity.

In Japan, distributor sales account for nearly 90% of sales, but most subsidiaries have yet to utilize distributors, and its sales in Germany, for example, are still in the single digits. We would like to increase the man-hours for new development and improving sales of direct sales personnel by closely working with our distributors.

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This is about promotion of local production for local consumption in China. As you all really know, this is also quite a geopolitical risk between the United States and China. In order to be prepared for such contingencies, and at the same time, since labor costs in China are rising, we have begun discussions to move mass-produced products to Vietnam and to have Chinese factories specialize in the Chinese market.

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