TDK Corp

TSE:6762

Earnings Call Transcript 2019-Q1

[Unknown Executive]

Hello. We're soon to start our performance briefing for the first quarter and the fiscal year March 2019. Allow me first to introduce the attendees from the company. We have Mr. Hiroyuki Uemura, Senior Executive Vice President; and we have Mr. Noboru Saito, Senior Vice President; next, we have Mr. Tetsuji Yamanishi, Senior Vice President; last but not least from Energy Solutions Business Company, we have Mr. Fumio Sashida, CEO.

So those are the 4 attendees from the company. Thank you again.

First, in regard to the consolidated performance for the first quarter, I'd like to have Mr. Yamanishi to go through the highlights.

[Tetsuji Yamanishi, executive]

Hello, this is Yamanishi speaking. First one, I'd like to thank you for your precious time despite a busy schedule and also despite the quite hot weather outside to attend this first quarter consolidated performance for FY March 2019. Without further ado, I'd like to go through the highlights.

First, the highlights in -- of the earnings. Net sales, Y-o-Y basis was up 18.5%. Operating income grew dramatically by 53%. We're able to renew the sales record on a quarterly basis we achieved in the third quarter last year. In regard to the Passive Components business, thanks to the continuing growth in the automotive and industrial equipments markets, our capacitor revenue grew firmly. Of particular note is that MLCC due to an increased demand for highly reliable and redundant products made further contribution to the profitable business of the whole Passive Components segment.

Sensor Application Products business. On top of the firm and continuing sales of the temperature and pressure sensors and the magnetic sensors for the automotive market, the magnetic sensors for ICT particularly was able to maintain its profit.

As for the Magnetic Application Product. With the overall HDD head demand, market as a whole declined about 3% Y-o-Y basis. The sales volume of 2.5-inch hard disk drive in heads for personal computers declined. But with the data centers the business grew as our tailwind, our near-line HDD on the heads increased resulting into the better product mix while the volumes sold declined by 7%. Despite of that fact, we are able to grow the sales and profit.

Energy Application Products. In the Rechargeable Batteries business, we were able to respond surely to the increased orders coming from the major Chinese customers, who launched new devices and adjusted their inventory level to put them in tablets and notebook and personal computers and games, nonsmartphone business continued a firm revenue. The increased production and improved factoring operation together with the improved cost, all in all, help us to increase our sales and profit gradually.

Moving on to the performance outline. Net sales was JPY 343.1 billion, up JPY 53.6 billion Y-o-Y basis or up 18.5%. Operating income was JPY 25.4 billion, up JPY 8.8 billion or up 53% Y-o-Y basis. Income before income taxes was JPY 23.7 billion. Net income was JPY 16.2 billion. Earnings per share was JPY 128.29.

For your information on the -- due to the U.S. GAAP change, starting from April this year. There has been a change in regard to how to deal with the retirement benefits. Because of that, part of the budget there, almost JPY 1 billion, has now placed on to the nonoperating expense side.

As for the first quarter, for this current fiscal year, this has been already reflected into the nonoperating performance. The average exchange rate for the term is JPY 109.09 to the U.S. dollar, up 1.9% on the yen side and JPY 130.16 to euro, down 6.7% on the yen side. With this, the impact from the currencies was positive JPY 2.8 billion in revenue and positive JPY 1.1 billion in operating income.

The FX sensitivity in our assumption is about JPY 1.2 billion between yen, Japanese yen and U.S. dollar. If yen moved to JPY 1, no change from the previous yen and about JPY 200 million between the Japanese yen and the euro.

Allow me to move on to the segmentation update. As has been explained in the previous performance briefing, there's been some changes in the segmentation. Because of that, we had to actually modify the last year's numbers. That's what you see here. As for the Passive Components, the actuators for the camera modules as well as due to the changes in the product mix, actually the revenue went down JPY 6.8 billion, actual -- operating income actually moved up JPY 1 billion. JPY 127 billion for the segmentation and 26% increase, operating income JPY 14 billion or up 35.9% and operating income ratio 12.4%. All in all, we're able to actually increase our sales as well as we're able to improve the profitability.

And ceramic capacitors, by the way, thanks to the strong demand in the cost market. We're able to sell our product for automotive resulting in the increased revenue. And also due to the strong demand for the high quality, high reliability and the other high features, we're able to actually sell more, improving our profitability.

Aluminum and film capacitors, actually we enjoyed really good sales. And also renewable industrial equipments business actually, we're able to grow giving us good growth in both sales and revenues.

Inductive Devices, by the way, again, thanks to the strong demand in automotive industries. With that in the background, we're able to actually improve the product mix, particularly on the side of the car business. In High-Frequency and [indiscernible] actually was able to grow, thanks to the great demand in our Indian and our Chinese market. And the piezoelectric and the circuit protection actually, thanks for the greater demand for the automotive as well as industrial equipments business, we're able to grow both sales and profitability.

Moving on, I'd like to move on to the Sensor Application business. Of course, there has been some partial change in the product mix, and actually, the sales went down JPY 100 million and operating income actually increased JPY 100 million. Net sales was JPY 18.9 billion, up 16% Y-o-Y basis, and operating income, again on [indiscernible] conditional cost actually went down by JPY 2.1 billion from the previous year, and still we suffered from the decline as much as JPY 400 million on the side of operating income. Sales for the automotive market, this shows about 90% increase in revenue, driven by the temperature and pressure sensors, mainly in Europe and Japanese markets.

ICT market revenue shows 4% growth due to the expanded opportunities in the magnetic sensors improving its profitability. We're so happy as to this point.

MEMS motion sensors is actually growing for industrial equipments and include new drones. But as has been expected since the beginning of this fiscal year, the major customers for ICT actually declining, and also we are working on the initiatives and to try to expand our customer basis. And also we are working on the new development and -- new product development, including the ultrasonic authentication and applications and others that are pushing up the cost on our side, so our loss is becoming bigger.

Next, Magnetic Application Products. With the recombination of the sectors and segment and the last year's performance, reduced it by JPY 13.6 billion in net sales and JPY 1.1 billion and a decline in operating income. The outline of business. The net sales is JPY 70.5 billion, 6.2% up year-on-year, and operating income is JPY 3.5 billion and 5.4% growth year-on-year and operating profit margin is 5.0%

HDD heads have declined its sales volumes by 7% year-on-year. But on the other hand, now we have incremental sales for the near-line head for the -- with the incremental demands of the HDD for data centers and also average selling price will -- an improvement with this to improvements in mix. So then we have 7% growth on net sales and also we have a better profitability. When it comes to HDD suspensions, sales volume have been flat from last year, but the suspension application products have been expanded in the ICT market. And all in all, we could secure the 9% of growth in net sales.

But when it comes to operating income, the expenses for the start out of the suspension application products have negatively affected the operating income. When it comes to magnets, now -- and with the declining sales for the wind power generation business will deteriorate the mix and will have negative growth in both net sales as well as the net operating income.

Next, let me talk about Energy Application Products. On top of the traditional and Rechargeable Batteries and now we have industrial equipment Power Supplies and automotive Power Supply products have been integrated as part of the Energy Application Products segment. So now we have increased it by JPY 15.6 billion of net sales year-on-year and also JPY 800 million of growth of an operating income year-on-year.

Net sales is JPY 125.6 billion with the JPY 21 billion of operating income, 31.8% and -- of the net sales increase and 55.6% growth of the net operating income dramatically. And see, we maintain a bit high operating profit margin with 16.7%.

The Rechargeable Battery have a -- an increased push up by that dramatic demand of the smartphone market in China. And on top of that, also we have nonsmartphone sales like tablet, notebook and the game consoles. So now with the synergy of that and volumes increase and improvements in the productivity have been improving profitability rather efficiently. So industrial equipment Power Supplies have been very steady based on the very stable demand.

Next, let me talk about business result on a quarter-on-quarter basis from the last Q4 to this -- Q1, this fiscal year by segment. This is both for that the net sales and operating income. Due to the recombination of segments and now just like mentioned earlier and then we have just revised that business performance. The first of all for the Passive Components segments. Net sales have increased by JPY 6.8 billion, 6.4% growth the quarter-on-quarter basis. And ceramic capacitors have been very steady for the automotive markets. On top of that now aluminum film capacitors have been increasing for the renewable energy markets. So that's why it has increased by JPY 3.1 billion, 7.5% Q-on-Q basis as from last quarter. Inductive Devices, net sales have increased by JPY 2.1 billion, 5.4% growth quarter-on-quarter. And ceramic capacitors has been very steady in automotive markets. And then also, now we have more sales in the smartphone market in China.

And the sales of the [ anti ] Passive Components has increased by JPY 1.6 billion, 6.3% increased from the -- on a quarter-on-quarter basis. High-Frequency Components have increased for the ceramic capacitors -- ceramic filter and the smartphone market in China and [indiscernible] components and the circuit production components have been increased for the industrial markets.

Operating income of the Passive Components have increased by JPY 400 million, 2.9% on Q-on-Q basis. Ceramic capacitors' increase is the volumes and also improvements of the productivity have contributed. And also, it has been very favorable business inductor have the major factor.

Next, the sales of the Sensor Application Products have declined by JPY 400 million, 2.1% of decline from the last quarter. The magnetic sensor have increased for the ICT market. But on the other hand, all the MEMS sensor have been adversely affected by the inventory adjustments on the ICT market and also for that -- the demand for that the gaming console and drones have been adversely affect the net sales. Operating income have declined by JPY 300 million, but now is included -- even when including JPY 100 million reduction of the InvenSense M&A and later expenses and also increasing of the sales of magnetic sensor, that is -- have been an offset more than -- offset by the declining business of MEMS sensor and also when fixed expenses increased by the M&A with [indiscernible].

Next, let me talk about Magnetic Application Products segment. The sales have increased by JPY 3.6 billion, 5.4% from last quarter. And the sales of HDD head have -- based on the increased volumes of the shipments and also the improvement in product mix, it have increased by 11% and HDD suspensions now have been flat for the suspension sales. But on the other hand, the applications products, this is microfabrication product sales have declined due to that shrinking demand.

The sales of the magnet have declined by 5%. And for the quarter-on-quarter basis from last quarter due to that shrinking sales for the renewable energy business, the operating income of Magnetic Application Products have increased by JPY 2.9 billion from the last year Q4. So that restructuring expenses recognized in Q4 and also for that impaired and loss for the HDD wafer and also that the negative impacts involved in the -- of the operations and in -- or the China New Years have all gone. So that's now pushed up by that incremental volumes of HDD head.

Next, let me talk about Energy Application Products segment. The sales of the segment have increased by JPY 25.2 billion, 25.1% increase from the last quarter. The Rechargeable Battery have been very favorable due to an increasing orders for the smartphone market in the China for the new devices and also -- and now we have [indiscernible] as the start-up of the recovery of the productions after an inventory adjustment in Q4. Now operating income have increased by JPY 8 billion from the JPY 13 billion to JPY 21 billion. So due to this that's -- an exclusion of the negative and operational and impact of that for the Chinese New Year's and then also with increasing of the volumes and we could improve that marginal profits and also the cost reductions contributed this.

Let me -- next, let me talk about breakdown of operating income changes. Now in total, we have incremental profit of JPY 8.8 billion year-on-year. So first of all, capacitor and HDD head and the secondary batteries, and with all these and the change in the sales pushed by JPY 10 billion profit. On the other hand, with the sales price reductions have a negative impact by JPY 7.5 billion. But on the other hand, the rationalization cost, the cost reductions have the JPY 10.5 billion positive effects. And also, benefits from the restructuring we implemented in the last Q4, we have JPY 200 million and reductions of that onetime expenses for -- related to the InvenSense M&A and pushed up by JPY 2.1 billion. But on the other hand, with the expansion of the Rechargeable Batteries and we have incremental SG&A expenses due to an enhancement of that in the business, organizations and the negative JPY 6.6 billion. And on the other hand, we have JPY 1.1 billion with the change fluctuations. Taking all this into consideration, the bottom line is JPY 8.8 billion positive.

Next, let me talk about the projections for Q2 of FY March 2019, images of changes in sales. First of all, for the Passive Components, now it would be almost flat from that the Q1 is now projected. When it comes to MLCC and now, and we are in the full end in the production capacity to deal with that -- the demand, so that we expect that that's almost flat in terms of the net sales. But when it comes to the inductor and high-frequency components, now we expect about an increase of business with the new device for the North America. But when it comes to aluminum film capacitors due to [indiscernible] favorable so far about the renewable energies. But now in China, the feed-in tariff price will be declined. So that's why, we're getting into some negative impacts. That's why taking all this into considerations into some of the favorable and unfavorable conditions will be offset with each other. So all in all, we still forecast it to flat. When it comes to Sensor Application Products, we expect about the increase of 8% to 11% in terms of net sales.

So with the new device in the North America and this whether have the favorable business magnetic sensor then also we expect about the MEMS sensors and business will be increased -- will increase due to the smartphone market in China. And for the Magnetic Application Products, we are forecasting about positive 5% to 7%. We expect about 8% of the volumes for HDD heads. And on top of that, we expect about a -- HDD suspension we'll forecast to increase by 14% and besides about Suspension Application Products, this is about the -- microfabrication products will also increase.

On the other hand, and when it comes to magnets, due to the change of the product mix, but still our forecast is flat for magnets. And when it comes to Energy Application Products, we -- our forecast is the 9% to 12% growth in net sales. When it comes to Rechargeable Batteries, now we expect it to a little bit slow down in the Q1. When it comes to the smartphone market in China that we expect it about an incremental business with that new device market for the North America. So all in all, we think it's a little bit increase. And for the Power Supplies, our forecast is flat.

Last of all, let me talk about the full year projections on consolidated business in FY March 2019. And in conclusions, and we don't make any change from that announcements and forecast in April we announced last time. When it comes to that business performance of the Q1, as we have just explained so far and a -- compared to that assumptions before the Q1 and then business performance that a little bit exceeded that assumptions and the forecast, but still -- and when we look at the ICT markets, right, which is a big impact on the business, still we see that uncertainty in the ICT market in the second half and also we have to think about uncertainty and the trade frictions or that the currencies, so that taken all this into considerations. I'd like to be a little bit more conservative. So that's why we'll stay the same. So after when all this -- the situation [indiscernible] more clear, we'd like to revise our forecast for the full year projections. That's all my presentation. Thank you very much. Thank you.