TDK Corp

TSE:6762

Earnings Call Transcript 2020-Q1

[Operator]

So as the time has come, I would like to start the performance briefing of the first quarter fiscal year March 2020 for TDK. So I'd like to introduce today's participants: Senior Vice President, Tetsuji Yamanishi; Senior Vice President, Noboru Saito; Corporate Officer, CEO of Electronic Components Business, Shigeki Sato; Corporate Officer, CEO Energy of Solutions business, Fumio Sashida. So we have 4 participants from TDK.

So first of all, in terms of the outline of the first quarter. Mr. Yamanishi is going to make a presentation.

[Tetsuji Yamanishi, executive]

Okay. So hello, this is Yamanishi. Thank you very much to coming over to the performance briefing of the first quarter of fiscal year March 2020 for TDK despite your busy schedule. So from my side, I would like to review on our consolidated results.

First of all, this is the highlights of the performance in the first quarter. Both the United States and China has raised their tariffs, and there has been escalation of the trade friction between United States and China. The impact of this has been spreading all over the world and the business environment has been impacted by the deceleration of the global economy.

On a year-over-year basis, in the first quarter, sales has gone down by 1.8%. Operating income has gone down by 1.6%, going down slightly. And so basically, in terms of the earnings, we've been able to maintain the same level as last year. So we have 3 key priority markets: ICT, automotive, industrial equipment and energy. In terms of the demand trend of these markets, it is mixed. In terms of the ICT market-related sales, it is over our expectations that we had expected the beginning of this year.

In terms of the rechargeable batteries, it has been able to increase our sales to our major clients with smartphones, so the sales increase. So it has -- we have seen an increase in sales and profit in this area that has driven our earnings of our company as a whole. In terms of the automotive and industrial equipment related sales, specifically in the Chinese market, there has been acceleration of the demand, and the demand level has been below compared to what we expected initially year-over-year. Sales has gone down in this area. As a result, in the Passive Component business in all of the business areas year-over-year, sales has declined. In terms of the Sensor Application Products, specifically for the automotive sales has been stagnant, and we have seen a decline both in sales and income.

Because of the impact of deceleration of the global economy on the second quarter onwards in terms of demand trend, the outlook is unclear. That is what we are expecting. But we will go forward in the initiatives that we have decided the beginning of the year in each businesses, and we will focus on achieving our targets for our midterm management plan.

Next, going to the outline of our performance. Sales were JPY 336.8 billion. Year-over-year, JPY 6.3 billion of decline, it's a 1.8% of decline of sales.

Operating income, JPY 25 billion year-over-year, minus JPY 0.4 billion. This is a 1.6% decline in profit. Our profit before tax is JPY 24.7 billion. The net income is JPY 15.6 billion. The earnings per share is JPY 123.43.

In terms of dollars exchange rate will be JPY 110.10 to the dollar, this is a 0.9% weaker yen. Against the euro, JPY 123.57, this is a 5.1% stronger yen as a result -- because of the changes of the exchange rate. In terms of the sales, the impact was JPY 3.9 billion of decline over sales. In terms of operating income, this has been JPY 0.6 billion positive impact increase of profit.

In terms of sensitivity of the currency, for instance, against the dollar is against JPY 1 fluctuation. This was a JPY 1.2 billion impact. Against the euro, JPY 1 fluctuations accounts for JPY 0.2 billion of impact for the year.

Going to the by segment situation. Of this year, in terms of the Passive Components business, some of the inducted device products has been reclassified under the other passive components. So as a result, Inductive Device year-over-year first quarter sales has gone down by JPY 2.4 billion. Operating income has gone down by JPY 0.5 billion. So because this was a reclassification against the previous year. In terms of the Passive Components sales, it's JPY 98.3 billion. This is the decline of sales of 12.8%. Operating income was JPY 10.3 billion. Year-over-year, it was minus 26.4% of decline in profit. Operating margin was 10.5%. For the Ceramic Capacitors in -- so the ICT market sales, for instance, sales for the base stations has increased, but for the industrial equipment, sales has gone down. For the automotive market demand of this was decelerated, and there has been the adjustment of inventory, meaning that the sales to distributors has gone down. So overall, we are seeing a decline in sales.

As for the higher added value product, sales has increased. The average sales prices has gone up, and so the income has gone up, and the profitability has improved. For the aluminum electrolytic capacitors, for the automotive market for the renewable energy, this is where the industrial equipment sales has gone down substantially, and so the sales has gone down overall, and the profit has gone down as well.

Going to the Inductive Devices for the automotive market and for the distributors, sales has gone down. So again, this is a decline in sales. In terms of the products that is more profitable for the automotive market, this has gone down, so the profits are going down. But the High-Frequency components, the sales for this business has gone well. So the increase of sales for the Piezoelectric Materials and Circuit Protection Component for the automotive and industrial equipment related sales has gone down. So we have seen the decline in sales in this area.

Next going to the Sensor Application Product. Sales was JPY 18.1 billion. This has been a 4.2% decline of sales year-over-year. Operating income was JPY 7 billion of loss year-over-year. This is a JPY 2.1 billion of decrease of profit. JPY 1.4 billion of expenses related to the acquisition of InvenSense is included as the same situation last year. Going to the market sales situation by market for the automotive market because of deceleration of the demand, we are seeing a major impact. In terms of the Temperature Sensor and the Hall Sensor in -- mainly in these areas, sales for the automotive market has gone down by 13% in terms of sales.

For the ICT-related sales, TMR sensors, smartphone-related sales has increased. And for MEMS sensors, we have been able to increase our customer base. And we have been able to start the sales to our major customers. So this has been related to a 12% increase of sales.

In terms of the Temperature and Pressure Sensors. For pressure sensors, the sales has increased very steadily. On the other hand, for temperature sensors, sales has decreased. So overall, it is a slight decline of sales.

For the Magnetic Sensors, this has been a substantial decline of sales of Hall Sensors. So overall, a substantial decline in sales. For the MEMS Sensors, there is more applications for mics and for the motion sensors, we have been able to offset the decline of conventional products by increased sales of new products. So overall, we have seen a substantial increase.

In terms of the operating income, we have seen a decline of sales and profitability for the automotive market and MEMS motion sensors mass production, there was an increase of development costs. So compared to the last year, loss has been expanding.

Going to the Magnetic Application Products business. Sales was JPY 55.5 billion year-over-year. This is a decline by 21.3% of sales. Operating income is JPY 3.3 billion year-over-year, a decline of profit by 5.7%. Operating margin is 5.9%, so a slight improvement.

In the hard disk drive Heads sales volume is -- for this term is -- in the index is JPY 88 billion. Year-over-year, this is a -- compared to the same month of last year, it's a 12% decline. In terms of the hard disk drive assembly sales, year-over-year, it has declined by 43% in terms of sales. So as a result, overall, for this business line, we have seen the 25% decline of sales.

For the hard disk drive Suspension Sales, there has been a more increased product mix where the market deal escaped stage-actuated type, which has more added value, more composition for this. As a result, our results -- prices have gone up. And for the application products has been increasing for ICT market. However, for the hard disk drive Suspension, overall sales volume has gone down by 27%. So for the HDD Suspension overall, the sales has gone down by 17%. For the hard disk drive Head suspension, overall operating income because of the kind of the sales volume, and we have seen a slight decline in profit.

In terms of magnets for wind power applications and for the industrial equipment such as industrial robots or the machine tools, that has gone down by 9% in terms of sales. But in terms of the operating profit, it's basically the same level as last year.

Next, let me talk about Energy Application Products. Net sales was JPY 144.5 billion. Operating income was JPY 26.5 billion. And net sales was up by 15%, and the operating income was up by 26.2%, and the operating income margin was also at 18.3%. That's an improvement for the secondary market. Now however, a slight decline in that -- and the business was -- the market -- and smartphone market in China. Then also -- but on the other hand, we can have this deposit -- and the market share up and also -- and we can have the more sales with the major customers. And that will be more than offset. And also for that -- to the tablet and notebook and also well above the mini cells, and they were pushed up. That's about the most to the top lines and also furthering the profits. And with the increase in the number of productions and the production efficiency. For the industrial -- power supply of the industrial equipments had declined and as the industrial equipments market, including the semiconductor manufacturing equipments and also for the [indiscernible] demands have pushed down that momentum.

Next, let me talk about the quarter-on-quarter results by segments, focusing on -- about the net sales and operating income changes. So first of all, for the Passive Component segments, the net sales was declined by JPY 3.6 billion, JPY 3.5 billion decline (sic) [ 3.5% ] from the Q4. For Ceramic Capacitors have a decline into the sales to the distributors. And for -- aluminum Film Capacitors have declined for the sales for the automotive and the industrial equipments, and decreased by JPY 3 billion and 7.1% from the previous quarter. For Inductive Device business, for the net sales -- declined by JPY 200 million, 0.6% from the previous quarter Q4. And the sales for the automotive market, haven't decreased and on the other hand, ICT market business, including the smartphone, have pushed up. And all in all, it's only slight decline. And the sales of the other Passive Components were declined by JPY 500 million, 2% decline. For the High-Frequency Component products, ceramic filter have increased for the smartphone market. And piezoelectric components and the Circuit Protection Components have declined for the automotives and industrial equipment markets. So the operating income for the Passive Components have also decreased by JPY 3 billion to 22.6% from the Q4. And for the capacitors and -- operating income of capacitors have declined in then both the top line and the also profits. And aluminum film capacitors declining and -- also for the profits and also including the production decrease. And Induction Device (sic) [ Inductive Devices ] have declined because we now have the less sales forward as to the highly profitable automotive markets. But -- and High-Frequency Components [ have been flat ]. And also -- and piezoelectric and then also the Circuit Protection Components have declined in both top line and profits.

For the Sensor Application Products, and its net sales have increased about JPY 800 million, 4.6%. For the Temperatures and Pressure Sensor is flat. And -- but the Magnetic Sensors and then Hall Sensors have declined dramatically for the automotive markets. And TMR sensor is -- have increased, but -- and for the ICT market, but they have, all in all, decline for the MEMS sensors. But increased the ICT market and also for that having a favorable business [ for the game ] and the industry equipments. And operating income have pushed up by JPY 200 million, but excluding the [indiscernible] -- for the InvenSense. And M&A costs have increased by JPY 400 million. So that on a net basis, now that the loss have shrinked by JPY 600 million. Temperature and the Pressure Sensor business have been flat. And Magnetic Sensor and the Hall Sensor have declined in profits. But TMR sensors have the incremental incomes. And now for the MEMS Sensor have an increased in and the sales and then also the profits.

So when it comes to the Magnetic Application segments and the net sales have declined by JPY 5 billion and 8.3% decline from the Q4. So the sales of HDD Head have -- now although that the shipment volumes increased by 8%, but now declining in the average pricing sales. And then also about 40% of decline, and that's the sales of the HDD Assembly business. So that, all in all -- and have decreased by 13% as a whole for the HDD Suspensions. And the sales of Suspensions have -- although that the volume decline, but now at an average -- and the unit price isn't up, so that they were almost flat. And the Magnet is almost -- and flat in net sales. And operating income for the Magnetic Application Components is declined by JPY 1.5 billion, 31.3% quarter-on-quarter. And Magnets and HDD Suspensions have almost flat in Q4. But -- now HDD have been declined, both in -- about the sales and then incomes and then also due to that and the declining prices. And also doing for that the development costs have pushed down the profit.

Next, the Energy Application Products. And the net sales have increased by JPY 32.7 billion and 29.2% from -- on a Q-o-Q basis. But secondly, a battery have been favorable for the sales to our smartphone for the major customers and also for the North America and then China. And also, we have a substantial increase -- and favorable business with tablet and notebook. And also in industrial equipment and the power supplies were flat. When it comes to operating income was increased by JPY 12.1 billion from the Q4 and JPY 144 billion to the JPY 26.5 billion. So that we have just a negative impacts of this and operational loss of the Chinese New Year, but at the same time we have secured the substantial increase of the sales and profits to the supplies.

Let's -- let me talk about the breakdown of operating income changes. So -- and let me correct that one information in the slide. Now you're looking at the informations of the bridge charts. Now it is M&A one-time expenses related to M&A. It showed that -- and the 400 million-plus. Actually, this is related to the expenses for the InvenSense M&A. And JPY 1.4 billion, and then exactly the same amount. There is no any change of JPY 1.4 billion. So that's why this JPY 400 million is about that -- about the -- offset by the increase of the volumes. So that's why -- so due to that about the changes in the sales is not the JPY 2.7 billion and actually is a JPY 3.1 billion. These are the 2 corrections I would like to make here on this bridge charts.

Okay. First of all, this -- let me talk about this. And the factors for the JPY 400 million of the operating income for -- and then due to JPY 3.1 billion with increasing -- that's the changes in the sales. And particularly for the secondary batteries. And about the JPY 5.3 billion negative -- minus due to that decline in price and sale -- sales pricing for the secondary batteries. And also, on the other hand, about JPY 3 billion and a plus for the rationalization cost reductions and also for the JPY 500 million for the impaired loss. And for that expansion of the secondary batteries will lead to that increasing SG&A expenses increase by JPY 2.3 billion. And the fluctuations of the currency will lead to the JPY 600 million. So that, in total, JPY 400 million is the changes.

Next, let me talk about the percentage for Q2 of the changes in sales. First of all, for Passive Components from the Q1. And we expect about 8% to 11% of increase of the sales. From the rest of this second half of the Q4, there we expect about the -- a slightly increase of the automotive markets, and we expect about that the increase about the MLCC, Inductive device and the piezoelectric components and the Circuit Protection Components. And also for -- and ICT market business, we'll be going to the peak season, including smartphone and we expected about the sales of Inductive Devices and the High-Frequency Components. We do not expect the so much substantial recovery of industrial equipment market. So that's why film condenser (sic) [ capacitor ] business will be only slightly increased. For the Sensor Application Product, we forecast it to increase by 14% to 17% in net sales. So there's only slight increase of the Temperature and the Pressure Sensor. For the Magnetic Sensor and the TMR sensor would substantially increase in the ICT market. And also, we expect about the favorable business for the MEMS Sensor. And also when it comes to Magnetic Application Products and the volumes of HDD Head will increase by 6%. But on the other hand, assembly of -- HDD assembly will further drop. And all in all, for HDD Head, will be -- the business will be flat. And the volume of HDD Suspensions will in -- will be up by 24% and also top line increase we expect. And the magnet will be almost flat. For Energy Application Products, will increase by 12% to 15% and increase in sales. For the secondary batteries -- for the sales to the major customers and then dramatical increase in Q1 with just a slowdown. But on the other hand, we expect about this, the volumes on the mini cells increase in the peak season. And for the power supply products, we'll be almost flat.

Next and last of all, let me talk about a full year projection for the FY March 2020. So as for the forecast, of this fiscal year, that's -- there is no any change from the focus we announced in the last the time in April and 3 major focus markets. Now the demands is now varies from markets to market. But at the same time, and the trade friction between the U.S. and China and Brexit, and it will be a -- we have to have some that are impacted due to all this global macro economy. But at the same time, we like to secure that the opportunities with growth. And based on the demands and also we'll like to -- and carry out of it all this and improvements of the efficiency of the businesses and try to achieve the target. That's all my presentation. Thank you very much. Thank you.