TDK Corp

TSE:6762

Earnings Call Transcript 2024-Q1

[Tetsuji Yamanishi, Executive Vice President]

This is Yamanishi. Thank you for you taking time despite your busy schedule. We are so honored to have so many people attending this financial briefing for the First Quarter, the Fiscal Year Ending March 2024.

We are here now to go through the consolidated results First, the highlights of the results. The global economy is in unstable situation with the speed of growth slowing down due to the prolonged inflation and the continued monitoring tightening process in the U.S. and European countries. The yen has been depreciating against the U.S. dollar and the euro. This has become a remarkable situation in the FX space. Under such business environment, the electronics market, which will have an impact on our performance, is suffering from a prolonged the sluggish final demand slowing down the demand for ICT market, HDD market and the automotive market now faced with the changing demand trends. On a year-on-year basis, our net sales was down 1.4% and operating profit was down 41% year-on-year.

In the ICT market, sales of passive components, especially in the smartphones declined significantly. While our sales of HDD heads and HDD suspension assemblies dropped sharply due to 31% year-on-year decline in demand for HDDs. In the automotive market, sales of passive components and sensors grew, but remained sluggish compared to our initial forecast due to customers' inventory adjustment of automotive components. In the industrial equipment, sales of power supply and products remained firm. Demand for ICT-related devices, which has been sluggish is expected to decline in the second quarter onward from our assumption we made in the beginning of the fiscal year.

In particular, the production volume of HDDs for data centers is expected to decrease significantly. In addition, the demand trend for automotive components has been changing due to the inventory adjustment by some customers. As a result of reviewing the order and forecast in light of such demand outlook, we expect the sales of HDD heads, suspensions and passive components to fall below the initial forecast. And we have revised down the forecast we have announced on April 28. In addition, we expect that it is going to take some more time for HDD demand to recover. So we have included in our forecast structural reforms to optimize the production operations for HDD heads and suspension assemblies.

Next, allow me to explain the summary of the business performance. The foreign exchange fluctuation had an effect of increasing net sales by approximately ¥18.1 billion and operating profit by approximately ¥6.5 billion, resulting in net sales of ¥503.4 billion, down ¥7.1 billion or 1.4% year-on-year. And operating profit becoming ¥26.3 billion, down ¥18.3 billion or 41%. Profit before tax becoming ¥21 billion and net profit becoming ¥14.7 billion. Earnings per share became ¥38.82. As for the sensitivity due to ForEx fluctuations, following the last time, we estimate that ¥1 change in the yen-dollar will result in an annual change of approximately ¥2 billion and ¥1 change and the euro will result in annual change of approximately ¥600 million.

Next, I will explain the situation by segment for the full year. Sales of passive components was ¥140.7 million, slightly down by 1.1% year-on-year. Although sales to the automotive market, mainly for xEVs grew, sales to the ICT market declined, pushing down the profit by 42.3%. Aluminum and film capacitors and film in sales to the automobile and the renewable energy sectors secured both sales and profit.

The ceramic and capacitors grew in sales for the automobile market, but due partly to due to the decline in sales volume for the distributors, profit declined slightly, high frequency in components and having a high portion in smartphone business declined both in sales and profit. Inductive devices and piezoelectric components and circuit protection components grew for automotive business, but it declined in ICT market and the industrial equipment as well as the sales for distributors declined, resulting in drop both in sales and profit.

In the Sensor Application Products business, net sales, ¥38.8 billion, almost flat from the previous year and operating profit of ¥600 million, down 76.7%. Temperature and pressure sensors grew due to the high-end sales to the automotive industry. In magnetic sensors, sales of hall sensors and TMR sensors increased for the automotive market. And the sales for smartphones remained almost at the same level, resulting in higher sales. But due to the advanced investment for increased production, pushing up fixed costs, profit declined slightly. In the MEMS sensor business, sales of motion sensors for the automotive industry expanded, but sales to the ICT market declined, resulting in lower sales and lower profit.

In the Magnetics and Applied Products business, net sales being ¥38.2 billion, significant drop and as much 30.7% year-on-year and operating profit was a significant loss of ¥9.7 billion. And HDD head and suspension business, sales volume of both HDD heads and suspensions for the new line HDDs fell sharply and posted a loss as a result of 31 year-on-year decline in overall HDD demand due to the decline in investment in the data centers caused by economic slowdown and the prolonged HDD inventory adjustment. As a result, sales volume of both head and suspension for HDDs declined significantly from the previous year, resulting in a significant drop in sales and posting a loss. Sales of magnets increased due to higher sales for xEVs, but a delayed improvement in the profitability due to delayed productivity improvement.

Next, Energy Application products. Net sales being ¥274.9 billion and operating profit being ¥32.2 billion, up 5.7% and 17.7%, respectively, year-on-year. In the rechargeable battery business, sales for the small batteries and smartphones increased, but sales of medium capacity batteries decreased due to the transfer of joint ventures. And overall sales and profits were almost unchanged from the previous year. Power supplies for industrial equipment grew both in sales and profit, thanks to the firm demand for semiconductor manufacturing equipment and medical equipment. Its profitability improved significantly. As for power supplies for the EVs, on top of the increased revenue, we were benefited by the structural reform we had toward the end of the previous fiscal year. We are happy for this.

Next, I will explain the factors behind the change in the sales and operating profit by segment from the fourth quarter of the previous fiscal year to the first quarter of the current fiscal year. First, the Passive Components segment. Net sales was up ¥3.2 billion or 2.3% from the fourth quarter, while operating profit declined ¥800 million or 5.5%. And aluminum film capacitors for renewable energy and other industrial equipment grew. As for other products, excluding the ForEx impact, the overall profit declined in the real terms. Overall, net profit declined.

Next, Sensor Application Products. Net sales was slightly down by ¥200 million. As for operating profit, excluding one-time cost of ¥2.5 billion, which incurred in the fourth quarter, it grew slightly. Temperature and pressure sensors for the automotive market grew, resulting in increased sales and profit. Magnetic sensors turned out to be flat, though the smartphone business declined in sales, but the sales for the automotive market increased. Operating profit grew slightly. MEMS sensors. While sales for the automotive grew, but the ICT sales turn out to be sluggish, pushing down both sales and profit.

Next, the Magnetic Application Products. Sales decreased by ¥5.1 billion or 11.7%. Operating profit, down by ¥3.7 billion in real terms, excluding a onetime cost of ¥26.9 billion, which occurred in the fourth quarter. Sales of HDD has declined 35% from the fourth quarter, mainly as a result of the further decline in the overall demand for nearline HDDs, while sales of suspension also declined, resulting into a significant decline in the overall head of sales. Operating profit improved despite a loss as a result of the effects of the structural reforms and the cost improvements. Magnets go on a slight decline in sales, but profit has been improved.

In the Energy and Applied Products segment, sales up by 14.8% to ¥35.4 billion. Operating profit increased by ¥6 billion in real terms, excluding a one-time cost of ¥17 billion incurred in the fourth quarter. In the rechargeable battery business, sales of medium capacity batteries decreased due to the transfer to joint ventures, while sales of the small batteries for ICT increased, resulting in an overall increase in both sales and profit. Sales and profit of industrial power supplies remained strong with increased sales and profit. Sales of power supplies for EV has increased and filter improved, partly due to the effect of the structural reforms.

Next analysis of the change of operating profit, the decrease in operating income of ¥18.3 billion. And this was due to ¥36.3 billion decrease in profit from a decline in the sales volumes of HDD heads, suspension and passive components and ¥9.5 billion decrease due to changes in selling prices. The decrease in operating income was due to the impact of the decrease in the sales volumes, which could not be offset even by the increase in operating income of ¥6.5 billion from the depreciation of yen, rationalization cost reductions of ¥5.2 billion, mainly in secondary battles and the Pacific components as well as the effects of structural reform implemented in the previous year of ¥4.2 billion and the increase in operating income of ¥11.6 billion from the efficiency improvements of the SG&A.

Next, I would like to continue with an overview of sales increase and the decrease from the image – of the first quarter to the second quarter of the fiscal year. In Passive Components, we expect overall sales to increase between 0% to plus 3%, mainly due to an increase in the sales of the ceramic capacitors for automotive applications. Sales of sensor application products are expected to increase between plus 9% to plus 12% due to steady sales for automotive applications as well as increased sales of magnetic sensors and MEMS microphones for ICT applications.

In the area of a magnetic application products, sales volume of HDD heads is expected to increase by approximately 20%, slightly decreased due to the impact of foreign exchange rates, while sales over suspensions are expected to decrease by approximately 14%, resulting in an overall decrease of minus 5% to minus 8% in sales.

In Energy Application Products, and rechargeable batteries, one of the volume of small batteries is expected to increase due to the launch of new smartphone products. The transfer of the medium size of the batteries business to JVs is expected to increase resulting in a minus 2% to plus 1%. As a result, overall sales are expected to increase by the minus 1% to 2%. But excluding the impact of lower sales due to the foreign exchange, sales are expected to increase by plus 3% to plus 6%.

That is all my presentation today. Thank you very much.

[Noboru Saito, President and Chief Executive Officer]

I am Saito, President and CEO. Thank you very much for joining us today. I explain full year forecast of FY March 2024. The first half, I would like to explain the revision of the production volume forecast for major devices leading to our company, our business, which is the assumption for our earnings forecast. As for the automotive markets, the shortage of semiconductors and other factors are under the way to being resolved and xEV production volume will remain steady. So there will be no change from the volume assumed at the beginning of the period.

But on the other hand, however, in passive components and the sensors for the automotive market, we expected the demand to be lower than we had assumed at the beginning of the period and some customers are making significant adjustments to their component inventories. The production volumes of smartphones, which represents the ICT market has been revised from the initial forecast of 11.18 billion units 11.08 billion units due to the uncertain macroeconomic environment as well as the lower replacement cycle of smartphones. The forecast for 5G smartphone has also been revised from 607 million units to 598 million units.

Next, in HDD market due to rapid changes and the data center investment environment, we expect customers HDD inventory consumption will take longer time than we had assumed at the beginning of the fiscal year. Due to these factors, the production volume of new line HDDs for data centers, which was expected to be 60 million units, up 9% from the previous year at the beginning of the fiscal year has been revised downward to 42 million units, down 19% from the previous year, far below the initial forecast.

We have also made downward revisions to our initial forecast for the PCs and the tablets. In light of these circumstances, we have revised our full year forecast for the fiscal year ending March 2024 and now we'll present forecast net sales of ¥1.970 trillion and operating income of ¥150 billion and net income of ¥105 billion. The exchange rate assumptions for the Q2 and onward and beyond remain unchanged from the beginning of the period, and there is no change in the dividend from the beginning of the fiscal year.

I will now continue with an overview of the projected increase and decrease in sales by segment after the revision for the fiscal year ending March 2024. In the Passive Components segment, we expect sales increase of ceramic capacitors and other products for the automotive markets, especially for HDDs. However, sales in the ICT market, industrial equipment market and the sales through distributors are expected to fall short of initial expectations. As a result, overall segment sales are expected to grow only 2% to 5% year-on-year basis.

In the Sensor Application Products segment, sales of magnetic sensors and temperature pressure sensors for the ICT and automotive markets are expected to increase. While sales of the MEMS motion sensors and the microphones for the ICT market are expected to grow less than initially expected. And result of that, the sales growth of – our focus with sales growth is only 1% to 4% over the previous fiscal year.

In the Magnetic Application Products segment, as explained earlier, the production volume of the new line HDDs for data center is expected to be much lower than initially expected. Accordingly, sales of HDD heads and the suspensions are also expected to be much lower than initially forecast, resulting in a 13% to 16%, minus 13% to minus 16% year-on-year decline for the segment as a whole.

In the Energy Application Products segment, sales of medium-sized rechargeable batteries business are expected to be lower than initially expected due to the transfer of the medium size of the rechargeable batteries business to a JV, which is progressing faster than initially planned. On the other hand, sales of smaller rechargeable batteries are expected to exceed the initial projection due to an increase in the market share and other factors, and the segment as a whole is projected to be minus 14% to 17% at the previous year's level.

Next, the breakdown analysis of the ¥40 billion decline of operating profits, HDD had suspensions about on HDD heads and suspensions, so declines decrease in the sales of passive components and so forth. And that will be pushed down by profit by ¥60.2 billion. We have recognized ¥3.5 billion as a structural reform expenses for HDD heads and suspensions and the effect of those expenses is expected to be ¥1.7 billion.

In addition, we expect to achieve an additional ¥10.7 billion from streamlining cost reductions and a ¥14 billion reduction in SG&A expenses including R&D expenses. And the profit fluctuation due to foreign exchange is expected to be plus ¥2.7 billion based on the Q1 results and assuming the exchange rates of ¥130 to the U.S. dollar and ¥142 to euro in Q2 and onward.

Next, I will explain how we are responding to the rapid changes in the HDD market that I have just described. CSP, the Cloud Service Providers, the trend of increasing CapEx allocation to AI-related projects has become more conspicuous since April. While the renewal cycle of general purpose servers and the storage systems have been longer and the storage utilization rates have been rising. As a result, the production volume of HDDs dropped significantly due to the slowdown of HDD inventory consumption.

And the demand for HDD heads and suspensions also dropped significantly compared to our initial forecast. In response to the drastic changes in the market environment, we have decided to restructure our profit structure. Specifically, we will lower fixed costs by reducing headcounts and consolidated basis and establish a structure that will enable us to achieve breakeven at the demand level of the latest in the second half. As a result, ¥3.5 billion of structural reform expenses will be recognized this fiscal year and the cost improvement effect is expected to be ¥1.7 billion this fiscal year.

Next, we have decided to review various expenses in line with the changes in the business environment. We plan to reduce the acquisition of fixed assets from ¥260 billion to ¥240 billion, depreciation from ¥185 billion to ¥180 billion and R&D expenses reduced from ¥180 billion to ¥170 billion each.

Finally, please let me talk about cash flow projections. Free cash flow is expected to be the positive ¥80 billion as planned at the beginning of the fiscal year due to the review of the capital investments and the inventory reduction plan. As I explained now, we will implement additional measures to respond to the rapid changes in the business environment. But as we have explained in the past, we will strive to maximize sustainable corporate value by capturing demand related to decarbonization, including EVs and renewable energy and the demand for sensors that are essential in the data society.

So I would like to start to maximize the corporate value in a sustainable manner. That's all my presentation. Thank you very much. Thank you.

Question-and-Answer Session