TDK Corp

TSE:6762

Earnings Call Transcript 2019-Q2

[Unknown Executive]

Now it's on time. So I'd like to start the performance briefing the first half of FY March 2019 for the TDK Corporation. First of all, let me introduce the attendance today, President and CEO, Mr. Shigenao Ishiguro; Senior Vice President, Mr. Hiroyuki Uemura; Managing Director, Mr. Noboru Saito; Managing Director, Mr. Tetsuji Yamanishi; Energy Solutions Company CEO, Mr. Fumio Sashida. These are the all 5 in attendance today from TDK. Thank you very much. Okay, then, the first of all, the consolidated results for first half of fiscal year March 2019 is presented by Mr. Yamanishi.

[Tetsuji Yamanishi, executive]

Thank you, everyone, I'm Yamanishi. Today thank you very much for joining us for our performance briefing first half of FY March 2019. I thank you very much. And I'm going to first talk about the consolidated performance briefly.

First of all, the highlights of this business performance. The net sales was a 15.8% growth year-on-year and operating income has grown by 40.7% and is a substantial growth year-on-year in both the net sales as well as operating income, and now we could recognize that record high in both the semi-annual and quarterly basis. For the Passive Components businesses and in the very favorable automotive businesses in capacitors and inductive devices and particularly for MLCC have been growing its sales, and also for MLCC. And for the automobiles application with high reliability and redundancy have a very good [ for ] that's catching up with the increasing demand and we could continuously demand that, both net sales and profits, and could make a big contribution to -- and also the high profitability of the Passive Components business. For the secondary battery for the Energy Application Products -- and we could expand the business and sales to that -- our major customer in China and tablet, notebook and PC and the gaming consoles, just like all these non-smartphone and business sales have still continued to be very favorable.

And on the top of that, we have a very good and the higher utilizations in facility and the continuous cost-reduction efforts, and all that contributes to the substantial and an increasing to the sales and profits. For that Magnetic Application products, for HDD Heads. And now for the volumes of the sales have declined by 6% year-on-year, but still we have a very good tailwind for the demand for the data centers and for an increase of the new line HDD Heads have an increase in the profitability. And also we restructured our manufacturing -- the facilities. And also we have a very substantial growth in both net sales and profits.

And just -- and also in the Magnetic business and the part of this -- this is part of the Magnetic Application Products. And we tried to catch up with the demand -- increasing demands on automotive industries and those are ferrite magnets and metal magnets. And now, for all these areas, we're going through that -- we're trying to enhancing the process improvements and product development. Still, when it comes to the ferrite magnets businesses, and it turned out to be very difficult to make the recovery for the short period of time. So that ended Q2, and we recognized that impaired loss for the long-term manufacturing and production.

Next, let me talk about the business performance overview of our first half. And net sales was JPY 721.9 billion. It was up from the 98 -- by JPY 98.3 billion, 15.8% year-on-year. Operating income was JPY 62.2 billion, including the JPY 4.7 billion of impaired loss, and it was increased by JPY 18 billion, 40.7% year-on-year. And income before income tax was JPY 57.8 billion. Net income was JPY 41.1 billion. Earnings per share was JPY 325.30. Now the part of that, the change of the U.S. GAAP requirements on the public benefit obligations and the part of that the cost of this -- and retirement allowance, JPY 1.9 billion in the first half, was now recombined into that non-operating income and nonoperating expenses. And from Q1 that would be recognized as part of nonoperating expenses.

The average rates for this JPY 110.30 to the dollar, 0.7% of yen appreciations. For the euro, and JPY 129.90, 3.0% of the yen depreciations. And due to the impacts of this, JPY 2.1 billion for the impacts on the sales and JPY 1.5 billion of impacts to that operating income. When it comes to sustainability of the currency and on an operating income basis and JPY 1 change to the -- JPY 1.2 billion, when it comes to dollar, and when it comes to euro, and JPY 200 million is the impact for the JPY 1 change.

Next, let me talk about segment-wise performance. From this the fiscal year, we changed the -- recombined that some in a common module and [ freight ] and on a partner products, so that's why for the Passive Components, we revised that and last year's sales by JPY 12.4 billion less and operating income JPY 800 million less. The sales of the Passive Components was JPY 224.8 billion, 11.0% year-on-year growth and operating income of 30.4% and 31.16% -- 31.6% gross year-on-year. Operating income margin was 13.5%, is a very steady business and recovering. For the semi-capacitor business. Due to the products with high reliability and redundancy, we could and steadily and catch up with that expanding demands in automobiles, and we could have that -- we have that as an increased sales. And we also for the -- due to that and improvements in productivity and product mix. We could successfully have the substantial increase of the both profits and sales. Aluminum and film capacitors also steady in the automotive markets, and also we can have the good business also in that industrial equipment. Inductive Devices is still doing very good and in automotive market and steadily, and starting from this Q4. Now, we have increased the sales also for that business for the smartphone, and we have a very good steady growth in business. For the high-frequency component business, ceramic capacitor is favorable in business in China for the smartphones, and we have incremental revenues.

And piezoelectric components and the circuit protection business have also good and going well for the automotive and industrial equipments, and we have both incremental revenue and a profit.

Next Sensor Application Products. Also in a part of the recombination of the products, we revised the last year's -- the sales by JPY 100 million less and that JPY 100 million up in operating income. The sales of this -- the Sensor Application Products is JPY 39.5 billion, 8.2% up year-on-year and operating income, including that [ impulse ] I mean, that cost JPY 2.8 billion and now JPY it's 9.5 billion operating loss.

So the sales for the automotive markets have been very steady, and the temperature and pressure sensor as well as magnetic sensor have increasing its sales by 16%, including Europe, Japan market -- Japanese market. And when it come magnetic sensors, and the sales for the ICT market for the magnetic sensor have substantially and greatly increased now when it to that productivity -- profitability of the magnetic sensors. When [ combined with ] motion sensors, now there is again a console business have been under the pressure of the decline in demand, but still -- and then also we have the decline in the ICT markets, and we need to pay for that -- for the expenses for the expansion of the console base. And we also accelerated development in new models. So there's an [ old app ] and including development [ weasel in ] in cost. We have expanded loss in this area.

Next, Magnetic Application Products. Also again due to the recombination of the segments now -- and we revised that in the last year's sales by [ JPY 24.5 billion ] and operating income JPY 2.4 billion less than last -- in the last years. When it comes to current business performance, sales was JPY 145.9 billion, a 5.6% increase year-on-year, and operating income was JPY 4.4 billion and 49.4% up year-on-year.

Operating income margin was 3.0%. As also explained earlier, this in Q2, we recognized that the impaired loss of ferrite magnet business by JPY 4.7 billion. This is the major reason of that declined profits. But excluding this onetime loss and on an actual basis, now we could secure the JPY 400 million of operating income and that is 4.6% growth year-on-year. When it comes to HDD Heads, Hard Disk Drive Head. Now the sales volumes declined by 6% year-on-year from the year earlier. But on the other hand, we have the incremental decreased demand of data center HDD, and we have more sales of [ near-line ] head. And also with improvement of the product mix, now we can have that -- an increase of the average unit and the selling price show that we have the 6% of growth in the revenues and sales, and also we have improvements of a first stability. When it comes to the HDD suspensions and due to that incremental sales volumes but also on the small size and highly-added value products increasing, so that we have a good improvements of the product mix. And we have a raising -- a rising average unit cost. And also we have a very good expansions of the business of suspension application product, ICD product, and now the profitability is turn out to be better.

For the magnets. For the industrial equipment for the wind power generation magnets have declined in sales. So this is due to the deterioration of the product mix, and we have declined most of the sales and profits. And also as I explained earlier, in a flat magnet business, and it would be quite difficult for us to make a recovery. And for the business -- for the short-term business, we needed to recognize that impaired loss.

Next, Energy Application Products. So the traditional secondary battery -- on top of that and the industrial power supply and also that power supply business for the automotive markets and now get old -- and integrated energies. Again, in this recombination, we pushed up the last year's business of segments JPY 34.2 billion and also pushed up the operating income by JPY 1.1 billion. And the sales of this first half was JPY 280.3 billion, operating income was JPY 54.3 billion, that is 28.9% up and 54.7% of the -- up by -- of the sales, and operating income margin was 19.4%. So that's -- we now have a very substantial growth in sales as well as the profitability.

When it comes to the secondary market. Secondary batteries and with the -- on the top of that, the substantial business growth and the smartphone market in China, and also we have tablet, notebook and game consoles. That kind of non-smartphone market business have been steadily increasing. And also on top and together with this, there's the improvements in efficiency of the manufacturing and have been more efficient. Now, for a -- we also have the incremental sales and profits for the industrial equipments power supply.

Next, let me talk about the breakdown over the operating income changes. In total, it has grown by JPY 18 billion in operating incomes, that's possible. And capacity and the HDD Head and the secondary battery, then all and it contributes to that increased sales and at the positive JPY 27.7 billion. And -- but the selling price declined and have a negative impact of JPY 9.9 billion, but can be more than offset by that JPY 16.3 billion of the rationalization and cost reductions and also for the effects of the restructuring and the JPY 400 million.

And when it comes to the expansion of business of secondary business and also developments and the other sensor business developments and pushed up the SG&A by JPY 17.7 billion. There was a negative impact, but, on the other hand. But -- including all the other factors, like for example, and Forex fluctuations were JPY 16.8 billion of an actual positive impact, excluding the onetime expenses; and also JPY 4.4 billion was declined for that -- and M&A related costs and the JPY 4.7 billion in impaired loss. And also including JPY 1.5 billion of foreign exchange positive impact. In total JPY 18 billion is the positive impact.

So looking at the results for the second quarter. Net sales was JPY 378.9 billion, increase of 13.4%. Operating income was JPY 36.8 billion, increase of 33.3%. On the quarterly basis, both the net sales and operating income have achieved a record high.

For the second quarter, we have included the impairment loss of JPY 4.7 billion. Therefore, the actual operating income was JPY 41.5 billion, and the net sales -- net income was JPY 24.9 billion, therefore, improvement of 26.4%.

Next I'd like to explain the quarterly results by segment. For the Passive Components segment, sales was down by JPY 600 million, decline of 0.5%. For the ceramic capacitors, the sales have went well for the automobile industry. However, for the aluminum and the film capacitors, because of the changes of FIT system in China, there have been decline in the sales for the renewable energies.

In the first quarter, the decline was JPY 600 million, down by 1.3%. For the Inductive Devices sales in the first quarter was improvement of 0.7%, improvement of JPY 300 million. For the ceramic capacitors, went well as the automobile industry. However, for the other Passive Components, sales was down by JPY 300 million, decline of 1.1%. For the High-Frequency Components, there have been increase of sales to the Chinese smartphone market of the ceramic filters. However, for the piezoelectric components and also the circuit protection components. Because of the implementation of emissions testing for the -- in the west -- in the Europe, there have been a decline -- onetime decline of the orders, and therefore, we are seeing a decline.

For the Passive Components, operating income was up by JPY 2.4 billion, improvement of 17.1% from the first quarter. For the ceramic capacitors, due to the good product mix and also the improvement of the production efficiency, we are able to see the increase of profit. And for the inductors and for the high-frequency products, we are able to achieve the increased profit as well as income.

Next, I would like to explain the Sensor Application Products sales. Improvement of JPY 1.7 billion, improvement of 9.0%. For the temperature and pressurized sensors, as I have explained about the emissions testing implementation, the sales was almost flat. However, for the magnetic sensors, it has improved the sales to the ICT market. For the MEMS sensors, there have been a decline of sales to the ICT. However, there have been improvement of the sales to drones and also the TV game consoles. For the operating income, we are able to achieve the improvement due to the increase of sales of the magnetic sensors. However, for the MEMS sensors, we have included the M&A cost of InvenSense of JPY 1.4 billion. And also we have provided an increased development resource for the new product. Therefore, they have been increase of rent. However, in total, for the Sensor Application Products, we are able to reduce the rent by JPY 300 million. For the magnetic segments, the sales had improved by 7%, increase of JPY 4.9 billion. HDD Heads sales, the shipment index had improved from 93 to 97 in the first quarter to the second quarter, increase of 4%, and the sales had increased by 5%. For the HDD suspensions, the volume of sales has increased. And also there has been an increase of suspension application products to the clients and -- therefore, in total, for the HDD Heads and suspension, in total, we are able to improve the profit. The sales of the magnets, for the metal magnets, there have been a decline for the wind power generation, therefore the industrial equipment sales have declined. However, the magnetic sales for the automobile industry had improved. Therefore, we had achieved a slight increase for the Magnetic Application Products operating income has been negative by JPY 2.6 billion. And also in the second quarter, we had included the impairment loss of JPY 4.7 billion. However, excluding that, we are able to achieve the actual increase of JPY 2.1 billion. For the HDD Heads, there have been improvements for the suspension as well. However, because of the magnets, we are able -- we aren't able to have the improvement. For the Energy Application segment, the sales have improved by JPY 29.2 billion, improvement of 23.2%. For the Rechargeable Batteries, the sales to the Chinese smartphone market is favorably, and also there have been an increase of sales to North America as well as increase of sales of tablets and PCs. For the industrial batteries, it's going fairly well. For the operating income from the first quarter JPY 21 billion, an increase of JPY 12.3 billion to JPY 33.3 billion. Because of the increase of the volume for the Rechargeable Batteries, the improvement of marginal profit, and also there have been an improvement in the cost impact. And therefore, we are able to achieve improvements through the rationalization, and therefore we have seen the improvement of profitability. Thank you very much.

[Unknown Executive]

Next, we would like to invite Mr. Ishiguro, please?

[Shigenao Ishiguro, executive]

Thank you, very much. So first of all, I would like to extend my gratitude to all of you for being with us today, and I would like to explain the consolidated full year projection for the third quarter. I would like to talk about the projection for the third quarter of the fiscal year March 2019.

For the Passive Components, there has been a fluctuation according to the market for the automobile industry. However, having said that, we do have a strength in powertrain and also there have been an improvement of demand for the ADAS. And therefore, we are seeing a favorable growth. And therefore, it will give a steady improvement to our business.

For the capacitors, we are expecting that we are going to increase the sales. And therefore, we believe that we will have a steady improvement. For the Inductive Devices, focusing on that, we are increasing the sales. And for the Passive Components, we expect an increase of 1% to 3%. For the Sensor Application Products, because of the impact of emissions test implementation, there has been a decline in the orders for the temperature and pressurized sensors. However, on the other hand, the magnetic sensors sales to the ICT will be having the seasonality impact. And also for the MEMS sensors, from the second quarter we expect a slight increase. Therefore, as a result, in total, we expect a flattening in the third quarter. For the Sensor Application Products projection, we expect that we are going to increase by 30%, and we have already explained this. And therefore, in the latter half of this year, we are going to have a delay in the launch of the new products. And therefore, it will be taking more time. For the Magnetic Application Products or the HDD Heads shipment index, from the second quarter, from 97, to third quarter, we expect the decline to 87, a decline of 10%. However, the sales of HDD Suspension will have a flattening effect. And we expect the suspension application product sales to have a full-fledged sales. And therefore, for the suspension as a whole, we expect there will be a growth.

For the magnetic products, we expect it's going to be flat. However, for the Magnetic Application Products, we expect a decline of 5% to 7% in the third quarter. For the energy-related products, we are able to have the increase to North America. On the other hand, for the Chinese sales, we expect a decline. And also non-smartphone sales is expected to decline slightly. Therefore, as a result, we expect this to be flat in the third quarter.

For the power supply for the industrial usage. The industrial market itself is having a slight recession. Therefore, we expect a slight negative -- slight decline. For the energy application as a whole we expect it's going to be almost flat. Therefore, as a total, the net sales, in comparison to second quarter's JPY 378.9 billion, we expect a decline of 1% to 3%.

Lastly, I would like to expect the full year projection. So based on the actual results of the first half and also looking at the trend in the latter half, as we have announced at the beginning of the year, we have revised our forecast, the net sales for full year, JPY 1.42 trillion; operating income, JPY 120 billion; income before tax, JPY 114 billion. And therefore, net income, JPY 80 billion. Therefore, we would like to revise upward for the dividend. In the first half, we are going to increase by JPY 10, from JPY 70 to JPY 80. In the later half, we expect the dividend payment to be JPY 80. Therefore, we are going to pay JPY 160 for the full year, therefore, increase of JPY 20.

The currency exchange rate is forecasted to be around JPY 110 to dollar and JPY 130 to euro. And therefore, we are expecting that the exchange rate will be almost as the first half for the full year forecast. And therefore, we are able to achieve more than we had expected in the first half. In addition, in the latter half, they'll be up and down according to the segments. However, as a whole, we are not going to revise upward nor downward. Therefore, we expect the revision as I have explained. That concludes my explanation. Thank you very much.