TDK Corp

TSE:6762

Earnings Call Transcript 2020-Q2

[Operator]

Now it's on time. So I would like to start the performance briefing of TDK Corporation for the first half of fiscal year March 2020.

Stage attendance from TDK Corporation is Shigenao Ishiguro, President and CEO; Tetsuji Yamanishi, Senior Vice President; Noboru Saito, Senior Vice President; Shigeki Sato, Corporate Officer and COO of Electronic Components Business Company; Fumio Sashida, Corporate Officer and Energy Solutions Business Company's CEO. These are in attendance from the TDK Corporation.

First of all, I'd like to start from the performance briefing on the first half of fiscal year March 2020 from Mr. Tetsuji Yamanishi.

[Tetsuji Yamanishi, executive]

I'm Yamanishi, and today, thank you very much for joining us in the business performance meeting for the first half of the fiscal year March 2020. Thank you very much. Then first, I would like to present about the overview of our business performance in the first half.

These are the points and the key points of this -- the business performance, getting into the second quarter and now and others -- the trade friction between U.S. and China get intensified. And now, you can see we have the continuous slowdown to the global economy, and it will lead to the most serious and impacts for the global economy and for that, our net sales of the first half was they declined by 2.1% year-on-year.

On the other hand, when it comes to the operating income, we have 10.6% of growth from the earlier and the income before income tax and the net income, now we have the record high -- recognized a record-high performance on both the quarter and the semi-annual basis.

And when it comes to demand, we have been flat from the previous quarter. And the sales in the ICT market, it had been very favorable and mainly for the smartphone markets and second to the battery and very favorable in, not only for the smartphone, but also wearable devices and tablet PC. We have expanded our business and also we have improved substantially, the profit, so that it's playing the leading role of the business. And the high-frequency components have increased the sales for the 5G base stations. And MEMS Sensor, TMR Sensor also have been going very well for the smartphone market.

On the other hand, when we look at the automotive and industrial equipment market sales, they were adversely affected by the slowdown of the demand, including China. And now the demand is lower than where expected. And now we have a negative sales from the year earlier.

Consequently, except for the high-frequency components, all of the passive component business, now we have a negative growth and in the sales and also negative profits in the passive components as a whole.

When it comes to sensor application products, the conventional sensor like temperature sensor and the hall sensor now in the automotive market application have been struggling. And all of the sensor application product as a whole, we have the negative growth in both the sales and profits. We could not expect any pickup or the recovery of this global economy, and we have a lot of uncertainty ahead. So that's why we have to implement and speed up implementing our -- a lot of countermeasures based on the growth strategy.

And also, we have announced this but now, and this is about the RF360 Holdings Singapore, that's the joint venture with Qualcomm, about 49% of the stake will be sold according to the option and when they exercise -- and they executed the option August 30 and we have already received JPY 124.5 billion on September 16. This money will be spent for paying the loans and the debt. And there was -- we bail out for that M&A for InvenSense, so that we can enhance our financial strength.

Next, the corporate business overview. Net sales was JPY 707 billion. That was JPY 14.9 billion less and 2.1% from year earlier, and operating income was JPY 68.8 billion and JPY 6.6 billion and 10.6% of the growth year-on-year, and income before income tax was JPY 68.6 billion. Net income was JPY 44.9 billion. And now the earnings per share was JPY 355.81.

Average foreign exchange rate was JPY 108.74 to a dollar, 1.4% of appreciation of the yen; JPY 121.51, 6.5% of the appreciation of the yen, certainly result of it -- the impacts of it is -- the currency fluctuation was JPY 20 billion minus for the net sales and JPY 2 billion minus for the operating income. When it comes to sensitivity to the currency, we did not change that for the yen and dollar and JPY 1.2 billion to the change of JPY 1, and JPY 200 million of the change of JPY 1 to euro.

Next, let me talk about segment-wise business performance. First of all, part of the products in inductive device where we shifted to the segment of the passive components. So that's -- in the first half, the sales of the inductive device in the previous year was pushed down by JPY 4.5 billion and JPY 1 billion, minus in operating income. So we have just revised that, the performance.

First of all, the net sales of the passive components was JPY 200.1 billion, 11 points negative from year earlier, and operating income was JPY 21.8 billion, 28.3% minus from the year earlier. And the operating income margin was 10.9%. When it comes ceramic capacitors, they have been increasing their business for the automotive and the base stations just like the ICT market. But now, when it comes to the sales of the distributors have declined due to the adjustment of inventory. And we have only slightly growth in ceramic capacitors. But now we have done more sales in that high-value-added products so that's why we have had the positive growth in the sales. And also, we have seen slightly improvement of the profitability.

When it comes to high-frequency components. Now with the startup of the 5G network, now we have more sales and business in the base stations so that we could have positive growth in the sales.

When it comes to other passive components business. Now it had been adversely affected the slowdown of the global economy. Aluminum and film capacitors have just like the previous quarter and have been struggling in the automotive and renewable energy markets like also for the industrial equipments, and it declined both the sales and the profits.

The inductive devices and the piezoelectric components and the circuit protection components have been also affected by the decline in demand of automotive and the other industrial equipment markets. And we have a negative in both the sales and the profit.

Next, the sensor application products. Sales was JPY 38.9 billion, minus 1.5% in sales in previous -- from previous year, and we have an operating loss of JPY 12.5 billion on operating performance. And we have the decline by JPY 3 billion year-on-year.

When it comes to the M&A expenses for InvenSense, that decreased by JPY 100 million, we have recognized JPY 2.7 billion. This segment is down, so slowdown of the global economy. Now TMR Sensor, MEMS sensor, and also the pressure sensor, they're all the promising products for us. And even in this slowdown in the global economy that we have expanded and steadily for this new application and new customers. But on the other hand, when it comes to the conventional sensor like temperature sensor and hall sensor have been and with a hard time and in automotive and in industrial equipments and also the Ag markets. And we have still this trend of declining. And sensor application products as a whole, we have to recognize the negative growth in both the sales and profits.

When it comes to the different business. And the temperature sensors have been declining. But on the other hand, the pressure sensor could expand the business to the automotive market. So all in all in both the sales and profits, they only have a slight decline from a year earlier.

When it comes to magnetic sensors, TMR sensors have been expanded for not only for the smartphone, but also for the new applications. It has been very boosting and also for the sales for the automotive applications have been favorable, so that's why we could push up this profitability.

On the other hand, hall sensor have decreased in business with automotive applications. So that's why the magnetic sensor as a whole, we had to recognize both negative growth in both the sales and the profits. When it comes to MEMS sensor, first of all, motion sensors have pushed its business for the major clients and also MEMS microphone has been very favorable for the smartphone and IoT devices. But on the other hand, we have to spend the expenses for the mass production of the MEMS -- motion sensor and also we've changed their product mix. So that's why we have extended the loss from previous year.

Next, Magnetic Application products. Sales was JPY 110 billion, 24.6% minus year-on-year; and operating income was JPY 6.7 billion and we have the 52.3% of growth. Operating income margin was 6.1%. When it comes to hard disk drive head, mainly for the demand for that, the 2.5-inch head for the PC have declined, so that's why this will lead to the reduction of the sales volume by 13% from the year earlier. And the assembly sales for the HDD have reduced by half from the previous year. So that we have lost in about the sales by 28% from the year earlier.

The sales of the HDD suspensions, now we have more of the micro DSA type of the suspensions have an increase in product mix so that we could have that and pushed up average selling price, and we have more revenues for this. And also when it comes to application product for suspensions, we could have it boosting the business in the ICT market.

But on the other hand, hard disk drive suspensions, the sales volumes have reduced. And all in all, our total sales for this segment have declined by 20% year-on-year. Hard disk drive head and the suspensions and about operating income was due to the shrink -- shrank in the revenues and also have a decline in the business and trend.

But when it comes to the new line head, HDD head, which is very highly added value and also micro DSA type suspension have increased the product mix. And we're also consolidating on a production basis, so with that, all the -- making those production efficiency, we are already -- we're starting to deliver the goods. So that's now we could maintain exactly same profitability from the last year.

When it comes to magnet for that application like the wind power generation, the industrial robotics and machine tools, these are all the industry-required markets. And we have -- net sales have declined by 13%. But now when it comes to operating income, now by improvements of the productions for the automotive market, a lot of those countermeasures. Now excluding that, incurred a loss of JPY 4.7 billion last year, excluding on an after basis, we have the improvements and the profitability.

Next on energy and application products. Net sales was JPY 318.2 billion. Operating income was JPY 69 billion, up 13.5% and 27.1%, respectively, a big jump, 21.7% and actually, in regards with the operating margin.

Rechargeable batteries. Sales for the Chinese smartphones grew flat Y-o-Y. On the other hand, in other regions other than China, our major customers had a good sales, pushing up in overall market for smartphones. Tablets and laptops grew firmly.

Furthermore, on the wearable on mini-cells and for the wireless on earphones grew in a big way. Besides the increase in income, improved in product mixes and income from production volume reached peak as well as the further improved productivity and efficiency. All in all, our profit grew in a big way.

Power supplies for industrial equipments have been affected by the slow economy. Revenue for the semiconductor manufacturing equipments and for the instrumentation equipment and actually for industrial equipments market declined, pushing down the profit.

Next, this shows analysis for the changes in operating income. Factors for JPY 6.6 billion increase in profit. We had a decline in the automotive. At same time, we had an increase in the rechargeable batteries, actually about JPY 4 billion. Hard disk drive head and rechargeable batteries, actually, there has been a decline as much as JPY 7.7 billion downside.

We went through a series on activities and for the manufacturing capabilities and its efficiency and then also rechargeable in operations, JPY 10.1 billion. Actually, now we're able to absorb the impact coming from the price erosion. We had impairment in the -- on the head, too, early in the quarter, actually and given us as much as JPY 1.1 billion, and also InvenSense acquisition cost coming down about JPY 100 million.

And due to the rechargeable battery and the business expansion as well as development in costs increasing as much as JPY 3.7 billion. FX impact was negative JPY 2 billion. All in all, we had a profit of JPY 6.6 billion, positive side.

Next, I will go through the outline of the consolidated numbers for the second quarter. Net sales was JPY 370.2 billion, down 2.3% year-on-year basis. Operating income was down 19.3%, becoming JPY 43.9 billion. Income before income taxes, JPY 43.9 billion. Net income, JPY 29.4 billion. Renew -- the record on the quarterly basis. Operating margin was about 11.9% and showing that we were on our way now to improve profit-making capability in a big way.

Next, I'd like to go through the changes by segment from the first quarter to the second quarter. Some of the factors I'd like to highlight for you.

First, Passive, the components segment. Actually, it went up JPY 3.6 billion from the first quarter in sales and 3.7%. Excluding the FX impact, actually that was an improvement by 6%. Ceramic and capacitors, particularly for the automotive and also on the 5G in our base stations, actually improved. Also capacitors actually, particularly for the industrial equipments actually went down. At the same time, for the car business, actually the numbers went up. So we had a flat from the first quarter. And actually up JPY 300 million from the first quarter or 0.8%. In the devices and the sales, and actually, JPY 1.6 billion from the first quarter were up 4.7%. And also, now we had slow sales for the Industrial equipments. At the same time, for the automotive market and also for smartphone markets, actually in ICT, our sales grew. Next on Other Passive Components. It went up JPY 1.8 billion, up 7.3%.

As for the High-frequency components, actually, thanks to the 5G basis. And actually, we had a good performance. And also cell maker filter actually went up for the smartphones. And also the piezoelectric components as well as the circuit on the production components actually have been flat from the first quarter.

Passive Components operating profit actually JPY 1.1 billion from the first quarter, up 10.7%. As for the cell maker and capacitor operating margin, actually the same level from the first quarter.

Only film and capacitors actually had a slight increase, inductive devices, and also the high-frequency components actually enjoyed both a sales increase and a profit increase. Piezoelectric components and also in the circuit protection actually now we had a flat situation from the first quarter.

Next, I'd like to now talk about in the Sensor Application products. Sales of JPY 2.7 billion, up 14.9%. Excluding FX impact, it was actually an increase as much as 18% from the first quarter.

Temperature and the Pressure sensors. Actually, while pressure sensors went up and also temperature sensor actually went down, they've given us [indiscernible] sensors actually for the hall sensor and actually further went down from the first quarter around the automotive market. And also TMR sensors actually went up in a big way, particularly for the ICT. As for MEMS sensor and ICT, sales went up and given us the increase in profit.

Operating income, JPY 1.5 billion, increased. But we had the acquisition cost and actually went down therefore, as much as JPY 100 million. So actually, we are able to actually reduce the loss as much as JPY 1.4 billion. Temperature and pressure sensors actually went down a slight number, but we were able to -- we were on the side of the black figures. In Magnetic sensors, actually, particularly the hall sensors actually had some loss. And MEMS sensors actually still higher than written numbers, but still we are trying to improve overall on the profitability structure.

Next, the Magnetic Application Product segments.

The net sales actually went down JPY 1 billion from the first quarter, down 1.8%. Hard disk drive head on sales. We had an index in the first quarter, 88, and that became 89 in the second quarter. It was an increase by about 1%. Hard disk drive and assembly, the revenue went down because of that actually -- overall, actually went down by 5%. Hard disk drive suspension and suspension sales became flat. But the suspension application and products actually grew and given us the increase of revenue of 11%.

Magnetic sales actually went down by about 8%. Magnetic application products operating profit actually ahead from the first quarter and went up JPY 12 million, or the 6.1%. HDD and head actually, they went down both in the sales and revenue. And our HDD and suspension actually increased in sales volume. And also on the suspension application products actually enjoyed good productivity, given us the better profitability. And also magnetic products actually went down in the loss number.

Next, I'd like to move on to the energy application products. Actually, it went up JPY 29.9 billion from the first quarter, up 20.2%. The rechargeable batteries, actually, particularly for smartphone, particularly for the North American market, made a great contribution. And also the good numbers and performance for the Chinese market and tablet and the laptop and also mini-cell products actually made great contributions. And as for the power supplies and for the industrial equipment, and actually, it further went down from the first quarter.

As for the operating income, actually it went up JPY 16 billion, becoming JPY 42.5 billion. And rechargeable or the batteries actually increased its volumes in sales, given us the increase on the margin profit. And also, we are able to actually improve the productivity. And that gave us further operating profit and given us good synergy.

And I went through the major highlights and all the activities for the first half. Thanks again for your kind attention.

For the full year and our forecast, I'd now like to have Mr. Ishiguro to go through his presentation.

[Shigenao Ishiguro, executive]

And this is Ishiguro. I'd like to thank you, again, for your precious time, just about your busy schedule. And that said, I'm quite happy now to explain our full year -- our forecast for FY March 2020. Following the first half, we are assuming that the demand will not recover due to the ongoing sluggish world economy. The current uncertainties are going to continue.

Well, in some semiconductor equipment, actually, there seem to be some recovery. But at the same time, actually, the automotive markets, a much bigger market, in this market segmentation, we're still suffering from the slow economic activities and nowhere for us to be able to make a good recovery. So that is why we decided to revise down our numbers.

As for the ICT market and the 5G market. Actually, it's given us step-by-step the impacts. But when it comes to the smartphones, and actually, due to the seasonality in the second half. And actually, we had a peak in the second quarter. And since then, actually, we do believe that it is going to come down slowly in assumption. All in all, and for the third quarter and this current fiscal year, as for the sales and forecast, we do believe that, it is going to become much tougher against us. And from the second quarter, minus 1% to minus 4%, that is going to be the level; we'll keep an eye on by segment.

And in passive components, I think it is going to be flat. And particularly, it is going to take more time for us to get to see recovery in the automotive market, inductive devices and also the piezoelectric. And also the high-frequency components, we do believe that there seem to be the good and smooth transition. As for the sensor application, actually, 6% to 9%, this is going to be the increase that we are assuming. And the TMR sensors, again, including for the ICT, yes, there is going to be the steady increase on MEMS sensors and expanding customers. And also MEMS like other products is going to help us to expand on our improvement and slowly but steadily, it is making good contributions to the improvement.

At the same time, all I say and also the temperature sensors, particularly important and then particularly in the automotive area, we do not expect that we can have a good recovery. As for the magnetic application and sensors actually, 5% to 8% is going to be the improvement we have in mind. Hard disk drive heads, in volume is going to go up slightly. And also, newer line hard disk drive heads are going to also grow. So it doesn't -- to an average in price and it's going to go up. And also hard disk drive and suspension also newer line is going to be expecting to go up. And also as for the magnets, hybrid cars, modern magnets are expected to grow in our assumption.

Energy application product, actually, 6% to 9%. Actually, it is going to be the downward in transition. As for rechargeable batteries, actually now due to seasonality there's going to be the slowdown taking into account. As for the power supplies, a slight increase is expected.

Lastly, for the full year, I'd like -- and actually, and I'll give you the following updates.

Net sales actually -- on actual for the first half. And also the future forecast, I have just explained, JPY 1.420 trillion, the revenue, and it's going to result in JPY 1.39 trillion, about 2% the downward revision. As I have already explained this, ICT, the market, actually, the driver there is going to be the reshuffle in the market. Actually, we are going to have the better performance, better than our own forecast. At the same time now, we're suffering from the overall slowing down of the economy. And also on the industrial equipments and also on the automotive, activities are definitely not going to have the dark cloud above us. And so we decided not to have too much expectation there all in all. The passive components and sensor products, certain products are going to actually go under our data -- our forecasted numbers. At the same time, operating profit and also income before income taxes, and also the net income, we announced those numbers in April, and we decided to stick to those numbers.

And then actually, FX and for the second half and also on CapEx and also on the R&D plans, actually, we decided not to change those numbers.

Also on the dividend. First half, actually, JPY 90. And as for the second half, actually, JPY 90 has been an assumed. So now for the full year, actually, it is going to be up JPY 20 -- actually, it is going to be JPY 180 for dividends.

Yes, we are faced up with the uncertainties of the global economy both in energy and our transformation, EX, and also on the digital transformation, DX. EX and DX definitely are going to help us so we have to tighten our belt. So that actually we are going to have the deeper engagement working on the best efforts in order to address the issues we are faced with. This concludes my presentation. Thank you, indeed, for your kind attention.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]