TDK Corp

TSE:6762

Earnings Call Transcript 2021-Q2

[Unknown Executive]

Thank you very much for waiting. It's on time so that we'd like to start that the performance briefing the first half of fiscal year March 2021 discussions. Today's speakers is Mr. Shigenao Ishiguro, the President and CEO; Executive Vice President, Mr. Tetsuji Yamanishi. These 2 are our speakers today. Thank you and very much.

Okay. First of all, consolidated results for the half of fiscal year March 2021 will be presented by Mr. Yamanishi.

[Tetsuji Yamanishi, executive]

I'm Yamanishi. Thank you very much for joining us today for this, the performance briefing of the first half of fiscal year March 2021. Thank you very much.

First of all, I'm going to explain about that -- and the business performance of the first half of this fiscal year. And the points to be highlighted is that getting into the Q2 and the lockdown have been lifted on a global basis, and now gradually, that's -- the social and economic activity have reopened. And also, for the major customers have restarted the production activity. And then we can take advantage of the clear rebound of the demand in electronics market. And the first in the Q1 due to that -- the negative impacts after the suspension of the products and automotive -- the markets and also the demand of HDD have dramatically declined. But getting into the second quarter, that demand have significantly rebounded.

When you look at the ICT markets, in the Q1, the remote working and remote learning have made progress for leading that digital transformation, DX, and it have been accelerated, and as well as the mobile devices and 5G-related demand have extended over our forecast. And now this momentum is still maintained in the Q2, and that is steady. And the first half as a whole, now we could achieve that and significant expansion of both the sales and operating income.

And as a result, and when you look at that on the first half and although in the first half, we are -- due to that lockdown, the negative impact of lockdown, it have declined by 2.2% in sales in year-on-year basis and 9.3% decline in operating income, but in -- and particularly for the Q2. Now we could have at the record high and then the sales on a quarterly basis, and we could, as a whole, secure that the growth in both the sales and income.

And getting into the Q2, the demand in the automotive market rapidly rebounded. And so the Passive Components like MLCC and the inductor and the sensor have expanded the sales. And also in Q2, that the acceleration of the digital transformation is still going on and -- in all these related products, demand is steady. And just a -- Passive Components like a secondary battery and the high-frequency components have pushed up and make big contributions to the favorable business performance. And when it comes to hard disk drive head, in Q1, we are -- that was adversely affected by the suspension of the factory operations. But now that the production of a customer have gradually rebounded, and it will lead to the improvements.

Now in order to deal with the deterioration of business due to the COVID-19, we have started our rationalization efforts as we're making the business efficient, and we'll continue to make exactly the same efforts. Although that now that we're observing the recovery of the demand, and now we have -- and it have lead to the synergy of over and exceeding than the forecast and have made big contributions to this further improvement of the business.

Next, let me talk about the business overviews, including that negative impacts of the appreciation of the yen -- and JPY 13.9 billion net impact on the sales and the JPY 300 million of the minus of impacts on operating income. So the sales was JPY 691.1 billion, minus JPY 15.9 billion, 2.2% decline year-on-year. This operating income was JPY 62.4 billion, the minus JPY 6.4 billion, 9.3% decline year-on-year. Income before tax was JPY 63.2 billion. Net income was JPY 42.2 billion. Earnings per share was JPY 334.27. When it comes to that currency sensitivity, there's no any change so far.

Next, let me talk about the segment-wise business overviews of first half, but not only talking about that year-on-year. Now since then, we have the major change in the demand from the Q1 to Q2 this year. So that's why not only talking about the first half year-on-year performance, but also, we'd like to talk about the Q2 performance on -- that's the quarter-on-quarter basis from the Q1 this year and also as well as the Q2 performance on year-on-year. We would like to use these 3 measurements.

And first of all, the passive component sales was JPY 138.3 billion (sic) [ JPY 183.8 billion ], minus 8.1% year-on-year. And the operating income was JPY 17.4 billion, minus 20.2% decline. And also that income margin was 9.5%. The sales of Q2 was minus 2.5% year-on-year and 14.9% decline in the operating income. And the profit margin was 9.8%.

The demand of automotive markets have rapidly recovered in Q2. And then also for the ICT market, we could observe that the 5G-related demands have been very steady in Q2. That's why the sales and operating income of Q2 have surged from that 17.8% to 26% for the operating income for each from the Q1. When you look at the first half basis and -- now high-frequency components were sort of based on that steady growth. And the demand of 5G have grown. And it's -- and also, aluminum, film capacitors have secured us the incremental income. For all the other products, now the still and is struggling to this declining the sales and income due to that and the poor demand in the automotive market in Q1.

Let me explain about for each products and the Q2 performance. First of all, ceramic capacitors. Now the sales for the 5G base stations have dropped from the Q1. But on the other hand, now the market, the demand for the automotives market have -- and rebounded, so that we can have an incremental sales. But now due to the negative impacts of the consumption of the strategically part of inventory from Q1, and now we have less of operating income. So that when it come to Q2, now that's all this automotive market have recovered to the level of the last year, the Q2. For the -- and also from these capacitors and have increased also for the industry equipment market as well the automotive, and the recovered to the level of the last year's Q2.

When it comes to inductive devices, the demand for the automotive market have rebounded. And also, the stand-up of the new smartphone product devices have pushed up the demand in ICT market. As well as that increase in demand for the industrial equipment, we could -- and recognized the significant increase from 1 -- Q1, and we have secured that operating income growth.

When it comes to the sales for the automotive markets, now they have recovered to the last year, the Q2 level -- and for the automotive market. When it comes to high-frequency components products, we have been very steady in 5G-related products. And we then we could maintain at the same level as that -- the operating income and sales for the Q1. For the piezoelectric components and the circuit protection components, they have been an increase in both the sales and the components and the automotive, ICT and industrial equipment, but still were struggling -- and in the automotive markets.

And now next, the Sensor Application Products business, the sales was JPY 34.5 billion, minus 11.3% in sales year-on-year basis. And the operating loss adjust a little bit and slightly shrunk. And the sales of Q2, which is due to that recovery of the automotive markets. And also, we have a very favorable -- and the business for the stand-up of the new smartphone devices in North America and as well as that incremental sales for our customer in China. Now it have grown by 34.7% on quarter-on-quarter from the Q1. And the operating income shrunk by JPY 2.2 billion and on -- a year-on-year basis, and it have grown -- but declined by JPY 4.8 billion, but now the operating income shrunk by JPY 400 million.

On a 1 -- the first half basis, due to the still the negative impact of declining the market and of automotive in 1Q -- Q1, now that Temperature and Pressure Sensor and Hall Sensor have suffered from the declining the sales and income. For the MEMS sensors, now even under the very weak mindsets of the consumption over the COVID-19 and also microphone demand for the Android device have declined. And the motion sensors and for the smartphone models and mounted motion sensors have declined. So that's why it will lead to that we have the operating loss. On the other hand, when it comes to TMR sensors, sales for the smartphone and -- contributed to the market share expansion. It have been the -- steady, and it will contribute to the significant increase in both the sales and income.

Now this is that the quarter-on-quarter basis performance of the Q2. There's temperature and then the pressure sensors that have a favorable and automotive markets. And still, we have -- so there's been a slight operating income, where we get ready for make a turnaround to make the business profitable for the Hall Sensors. Since the supply chain for the automotive market is very long, so that's why it's still in the middle of the full recovery. So this has been on the par with the level of Q1. For conventional sensors, so the sales for the automotive markets have and still and -- have not recovered to the level of the Q2 the previous year.

When it comes to TMR sensor, now since the -- also the start-up of the new smartphone devices will contribute for the significant increase of sales and also now -- and the operating income, too. For the MEMS Sensor, now the orders are for the gaming console declined from Q1, but on the other hand, they can be more than offset by the increase of sales to our major -- our customers in China. And now we have a growth in the sales and also the shrinking. We could shrink, that's operating loss.

Next, let me talk about Magnetic Application Product business. Sales was JPY 88.7 billion. It was the minus 19.4% year-on-year. And operating loss, this down with JPY 2.5 billion. So when it comes to the Q2 -- in Q1, the suspension of the production operation that negatively affected on the HDD, but they have recovered in Q2. And also for the HDD suspension, have increased for Nearline HDD. And for -- the magnet have been rebounding. It's -- and the demand until now will turn out to be favorable. So then on a quarter-on-quarter basis have grown by 31.6%. And now we have turning the business into profitable in Q2.

On one -- first half basis, and because of the decline in the total demand of HDD -- and we alluded to that the total and declining number of shipments of the HDD Heads and which also were the sales -- the drop of the HDD assembly. And now the -- we have -- for the both of the sales and the operating income or the digital-related, but on the other hand, the HDD suspension have been favorable for that business with a customer for the Nearline HDD and have increased its shipments, and we have secured the positive growth in both sales and the income. For the magnets, it is still -- and the automotive market, we're still in the middle of full recovery, but now we are observing improvements.

Now when it comes to the quarter-on-quarter basis performance of Q2. As for the HDD Heads, volume index have improved from 55 in Q1 to the 91 in Q2 and to recognize a significant increase in the sales and income. And for the HDD suspensions, then we have an orders, more orders from the major customers on the Nearline HDD as well as that -- the early-stage actuators and smaller type of -- those are the more profitable, the products have been pushed up the sales. And for the magnets now -- and the incremental business when automotive markets is now -- we have the more sales, but still, we have the operating income.

Next, Energy Application Products. The sales was JPY 357.5 billion. Operating income was JPY 79.6 billion, and it's 12.4% increase in growth in year-on-year for the sales and 15.4% of operating income growth. And operating profit margin was 22.3%, and we observed improvements of profitability.

When it comes to specifically for the Q2. Now the secondary battery, the rechargeable battery is still the very favorable. And at the same times, and the business for this -- the power supply that pushed up due to the -- mainly business for the semiconductor manufacturing business. So that quarter-on-quarter basis, that sales will increase by 27.9% and the operating income was pushed up by 54.3%.

There also is now in this first half, for the secondary batteries and due to the declining of the protection [indiscernible] slightly the drop. But on the other hand, PC and tablet business have more than offset this declining of the smartphones and substantially. And the residential ESS and --- this is for the storage batteries for the residence and the e-bike. And this is -- the application for the power cell products. So the power cell products have just fully started. So all in all, we have the significant increase of sales and income.

And the power supply have to suffer some -- a little bit decline. This is that -- on a quarter-on-quarter basis in Q1 for the secondary batteries. Now it's the peak season of smartphone that pushed up that sales significantly. And for the sales of PC and tablet, have further and pushed up and increased from 1 -- Q1 and also, for that -- and year-on-year basis, we have the increase on sales and income for the power supply, and we have that also increase in sales and profits due to that industrial equipment business favorable.

Next is the breakdown of the operating income changes of minus JPY 6.4 billion. Although sales of secondary batteries expanded, sales volume in Passive Components and HDD Heads declined, leading to a decline of JPY 4.7 billion. JPY 10.7 billion decline came from sales price reduction. On the other hand, we have focused on rationalization, including cost reduction efforts, to mitigate the negative effect on our earnings coming from COVID. This translate to a JPY 12.5 billion positive impact. At the same time, we are strengthening our corporate structure through JPY 1 billion of benefits from restructuring.

M&A expenses related to the -- was decreased by JPY 500 million, as SG&A development costs increased due to expansion of the secondary battery business and the acceptance of filter fees ended this year. Due to this, SG&A expenses increased by JPY 4.7 billion. There was a negative impact of JPY 300 million due to exchange rate fluctuations. All in all, operating income declined by JPY 6.4 billion.

Next is the consolidated results of -- for Q2 of fiscal year March 2021. Net sales was JPY 381.7 billion, up 3.1% year-over-year. Operating income increased 0.2% to JPY 44 billion. Income before taxes was JPY 42.5 billion. Net income was JPY 29 billion. On a quarterly basis, both net sales and operating income reached a record-high level. This shows the difference of the net sales and operating income by segment comparing Q1 and Q2 of this fiscal year. I have already explained about the Passive Components, et cetera, the 4 segments. So I will only refer to businesses included in Other that saw major changes.

In the Other segment, net sales was JPY 11.4 billion, a 25% decline quarter-on-quarter. Operating loss was JPY 2.8 billion. The loss increased by JPY 900 million against the previous quarter. The major reason of the decline was the deterioration of the micro-actuator business, which is a component of the camera module for smartphones. We are expanding our share mainly in high-end models of a major Chinese customer with unique camera module products. But sales has dropped sharply in Q2 and profitability is worsening.

[Unknown Executive]

So this has the first half performance, and Yamanishi has explained about that. Thank you for your attention. Next, for the full year outlook, Mr. Ishiguro will explain.

[Shigenao Ishiguro, executive]

Hello. I am Ishiguro. Thank you very much for your participation. From my side, I will explain about the full year projections for fiscal year March 2021. First, I will talk about how the market environment has changed in the past 6 months compared to our initial forecast and how that has impacted our performance or our demand trend.

From macroeconomic perspective, on the global basis, it is trending slightly below the initially anticipated minus 4% growth. I think you are all aware of this. Going forward, we feel it necessary to closely watch the impact of the second and third wave of COVID. If you go by device, we anticipate the demand for ICT devices, such as PCs, tablets and smartphones, will be slightly over our forecast. On the other hand, the automotive business is still below our initial forecast as demand recovery is slow. As for the demand for components, demand for devices is strong for the ICT market. Although we have seen some impact of the tightening of regulations against a major Chinese smartphone manufacturer, the world trend is favorable.

As have been explained previously, looking at the demand for the automotive market, orders for parts have started to recover in Q2. Demand recovery for the overall automobiles has not been strong, but demand for parts have started to recover. But we will watch the trend carefully, and this may mean that the customers are replenishing their stock to prepare for the market recovery or demand for future expectations may be included.

As for the future outlook, we cannot completely dismiss the impact of the second and third wave of COVID and concerns about the inventory and demand based on expectations. However, based on the first half results, specifically the recovery in Q2 and the recent order trend, we have decided to conduct an upward revision for the full year outlook. As we will continue to invest in businesses that can expect strong demand and growth, mainly in secondary batteries, we will increase our CapEx spending by 10% compared to our initial plan to JPY 200 billion. With the recovery of our performance, we are increasing our interim and year-end dividend that will bring the dividend outlook for the year to JPY 180.

Considering the demand trend for the second half, based on these market predictions, I will explain the image of changes in sales for the third quarter. We anticipate the world sales to be the same level as Q2, including seasonality factors, so it is at a high level. For Passive Components, we forecast a slight decline between 1% to 4% compared to the second quarter. Although sales will increase for the automotive market and smartphones, mainly in 5G, sales for 5G base stations will decline as it has peaked in the first half.

In Sensor Application Products, orders for Temperature and Pressure Sensors will continue to come from the automotive market. In addition, we are anticipating orders to increase for Hall Sensors, where recovery has been delayed. Demand is peaking for smartphone applications for TMR sensors. Sales will increase for MEMS microphone in the smartphone and IoT-device applications. But despite the sales decline of MEMS motion sensor to a major Chinese client, sales will increase in other clients. Overall, we are forecasting an increase between 8% to 11%.

Going to Magnetic Application Products and HDD Heads business. Although volume is going to grow for Nearline HDD Heads, HDD Heads for consumer electronics, such as for PCs and game consoles, is going to decrease. For the overall head business, sales volume will go down by 4%. Sales of the HDD assembly business will go down as well. For the total Magnetic Application Products, we are forecasting a decline between 5% to 8%. As for the HDD suspension business, nearline suspensions are doing well and will see a slight increase from the second quarter. We are anticipating sales to increase for magnets in line with the growth in demand for the automobiles.

In the Energy Application Products, we are forecasting sales to peak in the third quarter as the demand for smartphones is going to peak and demand for PCs and tablets will be strong. Sales for high-power products, such as residential ESS, is going well for power supply. For power supply, sales will be flat, and for industrial machinery, such as semiconductor production equipment. So this will be flat for the second quarter. Overall, sales change will be between 0% to plus 3%.

Lastly, this is the forecast for this fiscal year. Based on the demand environment and sales outlook that has been explained, we will make an upward revision of the initial forecast. Revised full year outlook will be as follows: net sales, JPY 1.4 trillion; operating income, JPY 110 billion; income before tax, JPY 111 billion; and net income, JPY 76 billion.

We have initially announced that we will pay JPY 80 per dividend for both the interim and year-end, JPY 160 for the full year. However, based on the increase of earnings per share, we will increase the dividend by JPY 20 for the year, paying JPY 90 for the interim and year-end and JPY 180 for the full year. Assumed exchange rate for the second half is JPY 105 to the dollar and JPY 124 to the euro. We will revise our CapEx upwards by JPY 20 billion to JPY 200 billion for the full year, mainly in the secondary battery business where demand is growing.

That is all from me. Thank you for your attention.

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