TDK Corp

TSE:6762

Earnings Call Analysis

Strong revenue growth and operational efficiency lead to revised earnings forecasts.

In the latest earnings call, the company reported a revenue increase of 2.8% year-on-year, reaching JPY 1.895 trillion, while operating profit surged by 55.8% to JPY 133.3 billion. This growth was driven by improved demand in the ICT sector, particularly for HDDs and rechargeable batteries. Due to these favorable results, the full-year forecast was raised to JPY 2.120 trillion in net sales and JPY 220 billion in operating income. Furthermore, a dividend increase from JPY 12 to JPY 14 reflects strong cash flow management, predicting full-year free cash flow up to JPY 120 billion.

Robust Performance Despite Market Challenges

In the earnings call, TDK Corporation illustrated a strong performance in the first half of fiscal 2025. Despite facing sluggish conditions in several markets, particularly in the automotive sector due to a slowdown in battery electric vehicle (BEV) sales, net sales for the six-month period rose by 2.8% year-on-year to JPY 1.895 billion. Meanwhile, operating profit soared 55.8%, achieving a record high of JPY 133.3 billion, driven largely by foreign exchange gains from a weakened yen and increased shipments in information and communication technology (ICT) related products.

Segment Performance Highlights

Performance varied significantly across TDK's segments. The Passive Components segment saw a minor decrease of 0.4% in sales year-on-year, totaling JPY 285 billion, with operating profit declining by 8.8% to JPY 28.9 billion, mainly due to lower demand in the industrial equipment sector. However, the Sensor Application Products segment experienced a 10.2% boost in sales to JPY 94.9 billion, although operating profit fell dramatically by 36.6% to JPY 3.2 billion due to the absence of prior year asset sale gains. In contrast, the Magnetic Application Products segment reported an impressive year-on-year sales increase of 33.6% to JPY 110.9 billion, with positive operating profit boosted by heightened demand for HDD heads and suspensions.

Future Projections and Adjustments

Looking ahead, TDK revised its full-year projections for the fiscal year ending March 2025. The net sales forecast was raised to JPY 2.120 billion, operating income to JPY 220 billion, and net income to JPY 160 billion. This revision comes as TDK adjusts to a recovering HDD market and the forecasted production increase for smartphones, although a downward revision in BEV production volumes continues to weigh on the automotive market outlook. Importantly, expected free cash flow has been revised upward to JPY 120 billion from previous estimates of JPY 15 billion due to improved operational efficiencies.

Strategic Initiatives for Sustainable Growth

To navigate current market dynamics, TDK's management emphasized a dual focus on asset efficiency improvements and proactive business portfolio management. Structural changes are underway to better monitor cash flow and enhance capital efficiency across the four main business units. Additionally, TDK is enhancing its technological prowess through investments in innovative projects, which they believe will significantly contribute to future growth and align with sustainability targets.

Increased Shareholder Return Commitment

TDK reaffirmed its commitment to enhancing shareholder returns by increasing interim dividends from JPY 12 to JPY 14, alongside a planned year-end dividend of the same amount. This marks an encouraging signal to investors about the company's confidence in its ongoing profit generation capabilities despite near-term challenges.

Long-Term Corporate Vision

TDK's management outlined their mid- to long-term vision, focusing on continuous dialog with investors, enhancing corporate value, and maximizing engagement among their workforce. This is part of a broader strategy to prepare the company for sustainable future growth, amidst evolving market landscapes.

Earnings Call Transcript 2025-Q2

[Operator]

It's time, so we would like to start TDK Corporation's performance briefing for the second quarter of fiscal year 2024. Thank you for attending this session despite your busy schedules.

First, we would like to introduce the participants. President and CEO, Saito Noboru; Senior Executive Vice President and CFO, Yamanishi Tetsuji; Corporate Officer, Sashida Fumio; Corporate Officer, Ikushima Taro; Corporate Officer, Tutsui Takao. That's all.

We will start with the presentation of the financial results for the second quarter and the full year forecast of FY '24 ending in March '25 to be followed by Q&A. We have about 75 minutes today. All materials used in this briefing are available on the company's website, both in Japanese and English. Now over to you.

[Tetsuji Yamanishi, executive]

My name is Yamanishi. Thank you very much for taking time out of your busy schedules today to participate in our financial results briefing for the first half of the fiscal year ending March 2025. I will now present an overview of our consolidated financial results.

First, I will explain the main points of the interim financial results. During the first half, the global economy remains unstable with North America remaining firm, but Europe remaining sluggish, and China's economy continued to slowdown and the situation in the Middle East region becoming increasingly tense. In addition, the yen continued to depreciate particularly against the U.S. dollar and the euro.

In the electronics market, which affects our business performance, production trends of ICT-related products recovered from the same period of the previous year due to replacement demand and the ramp-up of new models and the demand for Nearline HDDs for data centers recovered significantly.

On the other hand, in the industrial equipment market, overall capital investment demand remains sluggish. In the automotive market, demand for BEVs continued to show signs of slowdown, resulting in lower component demand than what was expected at the beginning of the period.

In this business environment, sales of medium-capacity rechargeable batteries for industry equipment, power supplies for industry equipment, passive components and the sensors declined during the 6-month period. Growth in sales of Passive Components and sensors for the automotive market slowed due to the slowdown of BEV sales.

On the other hand, sales of rechargeable batteries, HDD-related products and the sensors increased due to recovery in components demand in the ICT market. As a result, net sales for the 6-month period increased 2.8% year-on-year. Operating profit increased 55.8% year-on-year and reached a record high for the interim period due to the significant depreciation of the yen, increased shipments of products to the ICT market and effects of streamlining and the structural reforms implemented in the previous year.

Next, I will give an overview of our 6 months results. FX fluctuations against the U.S. dollar and other currencies increased net sales by approximately JPY 71.4 billion, and operating profit by approximately JPY 13.6 billion resulting in net sales of JPY [ 1.895 ] billion, up JPY 29.8 billion or 2.8% from the same period last year.

OP was JPY 133.3 billion, up JPY 47.8 billion or 55.8% from the previous year. Profit before tax was JPY 137.3 billion, up JPY 57.1 billion or 71.1% from the previous year. Net profit was JPY 105.7 billion, up 95.1% from the previous year. Operating profit and all subsequent profit levels renewed record highs.

Earnings per share was JPY 55.72. Exchange rate sensitivity is unchanged from the last quarter. JPY 1 change to the dollar has an impact of about JPY 2 billion and JPY 1 change to the euro have an impact of about JPY 0.3 billion per year.

Next, I will explain the situation by segment for the interim period. First, in Passive Components, sales decreased 0.4% from the previous year to JPY 285 billion, and operating profit decreased 8.8% to JPY 28.9 billion. Due to continued sluggish demand in the industrial equipment market and a slowdown in sales to the automotive market, such as BEVs. Despite increased sales to the ICT market such as smartphones, OP decreased by 8.8% to JPY 28.9 billion.

Ceramic capacitors and aluminum electrolytic capacitors, which account for a large portion of sales to the automotive and industrial equipment markets suffered declining sales and profits due to lower demand. Sales and earnings of inductive devices increased due to higher sales to the ICT market.

Sales of high-frequency components increased and the profitability improved due to the effect of sales expansion for the automotive market in addition to the ICT market. Sales of piezoelectric material components and the circuit protection components decreased due to lower sales to the automotive market.

Next, in the Sensor Application products. Sales increased 10.2% from the previous year to JPY 94.9 billion, while operating profit declined 36.6% to JPY 3.2 billion. Sales of temperature and pressure sensors increased due to higher sales to the automotive industry, but operating profit decreased due to the absence of onetime gains from the sale of assets in the previous year.

In magnetic sensors, both sales and profit of TMR sensors and [ whole ] sensors increased due to expanded sales of smartphones, as both MEMS sensors, sales of microphones for the ICT market increased, and profitability improved. But sales of motion sensors for automotive and industry equipment declined, resulting in lower overall sales and profit for MEMS sensor.

Next is Magnetic Application Products. Net sales increased 33.6% year-on-year to JPY 110.9 billion, and operating profit was positive, including a onetime gain of approximately JPY 4.3 billion from HDD heads and suspensions.

The HDD Head and Suspension business was profitable, even excluding onetime gains due to a 1.6-fold increase in demand for NL HDDs for data centers compared to the same period last year. Head sales volume was up 1.6x from the same period of last year, and the sales for Nearline HDD were up about 3x.

Although head sales volume was slightly below the breakeven point volume after restructuring, it returned to profitability, excluding onetime gains. Suspensions exceeded the breakeven point volume and are now formally in a positive territory. Magnet sales and profits declined due to lower sales to automotive market.

Next is Energy Application Products. Sales declined 1.2% to JPY 572 billion, and operating profit increased 37.6% to JPY 123.4 billion. Sales of rechargeable batteries increased only slightly despite an increase in sales volume from the launch of new smartphone models due to the impact of lower selling prices resulting from falling material prices and the completion of a JV transfer for medium capacity batteries, which reduced the consolidated sales of the company.

Operating profit increased slightly -- significantly due to -- in part to volume growth, ongoing rationalization effects and the foreign exchange gains. Sales and profits of power supplies for industrial equipment decreased due to a lack of recovery in demand for industry equipment. Sales and profits of power supplies for EVs also decreased due to a slowdown in sales of automotive, including those of BEVs.

Next is variance analysis of the JPY 47.8 billion increase in OP for the first 6 months. Although there was a decrease in profit due to lower sales volume in passive components and sensors, there was a JPY 27 billion increase in profit due to the effect of higher sales volume in rechargeable batteries and HDD heads and suspensions.

Cost reductions of JPY 14.3 billion through rationalization, absorbed the JPY 12.7 billion decrease in profit due to changes in selling prices. Structural reforms implemented in the previous year had a positive effect of JPY 4.4 billion, while onetime expenses of JPY 3 billion this fiscal year vis-a-vis JPY 1.4 billion in the previous year, resulting in an increase in expenses of JPY 1.6 billion.

SG&A expenses decreased by JPY 2.8 billion, including JPY 4.3 billion onetime gain recorded in HDD head suspension. The impact of yen depreciation was an increase of a profit of JPY 13.6 billion. As a result, overall profit increased by JPY 47.8 billion.

Next, I will give an overview of the second quarter results for the current fiscal year. Foreign exchange fluctuations against the U.S. dollar and other currencies increased net sales by approximately JPY 17.6 billion and operating profit by approximately JPY 2.5 billion, resulting in net sales of JPY 570.7 billion, up JPY 14.4 billion or 2.6% year-on-year. OP of JPY 75.4 billion, up JPY 16.2 billion or 27.3% year-on-year.

Profit before tax of JPY 8.5 billion, up 14.4% or JPY 67.6 billion year-on-year, and net profit attributable to owners of parent of JPY 46.1 billion, up 16.8% year-on-year.

I will now explain the factors behind the changes in sales and operating profit by segment from the first quarter to the second quarter. First, in the Passive Components segment, Sales decreased JPY 1.1 billion or 0.8% from Q1, while operating profit increased JPY 1.1 billion or 7.7%. Sales and profit of ceramic [ condensers ] declined mainly due to lower demand for BEVs. Sales of aluminum electrolytic capacitors were flat, and the profit increased due to higher sales to the automotive industry despite lower sales to the industrial equipment market.

Sales and profit of inductors increased due to higher sales to the ICT market. Sales and profit of high-frequency components also increased due to higher sales to the ICT market. Sales and profits of Piezoelectric Material Products and Circuit Protection Components remained almost flat. And sales of sensor application products increased 15.2% to JPY 6.7 billion, and the operating profit turned to a positive profit of JPY 3.8 billion in the second quarter from a loss in the first quarter. Sales and profits of temperature and pressure sensors increased due to higher sales to the automotive industry. Sales and profit of the magnetic sensors increased due to a significant increase in sales for smartphones despite a decrease in sales for automotive.

As for MEMS sensors, sales of microphones for the ICT market increased. And sales of motion sensor for the drone market also increased, resulting in higher sales and smaller losses.

Next is the Magnetic Application Products segment. Sales increased slightly by JPY 900 million and operating profit increased by JPY 300 million. The operating profit includes onetime expenses of JPY 2.1 billion in the second quarter and a onetime income of JPY 2.3 billion in Q1 and JPY 2 billion in the Q2, excluding one-off income and expenses. The OP increased by JPY 2.6 billion in real terms. HDD head sales increased due to a recovery in total demand for Nearline HDDs. HDD head sales volume up by about 4%, Nearline HDD head sales volume up by approximately 9%, and suspension sales volume increased by about 18%. Overall head sales increased and excluding the onetime income of JPY 2.3 billion in the Q1 and JPY 2 billion in Q2, the segment remained profitable on a substantial basis. Magnet sales decreased and with the onetime expenses of JPY 2.1 billion, the losses increased.

Next, the Energy Application Products segment. Sales were JPY 46.1 billion, up 17.5%. Operating profit JPY 12.7 billion, including onetime expenses of JPY 400 million in the second quarter, the OP grew by 22.9%. In the area of rechargeable batteries, sales of small capacity batteries for ICT applications increased significantly due to the strong sales of new products such as smartphones. And the sales of medium capacity batteries also increased due to spot orders of residential energy storage system, achieving increase in sales and profit. Sales and profit from power supplies for industrial equipment decreased and the EV power supply sales also decreased, and the loss increased with the onetime expenses of JPY 400 million in the second quarter.

Next, I will go over the status of cash flow. As for the 6 months results, operating cash flow was JPY 205.9 billion. Investment cash flow, including CapEx, was JPY 100 billion, and the free cash flow was JPY 105.9 billion, virtually the same level as JPY 106 billion free cash flow in the previous term.

We have been making efforts to maintain appropriate inventory levels since last year. And with a decrease in CapEx and increase in profits, we significantly exceeded our initial forecast for free cash flow. We have already greatly exceeded the full year free cash flow target of JPY 15 billion set at the beginning of the term. Through further revenue expansion and improved capital efficiency, we continue to aim to increase free cash flow.

That concludes my explanation. Thank you very much.

[Noboru Saito, executive]

I am Saito. Thank you for joining the performance briefing. I'll talk about the projections of the fiscal year ending March 2025. First of all, I would like to explain the revision to our assumptions of the projections, i.e., forecast for the production volume of major devices related to the company.

For the automotive market, total production volume of the vehicles have been revised down from the April forecast. The main factor is a downward revision of battery EVs among electric vehicle. On the other hand, that number of plug-in hybrid, PHEV vehicle, is revised upward.

Next is smartphone production, which holds a meaningful space in ICT market. We have revised the forecast from 1.144 billion units to 1.175 billion units. With regards to the HDD market, the market continues to recover. So we have revised the forecast for Nearline HDD production for data centers upward from April forecast to 59 million units.

Next is the image of the changes in net sales by segment in the third quarter. For the third quarter, we will not change the exchange rate assumption for the projections from the initial assumptions of JPY 140 to a dollar, but we will changes in net sales, excluding exchange rate fluctuations for easier comparison.

First, the Passive Components segment. Sales to the industrial equipment market are expected to remain weak, but the sales to the automotive market will increase. So overall sales will stay flat. In the Sensor Application Products segment, sales of temperature and the pressure sensors for automotive applications will increase.

As for sales of MEMS sensors, microphones will grow, but the sales of magnetic sensors for smartphone will decrease from the seasonal peak demand. So overall sales are expected to be in the range of decrease by 3% to flat.

Next, the Magnetic Application Products segment. We forecast HDD production to increase by around 2%, Nearline HDD production to increase by around 4%. Sales of suspension will increase, but the head sales will decrease due to off-season for new model launches, and we expect a decrease of between 12% to 9% overall.

Finally, in the Energy Application Products segment. Due to the sluggish industrial equipment market, sales of medium-capacity batteries and power supplies for industrial equipment will decline, but sales of small capacity batteries will be flat or increase slightly due to seasonal factors in the smartphone market. And overall sales are expected to increase by 1% to 2%.

Next, I would like to go over our consolidated full year projections for fiscal March 2025. As I mentioned, in the electronics market at the half year point, although production in the industrial equipment and the automotive market is sluggish, production of smartphones and HDDs in the ICT market has been strong and higher year-on-year. And the results for the first half exceeded the projections announced on April 26 of this year.

In the ICT market, with the launches of new models such as smartphones, sales of rechargeable batteries and sensors increased. In addition, demand for data centers, which was weak in the previous fiscal year, recovered significantly and the sales of HDD heads were strong.

In light of these situations, we reviewed the full year earnings projections and revised up our consolidated earnings forecast for the fiscal March 2025 from the forecast announced on April 26 this year to net sales of JPY 2.120 billion, operating income to JPY 220 billion and net income to JPY 160 billion. The exchange rate remains unchanged from the initial assumption of JPY 140.

Anticipating changes in future demand trends, we implement measures to improve asset efficiency and we plan to record a total of about JPY 10 billion of one-off expenses for the full year, including structural reform expenses, this is incorporated in the projections.

For dividend, we will increase the interim dividend from JPY 12 to JPY 14, and we also plan to pay a year-end dividend of JPY 14. Lastly, let me update the progress of the 3 points of the new midterm management plan that I explained at the Investors Day in May. The first is to strengthen our ability to generate free cash flow. At the beginning of the fiscal year, we expected full year free cash flow to be JPY 15 billion. And as I said, the interim results were better than the plan, and we now expect full year free cash flow to increase to JPY 120 billion.

We will continue to work to strengthen our cash flow management through measures such as optimizing inventory levels and CapEx in line with the market demand. The second is the about the progress on the proactive business portfolio management.

In the past, at the key meetings, such as management committee meeting, the top management of the 4 business companies reported and discussed initiatives to improve capital efficiency. From this fiscal year, we have changed to a reporting system led by leaders of each cash flow business unit, CBU.

As a result, we are now able to have more specific discussions on improvement measures for each CBU and we have started to look into the revitalization plans for the CBUs under review, and are making progress in determining the direction. This change in structure is also utilized as a venue for succession planning for the future business group General Managers and the business company CEOs for the development of management talent.

The third point is the evolution of the [ Ferry tree ] and strengthening pre-financial capital. To strengthen human capital, we started to link executive compensation to engagement scores from this midterm to improve engagement. We conducted second survey in September and the participation rate improved from 80% to 89%. We are currently analyzing the detailed results, and we will incorporate them into specific actions to enhance employee engagement.

In strengthening our technological capabilities to contribute to mid- to long-term social transformation, we have made progress in developing new technologies, including all solid-state battery materials and neuromorphic devices as well as the development of the visible light 4-color laser control devices. Our neuromorphic device won the Innovation Award at the CTECH last month.

In addition, at the end of July, we established SensEI, a new company, which will provide new solutions using edge AI and sensor fusions to contribute to DX in society. In addition to this, we will continue to strengthen our sustainability activities and the DX initiatives. As progress of our sustainability activities, we received SBT certification from the international initiative, SBTi in June this year. And in July, we received a gold rating for the first time in a survey by EcoVadis, an International Sustainability Assessment organization.

And on October 1, we were certified as a DX-certified business by METI. We will continue to promote DX across the company in areas such as sales, marketing, manufacturing and sustainability activities to create new value. While continuing to strengthen our financial and pre-financial activities, we will strive to achieve our long-term vision, TDK transformation.

We have increased our dialogue with investors since the start of this fiscal year, and we will continue to enhance our constructive dialogue and our collaborative activities with you in order to improve our corporate value. And already, it has been increased to a double of the past. We ask for your continued support.

Thank you. This concludes my presentation.