TDK Corp

TSE:6762

Earnings Call Transcript 2018-Q3

[Unknown Executive]

If we may, I'd like to begin the Performance Briefing Third Quarter of Fiscal Year March 2018 for TDK Corporation. First, allow me to introduce participants from TDK's side. First, we have Mr. Hiroyuki Uemura, Corporate Vice President. Following him, let me introduce Mr. Noboru Saito, Senior VP; next to him, Senior VP and we have Mr. Tetsuji Yamanishi; [ last on the list ] from Energy Device Business company, we have CEO Mr. Fumio Sashida. For participants in from TDK side, thank you.

With that introduction done, we'll go through the consolidated results for the Third Quarter of FY March 2018, consolidated Full Year projection for FY March 2018. The presenter here is Mr. Yamanishi.

[Tetsuji Yamanishi, executive]

This is Yamanishi speaking, thank you. I thank you for your precious time despite your busy schedule, we are here to explain the performance and the results for the Fiscal Year March 2018.

First, allow me to go through the highlights for the third quarter on the sales. We were able to renew its record for three consecutive quarters since the beginning of the fiscal year. The third quarter revenue was up 5% year-on-year. Operating income was down 0.3% slightly from the last year. However, [ now we are able to absorb] JPY 10 million plus the impact from the partial transfer of the High-Frequency Components business.

Though, we had a one-time expense for the third quarter of JPY 2.2 billion from the InvenSense acquisition, we did actually and get on par to the third quarter [actuals] in the last year, which was a record high on a quarterly basis. As for the Passive Components, Passive Components had a sure growth, mainly driven by the capacitors and inductors and thanks to the still ongoing strong automotive and industrial equipment markets. We are currently enjoying a stable profitability of [ 20% and plus ] operating income.

Sensor Application Products, while leveraging the broader portfolio, trying to find new applications. In the third quarter, [ TML ] sensors expanded its sales driven by the automotive products as well as by the ICT in the marketplace. Thus, contributed to our improved profitability. We have almost completed our evaluation on the goodwill in regard to the InvenSense acquisition. This time, we booked as much as -- this time, JPY 1.2 billion in the quarter as the intangible fixed assets, separated away from the goodwill and going back to the point of the acquisition.

Magnetic Application Products well exceeded the market and has been moving almost within our expectations in terms of total demand, though the hard disk drive (HDD) Heads volume, thanks to the decrease. But thanks to the improved product mix, the revenue moved and as we had expected, resulting in a rather stable profit. As on the Magnet and Power Supply Products, thanks to the firm demand driven by the semiconductor manufacturing devices and robotics devices and the industrial machinery and furthermore, renewable energy-related demand is still going on. So resulted in the growth in both in sales and in profit. We are so happy as for this result.

As for the Rechargeable Batteries, our sales for smartphones continue to grow and on tablet and on the PC, the business actually grew firmly. Furthermore, apps related business expanded continuously following the second quarter where both revenue and operating income renewed its record respectively.

Allow me to give you the outline of the third quarter. Net sales was JPY 341.1 billion, up JPY 16.3 billion or 5% Y-o-Y basis. Operating income was JPY 32.4 billion, down JPY 100 billion or down 0.3%, almost the same level from the previous year. In the third quarter, we had a one-time expense of JPY 2.2 billion for the M&A. So in substance, we overachieved the profit year-on-year basis in a big way. Operating income ratio was 9.5%. We [indiscernible] a highly profitable High-Frequency Component business, but we were able to offset its impact on profitability.

Income before income tax was JPY 33.5 billion, up 4.4%. Net income for the quarter was JPY 2.8 billion or down 11.5%. But may I remind you that we had additional tax expense of almost minus JPY 3.5 billion due to the tax reform in the U.S., giving us growth in profit ultimately. So JPY 170.96 was the EPS we are able to confirm. Average FX rate for the quarter was JPY 112.97 to $1, the Japanese yen became weakened by 3.5%; as for euro, it was JPY 133, the yen depreciated by 13%. All in all, the FX had an impact of JPY 13.7 billion in net sales and JPY 1.6 billion in operating income, positive impacts. The FX sensitivity by the fluctuation of JPY 1 on operating income was the same from the last time, JPY 1.2 billion vis-a-vis the U.S. dollar and JPY 200 million to euro.

Next, I would like to move on to the segments. Starting from the third quarter, we newly added a Sensor Application product. As we have explained already, some product mix has not changed. And actually, the JPY 1.4 billion is the impact and also the revenue was JPY 4.9 billion impact. Passive Components revenue was JPY 112.7 billion, down 21.2% and operating income was JPY 12.3 billion, down 35.6%, giving us an operating income ratio being 10.9%. Ceramic capacitors next, thanks to the strong demand, continued to grow in the automotive market, improved the product mix and improved the productivity, we will enjoy a great increase in revenue and the profit grew more than we had expected. Actually, we were able to achieve higher than 10% level.

Next Inductive Devices. The segment was impacted by the decreased production volume by the Chinese smartphone major manufacturers. Yes, and particularly ICT sales shows decline in sales Y-o-Y basis. But having said that, at time with automotive and industrial robotics and instrumentation and other industrial equipment [ white goods ] as well as so-called white goods and those businesses grew and gave us increase in the sales.

High-Frequency Components, excluding [indiscernible] business, previous year actually we had WiFi module business in place, but in the third quarter that was gone pushing down our net sales, but [indiscernible] the ceramic filter business, actually we were able to grow both in the revenue and the profit and enjoying a high level of profitability. Piezoelectric Material products grew in sales for automotive, industrial equipments, whereas the camera module actuators for Chinese smartphone makers declined, both in revenue and profit due to the reduced production on the customer side. Whereas the impact from the transfer of the business of High-Frequency and Components actually with an impact of JPY 45 billion plus in revenue and the JPY 10 billion plus in operating income. But we are able to offset the loss in the entire passive components and segment effectively. Our operating profit being 10%, quite stabilized and now we are still -- we are making steady improvement in profitability.

Next Sensor Application products. Due to the change in the product mix of the new segmentation, previous years actual revenue was JPY 10.5 billion and operating income became negative JPY 1.5 billion. As for the -- actually we have the fixed on asset depreciation. So we went back to the point of M&A, actually JPY 1.9 billion and a one-time expense, put them together, actually JPY 2.2 billion. So total numbers actually we booked in the third quarter.

The revenue in the Automotive business, both in the temperature and in the pressure sensors and as well as the magnetic sensors actually grew, particularly in Europe and in Japan actually 32% and TRMS senor by the way, ICT business actually grew substantially and Sensor and Sensor Application segment as well. ICT accounts for about 30%. And automotive sales accounting for 40%. Industrial equipment accounts for about 30%. So I think we are enjoying really good balance among those segments.

And next, Magnetic Application business segments and due to partial recombination of a product mix of the segment again, now it's -- the previous net sales was revised downwardly by JPY 4.7 billion and operating income upwardly by JPY 2.2 billion. Magnetic business net sales is JPY 86.9 billion, 0.9% decline year-on-year and operating income was JPY 8.3 billion and 18.6% up year-on-year and operating income margin was 9.6%. When it comes to the HDD Head, on the volume basis is a decline by 14% year-on-year but on the other hand, that's -- the product mix have improved. For example [indiscernible] head have the more in volumes and the sales, so that's why and due to the improvements of the sales mix, we can have an increased average selling prices. So taking these all into considerations for a total of recording devices, now we can limit that decline, the margin of decline by 6% and also we have the other positive effects of the consolidations of [indiscernible] basis and then also the improvements of the fixed cost efficiency. And when it comes to magnets, now the sales of the magnet for HDD have declined, but on the other hand, we have a favorable business with wind power generations and industrial robots, so that's why we could just make it, that's the loss in half of the previous years and now we have steady improvements and that's profitability.

When it comes to Power Supplies, we have very good business and in semiconductor manufacturing equipment, measuring equipment as well as robotics markets, now the business has been very favorable and steady and also now the new product launch have contributed a lot for this expansion of the sales. Now we have the clear -- the double-digit operating profit margins and with increased revenues and the operating income.

Next, Film Application Products. The net sales was JPY 105.9 billion with JPY 23.6 billion operating income. It was up 38.6% of the net sales and 45.7% up on the operating income. Now, we have a record high in both net sales as well as operating income and also we have a 22.3% of high profit margin. Business for the smartphones now have been exceeding than the previous year's business. And on top of that, now we have also the other the good business, PC, tablet, drone and gaming devices, other than the smartphone applications. Now we have a dramatic margin of increase in both the net sales and income.

Next, let me talk about quarter-on-quarter, the segments' growth from the Q2 to Q3 for both net sales and the operating income. First of all, Passive Components business and the sales have increased by JPY 1.2 billion and 1.1% from Q2 to Q3. Ceramic capacitors has been very good for the automotive markets, but on the other hand, aluminum and film capacitors have some negative impacts due to the seasonal factors in the European markets. So that have slightly declined from Q2. But when it comes to inductive devices, net sales was declined by 0.5% from the Q2 for the automotive markets and industry equipment markets and in the home appliances markets have been steady, but on the other hand the Chinese customers, the smartphone manufacturing have declined. So that's, all in all it's only, it's just slightly declined.

Next, the sales of the other Passive Components business was up by JPY 500 million and 1.6% of growth quarter-on-quarter. Since our products have been increasing for the smartphone market, but again the Chinese manufacturers, smartphone manufacturers for the camera module actuators have declined. And so that all in all, it has only increased slightly on a quarter-on-quarter basis. The operating income of the passive components is declined by JPY 100 million, 0.8% decline from Q2 is almost flat. But when it comes to ceramic capacitors, we have dramatically increased the profit but the inductor devices have been flat and also the profit also flat and now the camera module actuator have declined largely in terms of profit, so the total is still flat.

Next, the Sensor Application products, the sales up by JPY 1.4 billion, 6.8% on Q-on-Q basis and [ TML ] sensor for ICT sales have increased, this is major factor. Operating income is the loss of JPY 2.2 billion. So that is just a shrink in the profit, but now it's -- the major factor of this JPY 2.2 billion, the margin of shrink of the loss, but now this is also included and we have the decline of that to the one-time cost for M&A, that is the main reason of the shrinking -- of the shrinking margin of the loss.

Next for the Magnetic Application product segments, the sales were up by JPY 1.3 billion, 1.5% of growth. When it comes to recording devices, that's the shipping index of HDD heads have declined from the JPY 103 billion in Q2 to JPY 89 billion in Q3. That means that's about 14% decline in the shipment index. But now on the other hand, we have incremental sales of near-line sales and also improvements of the mix, that would push up that average selling price, so that now and we have JPY 400 million up of the net sales, that's a 0.8% growth. The other Magnet Application Products, now the sales are up by JPY 900 million, 3.8% of growth. Now, we have a steady business with the industry equipment business and also for the magnetic products have been up by 2%, the Power Supplies, new products also contributed by 4%.

When it comes to the magnetic application products, the operating income was up by JPY 2.2 billion, 36.1% of growth on a Q-on-Q basis. HDD heads have a favorable improvement in the mix. And then also, we have a very good yield on improvements in magnetic products and then also when it comes to power supplies, we have the volume increase that are favorable and also we have an expansion of business of the highly profitable products.

Next, Film Application segment. The sales of the segment was increased by JPY 2.4 billion, 2.3% growth Q-on-Q basis, now we have the peak out -- and we have reached the peak for the smartphone sales and we have an incremental sales and also other than smartphone in other products like tablet, PC have been favorable. Then when it comes to the operating income, Q2 was JPY 21.3 billion and in this Q3, we have a JPY 23.6 billion, its increased by JPY 2.3 billion from Q2. Due to that, now we have the increase of the marginal profits due to this top line growth and then also on top of that we have improvements of the product mix.

Next, let me talk about that breakdown of the operating income changes. Now minus JPY 100 million is at the bottom line but first of all, with the change of sales including utilization and product mix, we have minus JPY 100 million -- about JPY 100 million, but this is [absorbed] the JPY 10 billion of that and the negative impact to the transfer of the high-frequency products. And JPY 4.7 billion negative for the sales and price reductions and also another JPY 3.1 billion due to the [indiscernible] expense increases. These are the total JPY 7.8 billion of negative impacts, but now you could absorb JPY 7.6 billion of that reconstruction and cost reduction and benefits from the restructuring were JPY 800 million, in total JPY 8.4 billion, could absorb this, the negative. And before the exchange fluctuations and the one-time cost, now we could secure JPY 500 million of operating income and depreciation of the yen have the impact of JPY 1.6 billion plus and also another one-time expenses of minus JPY 2.2 billion and taking all this including, and bottom line is minus JPY 100 million.

Next, let me talk about the consolidated business performance up to the 9 months total. Net sales was JPY 964.7 billion, 6.7% growth year-on-year and on a total 9 months basis, now we have, again the all-time high and record high and the net sales, just like we had in the last year. When it comes to operating income, we have a minus JPY 30 billion of this -- the part of negative impact due to the transfer of the high-frequency product business. But due to this negative impact, now we have about, the decline of the profit was only JPY 2.1 billion and this is 2.7% minus, but now we can secure JPY 74.7 billion of operating income. And excluding this JPY 9.4 billion negative impact, and again we have all-time high operating income levels. The net income, we have negative impacts of increase in taxation cost in the U.S. and the JPY 3.5 billion, but still we have a JPY 52.3 billion of net income, that is minus 8.4% year-on-year.

Last of all, let me talk about the forecast of full-year consolidated business performance. We did not change since the announcement, since last October, so that the full-year net sales is JPY 1,250 billion, operating income JPY 85 billion and the net income before tax JPY 88 billion and the net income would be JPY 60 billion. So average foreign exchange rate, there is again no change since the last time, so JPY 108 to the 1$ and JPY 127 to EUR 1.

Again and in dividends and JPY 70 in the second half and JPY 130 on a full-year basis, there is no change. When it comes to the net sales, we expect that again, that's the good favorable market environment and the automotive and also in industrial equipment markets. But on the other hand, when it comes to the smartphone market, we're expecting some kind of -- in Q4, we have some kind of decline in the demand due to the seasonal factors, usually. And on top of that we still have some uncertainty in demand and in the market. So that's why we try to make the forecast as conservative as possible. And also when it comes to HDD heads, now the sales of 2.5-inch of HDD head, we expect it to gradually decline. So that's why the volume index is 89 in the Q3 but Q4, we think that the index will be 77, so that we expect about 13% of decline is incorporated.

And when it comes to operating income and the cost for the InvenSense acquisition, we already recognized JPY 10 billion in the forecast, but now due to the depreciation of the intangible assets due to the goodwill evaluations, will additionally be included JPY 1.2 billion in the Q3 and another JPY 500 million in Q4. And when it comes to the magnetic application products, mainly for the HDD head, we're going to maximize the supply chains of all the bases, and we're going to spend about JPY 1 billion of structural reform cost [indiscernible] all these additional costs are included, we still have that forecast of JPY 85 billion of operating income. [indiscernible] expenses, there was no any change in the forecast, so the JPY 170 billion of the CapEx and JPY 90 billion of appreciations and JPY 99 billion of R&D expenses.

That's all my presentation. Thank you very much. Thank you.