TDK Corp

TSE:6762

Earnings Call Transcript 2019-Q3

[Unknown Executive]

Eastern time. So I'd like to -- now like to kick off. That's our -- the performance briefing for the third quarter of fiscal year March 2019 of TDK Corporation. First of all, let me introduce the attendees of today from the TDK Corporation. Mr. Hiroyuki Uemura, the Senior Executive Vice President; Mr. Noboru Saito, Senior Vice President; Mr. Tetsuji Yamanishi, Senior Vice President; Mr. Fumio Sashida, the CEO Energy Solutions Business Company. These are the 4 on our attendees from TDK Corporation today.

So first of all, in the consolidated result of the third quarter from March 2019 and consolidated full year projections for FY March 2019 will be presented by Mr. Tetsuji Yamanishi.

[Tetsuji Yamanishi, executive]

This is Yamanishi.

Slightly up 2.8% year-on-year. Operating income was slightly down 2.1%. Yet, we did not stop the first half momentum. For the 9-month basis, net sales, operating income as well as income before income taxes and net income, all achieved new record highs.

Year-on-year basis, capacitors, particularly MLCC, grew dramatically mainly driven by the automotive market, which demands reliability and redundancy in design. Both sales and profit continuously expanded putting up the profit baseline for the entire Passive Components business for the company.

And Energy Application segment, particularly the Rechargeable Batteries, sales to major companies in China grew big. Sales for tablets and notebook PCs also had a steady growth. Thanks to our continuing efforts for cost reduction, our COGS declined giving us higher profitability. TDK's overall profit level increased in a big way. However, that said though, with regard of the U.S. and China trade frictions recently, we had -- we are having macroeconomic changes, in particular the decelerating Chinese economy is having a great impact on the world economy. In our case, orders in the major segments including auto and ICT and industrial equipments showed a rapid deterioration starting from the midpoint onward in the third quarter.

In the previous briefing we had on October 31, we made an upward revision for the full year forecast. Yet our assumption for orders have greatly changed and we believe this situation is here to stay for some time to come, we decided to modify our full year forecast downwardly.

As for details, I'm quite happy to give you good explanation later. The good market environment has changed so dramatically, giving us an unclear outlook at least for the short-term basis, but our markets environments have not changed a bit on the midterm basis. The so-called additional transformation, such as IoT and AI and the other additional technology-led transformations trends will not change, including further EVs deployment in the utility and energy fields.

And we believe that the electronic components TDK offers will have a sure growth going forward. So we should focus on achieving our midterm plan targets, while keeping an eye on for our midterm management environment.

Next, I'd like to go through the performance summary. The year-on-year basis, net sales was JPY 350.8 billion, up JPY 9.7 billion or up 2.8%. Operating income was JPY 32.8 billion, down JPY 700 million or down 2.1%, declined slightly. Income before income taxes was JPY 31 billion. Net income was JPY 22.4 billion. EPS was JPY 177.45, respectively.

Due to the U.S. gap, the retirement benefit cost changed, we transferred about JPY 1 billion retirement cost in previous year's profit and loss to non-operating expense.

As for the average exchange rate for the term was JPY 112.90 vis-à-vis the U.S. dollars and yen appreciated by the 0.1% and JPY 128.87 vis-à-vis Euro, yen up 3.1%. All in all, sale side actually we had an impact JPY 4.9 billion down, operating income actually about JPY 300 million downside. As for the FX sensitivity, no change. Looking at the yen the dollar had actually pro yen on a full year basis, JPY 1.2 billion. Between the yen and the euro, it was about JPY 200 million according to our estimate.

Now I would like to go segment by segment. Starting from the current fiscal year, we became 13.8% [Audio Gap] while with the improved profitability helped by the good sales of highly reliable and redundant products in the auto industry and its profit improved greatly due to the continuous -- the conditions coming from the improved product mix and improved productivity.

Aluminum and the film capacitors suffered from the declines in sales and profit affected by the renewable energy situations particularly in the Chinese market.

Inductive Devices enjoyed continuing firm sales mainly in the auto sector. On top of it, ICT sales grew. However, in the China market, in particular, observed a decline in home appliances and industrial equipment business and gaming business also declined, but operating income was maintained to the previous year's level due to the improved product mix.

Piezo electric materials and ceramic filters actually enjoyed growth in sales and also the Circuit Protection Components also was able to maintain its profit and up to the last year's level, thanks to the improved cost structure, though the sales [ per se ] for ICT declined.

Next, the Sensor Application Products segment. Due to some product mix change, operating income basis grew by JPY 100 million. Net sales, JPY 19.7 billion or down 8.8% Y-o-Y basis. Operating income, including the InvenSense acquisition cost JPY 1.6 billion, became loss of JPY 5.5 billion.

Temperature and the pressure sensors, despite an impact coming from the decline in the home appliance business in China, the auto business grew firmly in sales. Its profit moved flat in light of the increased R&D and sales promotion spend, particularly in the piezoelectric field.

Magnetic Sensors, thanks to the increased sales in the automotive and whole sensor business grew both in sales and profit. In regard to

[Audio Gap]

TMR sensors were down due to the

[Audio Gap]

our continuing efforts and for the cost, actually we are enjoying good improve. MEMS sensors were affected by the slowdown in the Chinese economy as smartphones and drone sales were down. Sales for the gaming devices also declined. Though M&A cost went down by JPY 6 million from the previous year due to the initiatives and for the customer base expansion as well as the new models deployment in a rapid way, development cost actually went up making our loss bigger.

[Unknown Executive]

Next, we'll like to move onto the Magnetic Application Products and we have also revised the last year's performance due to the recombination of segments and JPY 14.4 billion minus of the net sales and JPY 1.5 billion for the operating income from last year. The business status and net sales is JPY 66.4 billion, 8.4% less than year-on-year, and operating income was JPY 7.8 billion and 13% of increase year-on-year and operating income margin was 11.7%. But when it comes to HDD Heads and sales volumes have declined by 9% year-on-year. But on the other hand, when it comes to the new line, the Head for the data center have improved mix and then also -- and we could push up the operator price and for the HDD Heads and the sales had almost flat and also for the HDD Suspensions, and also there's decrease in the sales volumes too, but the micro DSA type -- this is a higher added value products, will have more sales and so this improvement in mix will just pushed up the average price and sales is almost flat. On the other hand, but assembly of the hard disk drive is that the business and sales volumes have decreased and we have lost some of the revenues here and HDD Heads Suspensions and overall, we have minus net sales that when it comes to profits and pushed up our price and

[Audio Gap]

they have and

[Audio Gap]

And industrial application for the wind power generation have declined in sales. So that's why and also mix have deteriorated. When it comes -- when we talk about Energy Application products, and due to again the segment recombinations, we have revised last year's performance in JPY 700 million and more -- and JPY 19.1 billion more for the operating income. And now JPY 145.4 billion of net sales and the JPY 24.6 billion operating income, it's a 16.3% increase year-on-year and one -- of the revenues and 1.2% of increase in the profit. For the secondary batteries and now that sales to that major customer in China have been favorable and increased a lot, and also the sales for that secondary battery for notebook PC and tablet have also pushed up and are boost that net sales and profit. But on the other hand, now after all that slowdown of the demands of the smartphone have become conspicuous in the middle of the third quarter and due to that production adjustments and now we are -- and materials of the [ decabouts ] the raw materials have declined and they have some time lag. Before that, we have to pass on to that portion to the product price but -- and actually delayed and realized these effects of the declining raw material. So this time lag have caused the buzz and the specific loss between the selling price and that's the raw materials. And it has pushed down the profits. But when it comes to the -- or for due to -- and also we have some bad impact for the sales decline in China for the industrial equipment-related business.

Next, let me talk about the quarterly results by segment quarter-on-quarter and both net sales and operating income, I'd like to talk about the factors of the change. First of all, Passive Components segments. The sales have declined by JPY 5.4 billion from the Q2 and 4.8%

[Audio Gap]

and the smartphones and the Industrial equipment and also home and electrical appliance, all these markets have all, they have not been so -- going well. But when it comes

[Audio Gap]

the capacitors have dramatically and dropped in the smartphone, electric and also Circuit Protection components have declined in Industrial equipments. But when it comes to the Passive Components operating income, it has declined by JPY 1.7 billion, declined from the Q-o-Q basis, from Q2, 10.4% decrease. Ceramic Capacitors have still maintained high profitability, but the major reason of this minus impact is inductor and high-frequency products.

Next, Sensor Application Products. The net sales was declined by JPY 900 million, 4.4% of decline for the temperature and the pressure sensors and almost flat from Q2. But on the other hand, Magnetic Sensors have dramatically declined for the smartphone markets and MEMS sensors have increased for the smartphones. But on the other hand, product application for the drone and game consoles have been struggling. So when it comes to operating income and just like -- almost flat just like the temperatures and pressure sensors. And when it comes to magnetic sensors and auto, sales declined but we maintained that -- and profits for MEMS sensors, so that now JPY 1.4 billion. And for that the InvenSense and the M&A cost have just declined and have pushed up JPY 200 million, but now we have the more end loss for due to the decrease of the sales. So then overall, the Sensor Application Products and JPY 900 million is the minus impact on the profits.

Next, and Magnetic Application Products, sales have declined by JPY 9 billion from Q2, an 11.9% of decline. And this drove head sales and due to that shipment index have declined from 97 in Q2 to 81, that's 17% of drop. This is a major reason of that sales decline. So with this of 16% decline and now the revenues declined 15% for -- also for the hard disk drive suspensions and sales volumes of suspensions have dropped by 13%.

And when it comes to sales of the magnets, the application for the industrial and equipment have been slowed down. So that was related to that minus gross on the sales and when it comes to the Magnetic Application Products, the operating income increased by JPY 6.9 billion from Q2. But now the JPY 4.7 billion, this is impaired loss in the magnet to -- that have according to -- in Q2 -- if we selected on apple-and-apple basis, the margin of increase is JPY 2.2 billion. But when it comes to HDD Heads and Suspensions, now and we have about the -- have incremental profits due to that incremental mix and average price. But the magnets have -- we have to shrink the loss due to that decrease in [ better oss ].

For Energy Application Products, the sales have declined by JPY 9.4 billion, 6.1% quarter-on-quarter for Q2. The Secondary Battery business have been adversely affected by that sales in the slowdown of the China for the smartphone and mobile equipment and also for the sales and the smart -- and the gaming console is also -- that's a factor.

And Industrial Equipment, the power supply had been flat. Operating income declined from the JPY 33.3 billion to JPY 24.6 billion and -- from the Q2 and JPY 8.7 billion the decline. Due to that, the sales decline of secondary battery but on top of that also and that decreased that's the marginal profit. And due to that, there's some time lag of that declining raw materials and cost and that's -- they were passed on to the prices on to the products. And also based on that we have started that production adjustments after the November due to the slowdown of smartphone, these have all the minus impact.

Next, let me talk about breakdown of operating income changes. So this is the totally -- minus JPY 700 million is the changes, but for -- due to that incremental sales in the capacitor and secondary battery and the improvements of that HDD Heads and Suspensions and improvement of mix, JPY 6.5 billion positive. But on the other hand, the sales reduction had the minus of -- a negative impact of JPY 4.6 billion and also the rationalization and cost reduction efforts have had the positive JPY 3.1 billion. And after that, net we have about JPY 500 million of the restructuring after the pushdown.

For the expansion of the secondary battery business and also the -- the enhancement of the development of the Sensor business have pushed up that SG&A by JPY 6.5 billion, a little bit minus impact. And when it comes to the one-time -- reduction of the one-time, the cost for the M&A have a positive of JPY 600 million. And due to the fluctuation of the currency minus JPY 300 million. And all in all, and -- minus JPY 700 million, changes in operating income.

Next, let me talk about the consolidated results through -- up to the third quarter of FY March 2019. Net sales was JPY 1.727 trillion, 11.2% of the increase year-on-year. Operating income was JPY 94.9 billion, up 17.2% (sic) [ JPY 17.2 billion ] from the year earlier, 22.1% increase. And income before income tax was JPY 88.8 billion and net income was JPY 63.5 billion. That was -- that's 21.4% positive growth year-on-year. And we have the record high and -- the regulations on the sales, operating income, income before income tax and the net income.

First of all, let me talk about the full year -- original full year forecast. As mentioned earlier, and from the middle of the Q3, now we have the deteriorations of the orders from that middle of the Q3 and we needed to and revised downwardly, that's the full year forecast we announced on October 31, the last time. And now would like to just -- and explain about this downward revision of the focus -- full year focus. For the sales, the last time and now that -- not only for smartphone but automotive, industrial equipments, overall these sales have declined and from JPY 1.42 trillion and decreased by JPY 50 billion to JPY 1.37 trillion. Operating income due to this declined sales and -- from JPY 120 billion is JPY 10 billion less, at JPY 110 billion. There's no change in income before income taxes and net income.

When it comes to dividends and ATM and first half also, there's no change because the paid ATM to the second half and annual dividend payments will be JPY 160.

So the assumption of the foreign exchange rates in Q4 is JPY 108 to the dollar and JPY 124 to euro. So there's no any -- this is the change due to the more high yen appreciation.

So when it comes to CapEx, based on this change in orders and we now prove into and we go in details about this -- all the plan and now reduced by JPY 20 billion from the last forecast and it will be downward to the JPY 190 billion, but there is no any in the total CapEx plan and midterm business plan, there's no change. And for the depreciation and amortization and R&D expense, there's no any change in the difference. That's all my presentation. Thank you.