TDK Corp

TSE:6762

Earnings Call Transcript 2022-Q3

[Operator]

Now it's on time. I would like to start the performance briefing sessions of Q3 of FY March 2022 of TDK Corporation. Today's speaker is the Executive Vice President, Tetsuji Yamanishi.

[Tetsuji Yamanishi, executive]

I'm Yamanishi. Hello, everyone. Thank you very much. Okay. I'm Yamanishi speaking. Thank you very much for joining us today in your busy schedule. Thank you.

Okay. Then I'd like to start with the performance briefing of Q3 of FY March 2022. I'll start with the key points concerning earnings. And even under the COVID-19 pandemic and continuing for the first half and that normalizations of the social and economic activities is going on and all over the world, but that is still and the constraints on the supply chains and have prolonged it. So that's the adverse effects of the production units of automobiles and smartphone. But on the other hand, now at our electronics business has been steady so that we could have the increase with sales in all segments and including that improvement of profits under the Passive Components and also with the Sensor profitability have increased, and then we have a very well-balanced earnings structure.

Sales have increased by 26.3% year-on-year, and operating income have increased by 31.3% year-on-year. And for both the Q3 and the first 9 months of the fiscal year have both, and the work have recognized its all-time high. In the automobile markets, and due to that step, the shortage of the semiconductors, for example, and have lowered their production [indiscernible] year-on-year, but still the further development EXV and the further electrification of ADAS have increased it and the number of components installed per vehicle that had a favorable for a business so that our business is steady, and we could expand the sales of the Passive Components as well as Sensors.

In the ICT market, and now still -- and some -- the shortage of the semiconductors and the push down to the production of smartphones and also by the lower than the last year, but our own components have adopted more in the smartphones and on top of that, very strong demand in the PC and the tablet make a contribution of a steady business, and still, that's very good investments to the data center, pushing up the server demand. And all of these, our sales on the secondary battery, sensor as well as HDD Head have increased.

Also, in the end market of industrial equipment. Now the CapEx is very steady by the corporations, and in our sales for the semiconductor manufacturing equipment and renewable energy have increased. And also, Passive Components and industrial power supply have expanded in sales. And also, for the secondary battery -- and we also have a very good business, including -- that's the increasing sales of the [ metal size ] of the battery for the home-use ESS.

Just [indiscernible] under this and the good favorable environment, in the first 9 months of that -- this fiscal year have largely surpassed our forecast. So that's why -- and the full year projections were revised upward in light of operating results through Q3 and that latest order trends. Again, we have this and revision and from the last time in October. I'll explain in the details later.

Next, let me talk about the consolidated results of the first 9 months of the Q3. Exchange impacted to that -- the net sales have about JPY 85.3 billion and also -- and JPY 3.5 billion in operating income, including all these. The total sales was JPY 1.3939 trillion. That is JPY 307.1 billion or 28.3% increase year-on-year. Operating income was JPY 139.2 billion. That is JPY 31.8 billion or 29.5% up from the year earlier. The income before tax was JPY 146.6 billion. Net income was JPY 117.3 billion. So all these KPIs, we could recognize an all-time high. Earnings per share was JPY 309.53.

When it comes to the sensitivity to the currency, there's no any change before. So that JPY 1 to the dollar have the impact on the operating income of JPY 1.2 billion and JPY 200 million for the euro.

Next, let me -- the report about the consolidated results for Q3. So again, the exchange impacts on the sales have -- this JPY 39.9 billion and also JPY 5.3 billion impact on the operating income. And included in all these impacts, the total net sales was JPY 499.7 billion. That is JPY 104 billion or 26.3% increase year-on-year, and then operating income was JPY 59.2 billion. That is JPY 14.1 billion, 31.3% of the increase year-on-year. Income before tax was JPY 62.2 billion, and net income was JPY 49.1 billion, just like -- for the 9 months -- first, to the 9 months, and the total also, we have the record-high KPIs for all these and the figures. And earnings per share was JPY 129.5.

Next, let me talk about the segment-wise business performance in Q3. The Passive Components segment, the sales was JPY 129.5 billion. That is 18.3% increase year-on-year. The demand in automotive markets have been pushed up by the increasing number of components and the amount of the owned vehicles. And also, now on the industrial equipment markets or the renewable energy business also have been favorable, and in the ICT market, although the demand in smartphone will decline, but they added strong demand in the -- base stations, wearable devices have more than offset. So in the -- on all these [indiscernible], we could have then the positive growth in all of the segments.

Operating income was JPY 22.6 billion. That is 69.3% of increase year-on-year. And operating income margin was 17.5%, with increased profitability. Then business-wise, excluding High-Frequency Components, then we have all the profit increase, particularly, and improvements of the profitability of capacity and inductive devices that pushed up the business performance of all the segment. When it comes to High-Frequency Components, [indiscernible] the profit have declined slightly due to the upfront investment for the R&D for new products.

Next, Sensor Application Products segment. Now we have consecutively posted all-time sale -- high sales from the last Q3, and also in this Q3, we also have a record high sales of JPY 36.1 billion. That is a 57.1% increase year-on-year. Operating income also secured the profits, including that the pushed-up sales and also the better product mix. So now we can push up the [indiscernible] from the Q2, and now we have the operating income margin of over 10%. And a result of that, also in the first 9 months of the fiscal year, we could secure the profits.

The -- Temperature and Pressure Sensors, they were very steady in the demand for the industrial equipment or the home appliances. Then, we have the increased sales also for the Hall Sensors and supported by the automotive markets, and we have largely improved the profits. TMR Sensor is -- and then ICT markets now and the increase of demand in ICT market and also -- and adopted for the new applications, and we have largely a substantial increase on the sales and the profits. And for the MEMS Sensors, we could enjoy about the expansion of customer base and application base now have been reflected steady on the performance. And Motion Sensors, MEMS and microphone sales have increased and substantially. And now with the profitability improvement, we could successfully shrink that largely that -- the loss.

Next, Magnetic and Application Products business. Net sales was JPY 64 billion, 14.4% year-on-year. Operating income was JPY 3.3 billion, down 22.5% year-on-year. But here, may I remind you that in the third quarter, previous year, we had booked JPY 2.4 billion from the sales gain of suspension business. So in substance, this segment was able to secure growth in profit.

HDD Heads, several demand for data centers has been firm. Nearline HDD Heads grew 1.8x in volume. The total HDD Head became profitable, with its volume growing 28%. Hard disk drive suspension Nearline on the hard disk drives for the management customers and data centers continue to be firm, giving us growth both in revenue and profit. Magnet. Sales for the automotive has been firm in sales, with the price increase of raw materials. Loss number increased slightly.

Next, I will explain our Energy Application Products. Revenue was JPY 256.1 billion. Operating income was JPY 30.9 billion, up 31.1% in sales and 8.9% in profit year-on-year. As for Rechargeable Batteries, this segment was impacted by the FX changes as well as the increased price of raw materials. Talking of FX, the cheaper Japanese yen. But if we are to exclude this, with the smartphone production decline as much as 11% from the previous year, sales for smartphones declined. In contrast, in power cells and for electric motorcycles and the residential energy and storage systems expanded.

For the entire business, it became almost flat year-on-year, excluding FX impact and also [indiscernible] pricing factor. Operating income, well, the real sales did not grow. We made efforts to improve cost and fixed cost efficiency. And we are seeing improved profit starting from the second quarter, but in the third quarter this year, raw materials and price started again going up rapidly. So now we still have some potential factor now to push down profit. And also now, we have about JPY 5.1 billion as the royalty be paid.

As for the industrial equipment, the power devices, demand in the section action and has been rather firm, giving us opportunity to increase the revenue. But then we also have been faced with an increase in the materials we had to procure. And also, we have been within COVID-19. And with all these factors in place, we are having a slight decline in profit.

Next, I'd like to go through the factors behind the ups and downs of sales and operating profit numbers for the third quarter now by segment. First, on Passive Components segment. Net sales was up JPY 2.2 billion or 1.7% from the second quarter. Operating income was up JPY 1.3 billion or 5.9%. As for sales, it grew slightly, thanks to the strong auto market.

In the industrial equipment market, renewable energy and manufacturing facilities grew in sales, whereas in the ICT market, sales for smartphones declined. The business became profitable, except for the RF components. Operating income slide -- side, capacitors and inductors contributed to the overall profit growth.

Next, Sensor Application Products. Revenue share was JPY 3.5 billion, up 10.6%. Operating income was up JPY 2.3 billion. We continued to improve further since the second quarter. Temperature and Pressure Sensors slightly declined, partially due to the seasonal factor. In EMEA on the sensors, whole sensors grew firmly, particularly for the auto, and TRM Sensors (sic) [ TMR Sensors ] grew significantly in the sales volume of new products since Q2, thanks to the major customers for smartphones. Motion Sensors are firmly growing in sales, thanks to the expanded base of customers and applications. Operating income grew significantly, thanks to the good business of TMR Sensors. Motion Sensors contributed greatly to profit, reflecting the improved customer mix and product mix. All in all, they contributed greatly to the overall profit improvement.

Next, I will explain Magnetic Application Products, revenue being JPY 1.3 billion, down 2.1%. Operating income was down JPY 2.7 billion, excluding onetime costs of about JPY 4 billion we had in the third -- in second quarter. Revenue in HDD Heads volume mainly for PCs was down about 8%. And hard disk drive assembly sales volume also was down about 15%. In contrast, HDD Suspensions had a growth in profit driven by Nearlines business.

Magnets. This business grew in profit, thanks to the firm demand for auto. Operating income declined sharply due to the decline in HDD Heads volume as well as the selling -- the pricing erosion. Suspension improved on its profit, driven by the growth in sales and the mixture improvement by high-value products. Magnets are still in loss because the impact from the price rise is still with us.

Next, Energy Application Products segment. Revenue was JPY 20.6 billion, up 8.8%. Operating income was JPY 4.7 billion, up 13.6%. Rechargeable Batteries, sales grew thanks to the increased production volume of smartphones. Power cell and products sales grew in one. Excluding the FX impact and raw materials and price increase shifted to our selling price, revenue actually grew from the second quarter. Industrial power supplies grew slightly in revenue. Operating income -- raw materials for the Rechargeable Batteries started rising further from the second quarter, and its impact is still with us, but we made further efforts to improve the efficiency of fixed costs, resulting in the improved profitability starting from the second quarter. Industrial power supplies, thanks to the increase of sales, have resulted in the growth both in revenue and profit.

Next, I will go into details of JPY 14.1 billion of the operating income. We [ stay in a ] growth in sales of Passive Components profit expanded with the Sensor business becoming profitable, profit expanded with the recover -- the profit of HDD Heads, though we had some impact from the rising cost of materials. We had increased -- we had an increase in profit as much as JPY 12.6 billion. Impact from the sales price discounts remained rather small. Rationalization, cost down efforts as well as the impact of JPY 8.6 billion coming from the structural reform, we executed in the fourth quarter in the previous year.

In the previous fiscal year, our profit has been raised up -- actually increased JPY 12.5 billion. Major factors for that, first, in the third quarter, previous year, we had sales of the [indiscernible] almost JPY 2.4 billion. And also the rechargeable -- the royalty cost being JPY 5.1 billion. And with COVID-19 going on, there has been price increase in the distribution cost. Well, of course, Japanese yen becoming cheaper and actually up JPY 5.3 billion. All in all, it is going to be JPY 14.1 billion improvement in profit.

Lastly, I will explain our focus for the full year consolidated performance. As I said this in the outset, with the actuals and up until in the third quarter, and in light of the orders that we have received in the latest quarter, we revised upward our last numbers we announced back in November 1. So we made this revision again. Full year net sales is now JPY 1.850 trillion, operating income, JPY 160 billion. Income before income tax is now JPY 168 billion. Net income is now JPY 113 billion.

As for net sales demand for Passive Components, particularly for auto and industrial equipments and also for the Rechargeable Batteries, demand for smartphones turned out to be much faster than we had expected. So these are the reasons why we wanted to actually make the upper revision.

As for the operating income, we expect to grow the profit, thanks to the increased sales. We are also expecting to have onetime cost of JPY 9 billion for the consolidation of locations as well as the sales disposition of assets. And that has been expected in the fourth quarter. We expect to have onetime cost of tax around JPY 17 billion about that is [ expected ] in the fourth quarter. So with these factors in place, we are happy to announce that we made these revisions. As for the year-end dividend and CapEx and depreciation, amortization and R&D costs, there has been no change since the last time announcement.

This concludes my explanation. Thank you indeed for your kind attention.

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