TDK Corp

TSE:6762

Earnings Call Transcript 2023-Q3

[Unidentified Company Representative]

Thank you indeed for your precious time. Let us now get start the TDK FY 2023 ending March 31. This is going to be the explanation for the results and for the third quarter.

We have Mr. Tetsuji Yamanishi, Executive Vice President; and also Executive Officer, Mr. Fumio Sashida; Executive Officer, Taro Ikushima; and Executive Officer, Takao Tsutsui. They are the participants for this meeting. Thank you.

[Tetsuji Yamanishi, Executive Vice President]

This is Tetsuji Yamanishi, Executive Vice President. We do appreciate your precious time despite your busy schedule to attend our financial results briefing for the third quarter FY March 2023. We are so happy to have so many of you.

I am now pleased to go through this overview of the consolidated financial results.

First, key points for the earnings for Q3 and FY March 2023. The global economy has become increasingly stagnant and as a result of the continued price hikes in energy and certain materials due to the heightened geopolitical risks, including Russia's prolonged invasion of Ukraine, as well as higher interest rates due to the policy rate hikes in the U.S. and European countries, aiming at quelling the inflation.

As a result, the financial demand remained sluggish in the electronics market as well. But supported by the demand for EVs, such as xEV and automobiles, sales increased 17.5% year-on-year basis and operating profit rose 14.5% year-on-year basis.

In addition to the first half results, the third quarter was also firm, resulting in the record sales and operating profit on a cumulative 9-month basis. In the ICT market, demand for the PCs and tablets, which have been rather strong due to the corona, the pandemic, declined further. And the sales of HDD-related components fell sharply, as demand for the data centers remained sluggish.

While our smartphone production remained sluggish, sales of rechargeable batteries and sensors expanded for new models from major customers.

In the automotive market, despite the ongoing supply chain constraints such as semiconductor supply shortage, a gradual recovery was seen in overall and the sales of passive components and the sensors expanded as a result of continued strong demand for the components, especially with an increasing ratio of xEVs and in shifting to ADAS.

The rising of geopolitical risks have caused the energy supply instability and price hikes worldwide, and the demand for renewable energy, energy-saving equipment and energy storage systems for home use has continued to grow. I'm so happy to be able to report these positive points.

Next, I will give an overview of our business performance. First, the 9-month cumulative result shows an increase in net sales of ¥251.4 billion and an increase in operating profit of approximately ¥60.9 billion due to exchange rate fluctuations against the U.S. dollar, in particular.

Net sales amounted to ¥1.709 trillion, up ¥315.1 billion or 22.6% year-on-year, and operating profit amounted to ¥188.7 billion, up ¥47.4 billion or 33.5% year-on-year with profit before tax, totaling ¥188.7 billion.

Profit before tax was ¥181.1 billion, up ¥47.4 billion year-on-year basis or 33.5%.

And the net profit was ¥136.9 billion. Earnings per share was ¥361.06.

As for the sensitivity to exchange rates, we estimated that as the last time, 1 annual change in the yen-dollar exchange rate would result in annual change of accumulated ¥2 billion, and 1 change in the yen-euro exchange rate would result in an annual change of approximately [ ¥6 billion ].

Next, the third quarter results, including the impact of exchange rate fluctuations, net sales increased ¥87.3 billion or 17.5% year-on-year to ¥587 billion. Operating profit increased ¥8.7 billion or 14.5% year-on-year to ¥68.4 billion.

Profit before tax was ¥68.2 billion. Net profit was ¥49.9 billion, and net income was ¥49.9 billion, down 1.7% from the same period last year. Profit before tax was ¥68.2 billion, net profit was ¥49.9 billion, and earnings per share was ¥131.64.

The following is an overview of the third quarter results by segment. Sales of Passive Components was ¥144.6 billion, up 11.2% from the same period last year. Demand for the components for the automotive market, especially for the xEVs and ADAS, remained strong, and demand for the capacitors and inductive devices for the industrial equipment market remained rather strong as the demand for the capacitors for renewable energy and production equipment.

On the other hand, High-Frequency Components, of which account for a large proportion of sales for the smartphones, suffered a large decrease in both sales and profit due to a decline in the demand for smartphones, while the Piezoelectric market components and Circuit Protection Components offer a decrease in the profits due to decline in the sales volume for smartphones and home appliances.

Next, the Sensor Application Products business. Net sales was ¥45.6 billion, a significant increase of 26.3% year-on-year. And operating profit increased 1.8x due to a significant improvement in profitability, partly reflecting the effect of increased sales, and the operating income margin reached double digits for the first time.

Sales of Temperature and Pressure Sensors increased for automotive applications. Hall Sensors for automotive applications and new products for smartphone applications expanded. And the TMR Sensors for automotive applications remained rather strong, while sales for the smartphone applications expanded due to the increase in adoption. Profitability has also improved.

In the MEMS Sensors, sales to the ICT market where demand has been rather sluggish declined, but sales to the automotive industry expanded, and the sales to drone and game consoles also grow steadily, showing an increase in revenue.

Next, as for the Magnetic Application Products. Net sales was ¥47.5 billion, down 25.8% year-on-year, and operating profit was a loss of ¥13.9 billion.

And the HDD Heads and HDD Suspension Assemblies. Sales volume of both HDD Heads and Suspension for the PCs and the nearline HDDs dropped by more than 40% year-on-year basis, due to a further decline in overall demand for HDDs from the second quarter as a result of the lower data center investment due to the economic slowdown and HDD inventory adjustment, in addition to the impact of the PC market.

As a result, the sales volumes of the both Heads and Suspensions for HDDs fell by more than 1/2 year-on-year basis, resulting in a significant decrease in sales and posting a loss.

In addition that it will take some time for overall HDD demand to recover. Structural reform of HDD Heads has was implemented in the third quarter, resulting in about expense of about ¥1 billion.

Sales of Magnets increased due to the higher sales for xEVs, but earnings declined due to the soaring material costs and delay in the productivity improvement.

This is the last in the business, the Energy Application Products, and which reported net sales of ¥331.4 billion and operating income of ¥59.8 billion, up by 29.4% and 53.4%, respectively, on a year-on-year basis.

In Rechargeable Batteries, sales volume for mobile applications such as smartphones, tablets and notebook PCs in China declined. But the sales for the new smartphone models increased and sales of medium-sized batteries, mainly for home energy storage systems, also expanded steadily, resulting in a year-on-year sales growth in real terms, excluding the effect of exchange rates.

Operating income was also up year-on-year in real terms, excluding the impact of foreign exchange rates due to a turnaround in mix, improved the efficiency and overall cost including SG&A expenses and improved the profitability of medium-sized batteries, despite the negative impact of a decrease in the volumes of small batteries.

Sales and profits of Power Supplies for industrial equipment increased. It's increased due to steady demand for industrial equipment such as semiconductor manufacturing equipment and medical equipment.

Next, I will explain the factors behind the increase and decrease in the sales and operating income by segment from the second quarter to the third quarter of the current fiscal year, Q-on-Q basis.

The first, in the Passive Components segment, sales decreased by ¥8 billion or 5.3% from the Q2, and operating income declined by ¥3.6 billion or 12.1%.

In addition to a decline in the sales to the ICT market, mainly for the smartphones, sales to the industrial equipment markets, consumer electronics and sales to distributors also declined, resulting in lower sales in all businesses.

Sales of capacitors for which sales to the xEV market have been strong increased, while other businesses saw a decrease in profit due to the impact of lower sales.

In Sensor Application Products, sales remained almost flat, while operating income increased by ¥1.2 billion or 27.5%. Sales and profits of Temperature and Pressure Sensors decreased due to seasonal factors such as Christmas vacations in the automotive industry and lower sales in the consumer electronic industry was another negative factor.

For Magnetic Sensors, both TMR Sensors and Hall Sensors saw sales and profit increased due to the peak season demand for new models from the major customer. Sales and income of MEMS Sensors decreased due to a decline of the motion sensors for the smartphones in China and decreased in the sales of microphones.

Next, for the Magnetic Application Products segment, sales decreased by ¥7.2 billion or 13.2% and operating income declined by ¥12.1 billion. Sales fell sharply with a 29% decline in HDD Head sales volume and a 17% drop in the Suspension sales volume, mainly as a result of a further decline in overall demand for nearline HDDs. And operational losses also had a significant impact, resulting in a sharp decline in the profits and recognized the loss.

In consideration of future demands trends after this, we have decided to implement structural reforms under the post process of HDD Head with ¥1 billion recognized in Q3. Sales of Magnets increased due to higher sales for the xEVs.

Next, the Energy Application Products. The sales decreased by ¥10.9 billion or 3.2%, while the operating income increased by ¥6.3 billion or 11.7%. Sales and volume of rechargeable batteries for ICT applications increased for new models from the major customer, while overall sales of a smaller batteries for ICT applications decreased due to lower sales for mobile applications, such as PCs and tablets. And the sales of medium-sized batteries remained almost flat, mainly for home use energy storage systems, and the sales for the rechargeable batteries as a whole declined.

Although operating income was affected by price discounting due to lower material prices, we secured an increase in operating income by improving overall costs, including SG&A, in addition to improving the profitability of medium-sized batteries. Profitability of industrial Power Supplies has also improved due to increase in sales.

Next, breakdown of operating income changes of ¥8.7 billion. This change shows a significant decrease of ¥28.6 billion due to the decrease in the sales volume of HDD Heads and Suspensions and the rechargeable batteries, which are significantly affected by decline in demand in the ICT market.

However, ¥24 billion, of which was offset by the incremental income due to the effect of yen depreciation. And in addition, we improved the profits by approximately -- and from the [¥15 billion] from the previous year by promoting rationalization and cost reduction, mainly in rechargeable batteries and passive components, as well as by streamlining SG&A expenses. So this is about -- we have improvements by [ ¥15 billion]. So we can secure that the positive growth.

We also implemented the selective reform in the third quarter of this fiscal year in consideration of the drastically-changing demand environment for HDD Heads, and recognized approximately ¥1 billion as expense for these efforts.

Finally, I'll go to explain the outlook for the consolidated business results for the full fiscal year basis ending March 2023. As I mentioned earlier, the global economy has been suffering from a growing sense of stagnations triggered by continued price hikes in energy and materials caused by geopolitical risks and rising interest rates caused by policy rate hikes in Europe and the United States to COVID inflation, and the demand and the production volume for major devices related to our businesses are also expected to decline from the previous forecast announcement.

Given these are the demand environments, we have -- and including the -- based on the results through the third quarter and the current order status, now we have revised the focus downward to ¥2.170 trillion in sales and ¥185 billion in operating income, ¥185 billion in income before income taxes and ¥132 billion in net income. This is downward revision.

So in light of the current pressure on the demand, we decided to revise the forecast downwardly with approximately ¥20 billion to be recognized for the onetime restructuring cost, aiming at improving asset efficiency. So this is a major reason for this, the downward revision, but on the other hand, we expect the business environment to be difficult to forecast due to the lack of growth in sales volumes. Therefore, we will do utmost to improve profitability by streamlining fixed costs and improve the cash flow by reducing inventories and the like. And so consequently, we expect the free cash flow at the end of current fiscal year to be higher than initially projected.

The exchange rates assumed in the forecast are ¥130 to dollar in Q4 and ¥135 for the full year. When it comes euro, ¥137 to euro in Q4 and ¥140 for the full year.

We plan to pay a year-end dividend of ¥53 per share or ¥106 per share for the full year as we planned at the beginning of the fiscal year. And the capital expenditures, depreciation and R&D expenses remain unchanged from the previous forecast.

This is all my presentation. Thank you very much. Thank you.