TDK Corp

TSE:6762

Earnings Call Analysis

Optimistic Revised Full-Year Earnings Forecast

Despite global economic challenges and sluggish electronics market demand, the company exceeded its 9-month performance forecast due to a robust automotive market and unexpected recovery in the Chinese smartphone sector, prompting a raise in full-year projections. Net sales are now seen at JPY 2,090 billion, with operating income at JPY 170 billion and net income at JPY 120 billion. This uptick correlates with year-on-year figures showing a net sales decline of 5.3% and an operating profit drop of 17.5%. Looking ahead, ceramic capacitors are forecasted to grow, offsetting declines in inductive devices and sensor products, while HDD demand dips but nearline HDD shows promise. The focus will be on optimizing inventory and revising capital expenditures down by JPY 10 billion to JPY 230 billion, and addressing the yen depreciation's impact.

Economic Challenges and Foreign Exchange Sensitivity

As the economic climate faces challenges with slower growth in Europe and China, and geopolitical tensions in the Middle East, the company saw a depreciation of the Japanese yen but struggled with a drop in net sales by 5.3% and a decline in operating profit by 17.5%. The volatility in currency value led to a sizeable impact, where a one yen change against the US dollar could mean a 2 billion yen flux, and against the Euro, about 600 million yen.

Diverse Segment Performance

The company's performance varied significantly by segment. Passive components experienced a 3.2% decrease in net sales due to weakened ICT and industrial equipment demands, despite growth in the automotive sector. Operating profits in this segment dipped by 37% primarily due to a poorer product mix. Similarly, Sensor Application Products saw their net sales grow by 3.6%, but operating profits fell by 23.2%.

Magnetic and Energy Products Fluctuation

Net sales in magnetic application products dropped by 15.9% year-over-year, resulting in an operating loss of 26.2 billion yen due to a sluggish demand for HDDs. In contrast, Energy Application Products recognized a 5.4% increase in sales and a 10.4% increase in operating income, buoyed by robust orders in industrial equipment and medical gear.

Operational Adjustments and Incremental Gains

Operational adjustments across segments led to an increase in profits because of boosted sales in rechargeable batteries and SG&A expenses were kept almost neutral due to yen depreciation, resulting in an overall operating income increase by 1.8 billion yen despite a range of additional expenses and decreases in profit from sales adjustments.

Segment Breakdown From Q2 to Q3

Comparing second to third fiscal quarters, an overall decrease of operating income by 10.5 billion yen was reported. This reflected a decrease in passive component sales, while the Sensor Application Products segment experienced a growth of 400 million yen in operating income. Magnetic Application Products saw a reduction in losses and rechargeable batteries sales highlighted the Energy Application Products' operational income, which rose by 8.1 billion yen.

Forward-Looking Statements and Revised Forecasts

The company anticipates a mixed outlook: a decline in passive component sales due to seasonal demand shifts, a decrease in sensor application sales by 8-11%, and a potential uptick in magnetic application sales by 0-3%. Energy Application Products may see a severe 24-27% decline. Considering this, the full year forecast is optimistic, projecting net sales at 2,090 billion yen, operating income at 170 billion yen, and net income at 120 billion yen, which factors in the cost-saving measures and restructuring plans ahead.

Earnings Call Transcript 2024-Q3

[Operator]

If I may, now I would like to start the TDK cooperation, third quarter performance briefing for fiscal year ending March 2024. Allow me to introduce the attendees. We have Tetsuji Yamanishi, Executive Vice President; Fumio Sashida, Corporate Officer; Taro Ikushima, Corporate Officer; Takao Tsutsui, Corporate Officer. Thank you again for your kind attention.

[Tetsuji Yamanishi, executive]

Well, this is Yamanishi speaking. I would like to thank you for your personal time despite your business schedule to attend our third quarter performance briefing for FY March 2024. I'm so happy to have so many of you.

If I may now like to [indiscernible] and go through the outline of the consolidated results. First, during the third quarter, year-to-date, although the global economy remained firm in North America, the economic slowdown in Europe and China as well as the unrushed, the surrounding in the Middle East region caused grow in a sense of the economic slowing down. Furthermore, the Japanese yen continued to depreciate against the U.S. dollar as well as against the euro. Under such a business environment, in the electronic market, which actually affects our business performance, in addition to the stagnant demand in the ICT and HDD markets due to the prolonged slump. The overall demand in the industrial equipment market remained weak.

In the automotive market, production of xEVs and other vehicles exceeded the level of the same period of the previous year. But parts inventory adjustment by some customers were prolonged resulting in lower demand for parts then we had expected at the beginning of the period. And on a year-on basis, net sales were down 5.3% and operating profit was down 17.5%.

Looking at the sales by the business segment by market. Sales of passive components for the ICT and industrial equipment markets declined significantly, while sales of passive components and sensors for the automotive market increased, but the growth slowed down due to the prolonged inventory adjustments by customers. Demand in the HDD market was also significantly lower than the previous year and sales of HDD Heads and suspensions declined sharply, but signs of improvement began to appear from the third quarter. Sales volume of small rechargeable batteries for the ICT market remained almost unchanged year-on-year, but sales decreased due to a drop in selling prices following a decline in the market prices.

Next, I'd like to go through the highlights of the Q3 year-to-date results. With FX fluctuations, net sales was up about JPY 22.5 billion. Operating profit was about JPY 17.2 billion. Including that, with this impact in place, net sales was [ JPY 1.97 billion ] (sic) [ JPY 1,619 billion ] and JPY 90 billion on year-on-year basis, 5.3% decline. Operating profit, JPY 157 billion (sic) [ JPY 155.7 billion ], year-on-year basis, JPY 32.9 billion, 17.5%. And profit before tax was JPY 17.8 billion (sic) [JPY 157.1 billion ]. And actually, net profit attributable to owners of parent was JPY 65.3 billion (sic) [ JPY 119.5 billion ]. Actually, our earnings per share was JPY 172.14. As for the ForEx sensitivity, we assume that as before, the impact of one Japanese Yen fluctuation against U.S. dollar would be JPY 2 billion and the impact of one exchange vis-a-vis Euro would be about JPY 600 million.

Next allow me to explain the third quarter results on the consolidated basis. Including the impact of exchange rate fluctuations of appreciably JPY 22.5 billion on net sales and JPY 3.8 billion of operating income. Net sales decreased JPY 27.7 billion or 4.7% year-on-year to JPY 559.3 billion, while operating profit increased JPY 1.8 billion or 2.7% to JPY 70.2 billion. Profit before tax was JPY 76.9 billion and net profit attributable to owners of parent was JPY 65.3 billion, up 30.8% from the same period last year. Earnings per share amounted to JPY 172.14.

I will now explain the situation by the segment for the first 9 months of the fiscal year. Net sales of passive components were JPY 427.1 billion, down 3.2% year-on-year basis. Although the sales grew in the automotive market, mainly for xEVs caused by the declines in the sales for the ICT market as well as industrial equipment market. Operating profit was JPY 50.2 billion, down 37%. Although sales into the automotive market increased in all businesses, the performance of each business segment varied due to the ups and downs of orders received in each market and each application. Though we were able to secure the growth in sales in the ceramic capacitors due to the increased sales, particularly in the automotive market, but earnings declined due to the deteriorated product mix and other factors.

While our sales and profit of aluminum electrolytic capacitors and the film capacitors decreased due to a slowdown in demand in the industrial equipment market. Sales and profits of inductive devices and piezoelectric, the material components and the circuit protection components declined due to decreased demand from the industrial equipment market as well as the ICT market and also from the consumer electronics and gaming markets.

Next, the Sensor Application Products business. Net sales being JPY 135.3 billion, up 3.6% year-on-year. And operating profit was JPY 9.8 billion, down 23.2%. Sales and profits of temperature and pressure sensors increased due to higher sales into the automotive industry despite lower sales to the industrial equipment market and consumer electronics. Sales and profits of magnetic sensors increased due to higher sales of Hall sensors to the automotive industry and the strong sales of TMR sensors for smartphones. On the other hand, sales and profits of MEMS sensors decreased due to lower sales in the ICT market and industrial equipment, although the sales of motion sensors to the automotive industry expanded.

Next, the magnetic application products. Net sales were JPY 132.4 billion, down 15.9% year-on-year. And operating profit was a loss of JPY 26.2 billion. HDD Heads and suspensions, the continued sluggish demand for HDDs resulted in a 24% year-on-year decline in total HDD demand. And in particular, a 35% decline in total nearline HDD demand, which led to a significant year-on-year decline in sales volume for both heads and suspensions for HDDs. So revenue went down and the loss became larger. Structural reforms to optimize the production systems are being implemented as planned. We have allocated approximately JPY 1.9 billion for 9 months on a cumulative basis. Sales of magnets declined due to lower sales of industrial equipment and the deficit increased slightly due to the delayed productivity improvement.

Next, Energy Application Products. They recognized sales of JPY 883.5 billion and operating income of JPY 155.3 billion, a 5.4% increase from the same period of last year on sales, but -- on the other hand, it's an increase of 10.4% for the operating income. In the rechargeable battery business, while the sales volume of small batteries for smartphones increased. Sales increased due to the lower selling price and closed by the falling material prices and also the price discounting and also the sales of the medium-sized batteries also decreased due to the business transfer to the JV.

Despite the decline in sales, we secured an increase in operating income due to wanting the increase in the sales volumes, for second streamlining effects and the foreign exchange gains. Sales and the operating income of power supplies for industrial equipment increased due to enhanced sales to industrial equipment such as semiconductor manufacturing equipment and medical equipment in response to backlog of orders. While the loss on power supplies for EVs narrowed significantly due to the effect of structural reform at the end of the previous fiscal year in addition to increased sales.

Next, this is a one full chart representing the change of operating income of JPY 1.8 billion. The factors leading to this increase is in the third quarter include for one thing, the decline in the volume of passive components, deterioration and the product mix and the decrease in operating capacity. But on the other hand, operating income of rechargeable batteries increased due to the boosted sales. So the total change in the profits due to the change in sales amounted to JPY 3.8 billion. Rationalization cost reductions and the structural reform effect of JPY 10.8 billion almost offset the JPY 13.7 billion decrease in profits due to change in the selling prices.

SG&A expenses increased by JPY 2.5 billion due to an increase in sales volumes of rechargeable batteries and new product developments and restructuring costs of JPY 900 million in the previous fiscal year and another JPY 900 million in the current fiscal year, and we recognize it considering HDD heads. On top of that, another JPY 400 million was recognized for discontinuing the legacy products for the inductive devices. However, this increase was almost offset by the impact of yen depreciation of JPY 3.8 billion and eventually resulting in an overall increase of operating income by JPY 1.8 billion.

I will now explain that the factors behind the increase or decrease in sales and operating income by segment from the Q2 to Q3 of the current fiscal year. First in the passive components segment, sales decreased by JPY 4.5 billion or 3.1% on a Q-on-Q basis from the Q2, while operating income increased by JPY 1 billion or 5.7%. Sales and income of ceramic capacitor increased due to higher sales for automotive applications, while the sales and the income of aluminum family capacitor decreased due to lower demand from the industrial equipment market and the sales of inductive devices remained almost flat due to a decrease in the sales for the industrial equipment market. However, sales to that -- the automotive and ICT market increase, resulting in an increase in profit sales. And even with JPY 400 million of structural reform cost to discontinue legacy products.

Sales and earnings of high-frequency components increased due to higher sales to ICT market, while the sales of isoelectric and circuit protection components declined in all markets, resulting in a slight decrease in earnings. Next in Sensor Application Products. Sales increased by JPY 2 billion and operating income grew by JPY 400 million. Sales of temperature and pressure sensors increased due to an increase in sales for automotive applications, while magnetic sensors saw a slight decrease after that demand in ICT market picked out. But on the other hand, sales to the automotive market increased and both sales and operating income remained almost flat. In the magnetic sensor business, the sales volumes of motion sensors for smartphones in China went up and supported net sales growth.

Next, in Magnetic Application Products segment, sales increased by JPY 4.5 billion or 10%, and operating income increased by JPY 2.2 billion and reducing the loss. Sales of nearline HDDs bottomed out in Q2 and showed a signable recovery in the Q3. And leading to -- about the 14% increase in HDD Head sales volume from Q2 and approximately about 1% increase in suspension sales volume and eventually resulting in an increase in overall head sales and reducing the loss. Restructuring costs of JPY 900 million were recognized in both Q2 and Q3, and there was no increase or decrease. And on Q-on-Q basis, sales and operating income of magnet remained almost unchanged.

Next, in the Energy Application Products segment, net sales increased by JPY 600 million, and operating income rose remarkably JPY 8.1 billion. And rechargeable batteries, sales declined due to the transfer of medium-sized of the batteries to the joint venture, while the sales of small batteries increased for smartphones in China and resulting in an overall increase in sales and profits. Business of power supplies for industrial equipment remained steady, while sales and profits declined in power supplies for EVs. Next, let me explain the cash flow. For the first 9 months total of the current fiscal year, operating cash flow was JPY 333.3 billion, investment cash flow, including CapEx was JPY 147.8 billion, and free cash flow was JPY 185.5 billion.

In light of the market and demand situation, we have to further optimize the inventories since the end of the first half and have also made capital investments while carefully assessing the supply and the demand. And in Q4, we will continue to optimize the inventories, and we have an another JPY 500 million and also for that they have an JPY 8 billion is the -- already have succeeded from the forecast. And also going into Q4, we're going to work on optimizing the inventories and examining that's the capital investments.

Now I would like to explain full year forecast for the fiscal year March 2024. First of all, I would like to explain the image of sales increase and decrease from the third quarter to the fourth quarter of this fiscal year. We have assumed an exchange rate of JPY 145 to the U.S. dollar for the first quarter. So there will be almost no foreign exchange impact compared to Q3. As for passive components, sales of ceramic capacities for the automotive market are expected to grow. On the other hand, sales of inductive devices are expected to decline due to such factors as the seasonality of demand from the ICT market and overall passive component sales are expected to increase by plus/minus 0 to 3%.

In sensor application products, sales of TMR sensors are expected to decrease due to a seasonal decline in the demand from the ICT market and the sales of MEMS motion sensors and MEMS microphones are also expected to decrease due to a decline in ICT market and as well as decline in the sales for the game consoles. And it will be in 11% to 8% overall decrease is expected.

As for magnetic application products, while the total demand for HDD is expected to decline by approximately 6%. Total demand for nearline HDD is expected to increase by approximately 9% as signs of recovery are being seen. And about the 10% growth over the sales volumes of HDD head and suspension is expected. On the other hand, sales of magnets for the automotive market are expected to decline and overall sales of magnetic applications are expected to increase by plus/minus 0 to 3%.

The Energy Application Products, overall sales are expected to decline by dramatically in the sales and also for that and with that the transported business to the joint ventures and total 27% to 24% decline is expected. And so that's in the -- eventually in results, we expect an overall decrease of 16% to 13% in this segment. And lastly, I would like to explain our full year earnings forecast for the current fiscal year. During the 9 months period, productions for the electronics market as a whole remained sluggish due to the weak end market demand.

On the other hand, in the third quarter of the current fiscal year, in addition to the effect of the weaker Japanese yen and the demand, this recovered in the Chinese smartphone market, resulting in higher-than-expected sales of small rechargeable batteries and also higher expected sales of HDD Heads and suspension. And a result of all this, the 9 months total period performance exceeded the forecast announced on August 2.

Based on this performance, we have revised upwardly our full year forecast for the fiscal year March 2024 from those announced on August 2 to net sales of JPY 2,090 billion, operating income of JPY 170 billion and net income of JPY 120 billion. The first quarter forecast assumes an exchange rate of JPY 145 to the U.S. dollar from the previous forecast of JPY 130 to the dollar.

In addition, we expect to implement measures to improve asset management efficiency in anticipation of future changes in the demand trends and to recognize onetime expenses such as restructuring cost of approximately JPY 12 billion in the first quarter. Dividends are unchanged from the beginning of the fiscal year. And we have revised down widely our capital investment focus by JPY 10 billion to JPY 230 billion after careful consideration of demand trend, including a review of the timing of the investments made. And increased depreciation and R&D expenses by JPY 10 billion for each taking into consideration of expected cost increase triggered by the further depreciation of the Japanese yen in the second half of the fiscal year. Thank you very much. Thank you.