TDK Corp

TSE:6762

Earnings Call Transcript 2021-Q4

[Unknown Executive]

Now we have some time, so we'd like to start the performance briefing for FY March 2021 of TDK Corporation. First of all, let me introduce today's attendees and speaker, President and CEO, Shigenao Ishiguro; Executive Vice President, Tetsuji Yamanishi. These are the 2 speakers today. Thank you very much. Okay, then, first of all, Mr. Yamanishi is going to talk about the performance briefing for today's consolidated results.

[Tetsuji Yamanishi, executive]

Okay. Thank you very much. I'm Yamanishi. Thank you very much for joining us today for this performance briefing on FY March 2021. Thank you very much.

First of all, I'd like to talk about the consolidated results for FY March 2021. First of all, that's -- the key points. Global economy this year -- the last year was that due to that COVID-19 pandemic and also that [ resulted from ] the conflict between the U.S. and China have adversely affected the economy. But after the Q2, each country have started and restarted the economy and production activities gradually.

And now the demand for the electronics has continued to recover, particularly for the digital transformation, DX; and the energy transformation, EX. We have created the demand more than we have expected initially and also by dealing with this demand, now we could grow by net sales by 8.5% year-on-year and operating income have grown by 13.9% year-on-year. And both net sales and operating income could recognize the record high performance.

And now rapidly -- rapid recovery from the Q2 of the automotive market have just contributed. So also for that -- with acceleration of the next [indiscernible] of the automotive, like the ADAS EV, have been pushed up sales world of Passive Components and also in the ICT markets.

Now DX-related demand have been very steady from that the initial of the year. And the secondary market -- secondary the Passive Components and also Sensor Products have been expanded, particularly for the PC, tablet and the 5G smartphone markets. Also in the Industrial Equipment markets, we have to boost the demand for the renewable energies and EX-related demand have clearly recovered.

Now the market environment around electronics have been in the big disruptive changes, so then we think that this trend for DX/EX were further accelerated after this onwards, in order to take this opportunity for sure and so that in order to operate that business and competitively in the market. So that's why we have implemented that the business restructuring and also for that -- and for the structural reforms, including the assets and disposals in Q4.

Next, let me talk about consolidated full year results. Now the currency fluctuations pushed down by JPY 21.7 billion and JPY 8.1 billion negative impact on operating income. Still taking all this into consideration, the net sales were JPY 1.479 billion and JPY 116 billion or 8.5% growth year-on-year. And also operating income including JPY 17.6 billion of this onetime structural reform expenses, you see we have JPY 111.5 billion or a JPY 13.6 billion or 13.9% of growth year-on-year.

And income before income tax was JPY 121.9 billion. Net income was JPY 79.3 billion. Earnings per share was JPY 628.08. Currency sensitivity, there was not any change. And the JPY 1 change to the dollar have about JPY 1.2 billion of operating income on a full year basis and JPY 200 million for JPY 1 to the euro change.

Next, let me talk about full year segment-wise performance. Passive Components. For Passive Components products, sales was JPY 407.1 billion, 2.9% increase from the year earlier. The demand in the automotive market have rapidly recovered from Q2 and also in the ICT market. Now demand have been very steady based on -- mainly for the 5G and industrial equipment market have also added to the booming with -- particularly for the renewable energy. And my guess in all of the markets have been boosted, and now the operating income was JPY 40.2 billion, 2.8% growth from year earlier.

In Q4, we have spent onetime expenses for the restructuring, that was JPY 3.7 billion. So that's why that -- and operating income -- operating profit margin was on par with last year of the 9.9%.

And business-wise, Ceramic Capacitors has increase in sales. But now the profit are slightly declined due to that negative impact of lockdown in Q1 in the automotive markets. Aluminum and Film Capacitors now we have been dramatically increased in the sales and also the profit increased due to the renewable energy markets and industrial equipment market.

Inductive Devices have been and increased in both sales and profits due to that -- the favorable automotive market and the smartphone and ICT market also pushed up. And High-Frequency markets have also increased in both sales and profits due to 5G-related markets.

In the Piezoelectric Electric Components and the Circuit Protection Components market have been also increase in the sales and in the profits because of the renewable energy as well as the stay-at-home demand for the industrial equipment, like gaming consoles.

Next is Sensor Application Products. Sales was JPY 81.3 billion, 4.4% growth from a year earlier. And now, we have the same level of operating loss. In the first half, the sales and automotive market have dramatically declined. But then again, in the second half, this -- the market automotive have been recovered and also the customer base for the strategic products and application have been expanded. And now it made a major -- make a comeback on demand recovery and we have the record high sales and the quarterly basis in Q4.

We have spent about JPY 4.1 billion for that asset disposal and the business base consultations as a restructuring cost, but that's the improvements of the developments and also the cost reductions. Or do we still have the loss, but all in all, we can see that we observe the improvements in profitability.

TMR Sensors have been expanded and particularly in sales and in the ICT market sales and have been growing as profits. MEMS Sensor. On the MEMS Sensor and expansion of the customer base for motion sensor and also then start of the new business for the MEMS microphones we could expand the sales.

Next, let me talk about Magnetic Application Products. The sales was JPY 199.3 billion. It was 9.3% minus or JPY 2.4 billion of the operating loss was recognized. When it comes to HDD Head, since due to this closure of the plant operations by one of the major customers in Q1, have pushed down dramatically the sales volumes. And also we did not have any launch of new products in this year. So that's why that will lead to that declining the price of the conventional products and with it deteriorates that -- the profit.

On the other hand, the HDD suspensions, now we have Nearline HDD for the major customers have been really booming and micro DSA products have been expanded. That contributed to the increase in both sales and profits. When it comes to magnets, now industrial requirements, the market, particularly for the renewable energy, have increased. But on the other hand, and that's -- the decline in the demand in automotive markets in the first half more than offset. And with a decrease in sales and also with that the shrinking of the impairment assets and recognized in the first half will reduce that the margin of [ loss ].

Next, Energy Application Products. Sales was JPY 740.2 billion, operating income was JPY 147.4 billion, 23.8% increase in a year and 18.8% of increase also for operating income. The new power sale product startup of -- so we made an upfront investment for this new product for power cell for the secondary battery. So that's why now -- and the margin of gross of operating income to the sales, have just been a little bit lower.

When it comes to the secondary battery: smartphone, tablet, the note, PCs are for the application of mobiles. And along this mobile, the device-related market have been favorably -- favorable. And particularly for tablet, note, PC business have been growing due to this demand increase for that the stay-at-home demand. And also the gaming console and the mini cell products have expanded in sales. And the other, for example, that residential power storage systems or the electric motorcycle product, that will be for that -- the next-generation promising products that have been expanded from the last years that pushed up the power cell products.

When it comes to Power Supply, so now the demand have recovered and that industrial equipment, including the semiconductor manufacturing equipment, and we have secured the increase in both the sales and profits. When it comes to EV power supply, now although the DC-DC converters have been steadily increasing in the sales. But on the other hand, that decline of the sales in [indiscernible] products. So that all in all, it will have a decline sales.

Next [indiscernible] the breakdown of operating income changes of JPY 13.6 billion. Now first of all, for the change in the sales volume, mainly for the second [indiscernible] pushed up the profit by JPY 49.3 billion. On the other hand, that the sales price reduction, a negative impact of JPY 28.7 billion. But still now we can more than offset with that [indiscernible].

And also for -- we have the -- we could observe that this and the impact of the JPY 1.1 billion for the expenses M&A-related cost reductions. And the SG&A have increased by JPY 29 billion, including that -- and the expansion of business for the secondary business and the power cell development and also -- and the termination of filter fees. So that's why, all in all, we have the JPY 29 billion more of the SG&A.

And impairment loss have decreased by JPY 11 billion from the JPY 18.3 billion last year to the JPY 7.2 billion this year. And including -- so taking all these onetime expenses of JPY 10.3 billion and also including JPY 8.1 billion of foreign currencies, in total JPY 13.6 billion of increase.

Next, I want to explain about the quarter-on-quarter changes of sales and operating profit of each segment from the third quarter to the fourth quarter. First, for the Passive Components, sales increased by JPY 4.4 billion, 4% against the third quarter. But operating income decreased by JPY 3.9 billion, 29.1%. Sales for the automotive and industrial equipment market increased, while sales for the ICT market decreased due to the seasonality of smartphone sales, which the third quarter is the peak.

As a result, sales for Inductive Devices and High-Frequency Components were flat. For Other businesses, which have a high proportion for sales for the automotive and industrial equipment market, saw an increase of sales. For operating income, JPY 3.7 billion of one-off expense was booked in the fourth quarter for restructuring the site. However, excluding this item, operating income was basically flat quarter-over-quarter.

Going to the Sensor Application Products. Sales increased by JPY 900 million or 3.9%, while operating loss increased by JPY 4.4 billion. However, in the fourth quarter, JPY 4.1 billion of structural reform expenses was booked for site restructuring and asset disposal. With the demand recovering in automotive sector, sales of Temperature and Pressure Sensors and Hall Sensors increased.

In MEMS Sensors, sales of motion sensors grew due to increased demand for Chinese smartphones. Microphone sales increased with the start of new projects as well. However, sales of TMR Sensors have gone down as third quarter is a demand peak for smartphones.

Comparing the operating income on an actual basis, excluding the impact of structural reform costs, Temperature and Pressure Sensors profit grew, led by the increase of sales. While for the Magnetic Sensors, sales in TMR Sensor category went down due to the decline in sales. Under MEMS Sensors, although operating loss of shrunk motion sensors, cost increased due to the new product development for microphones. For the MEMS Sensor business overall, operating loss increased slightly.

Going to the Magnetic Application Products. Sales went down by JPY 1.3 billion or 2.3% and operating income declined by [ JPY 8.3 billion ]. Impairment losses and costs for site restructuring of JPY 5 billion was booked in the fourth quarter. In the third quarter, JPY 2.4 billion of gain was booked due to the sales of the medical precision and component businesses under the HDD Suspension business. This means that net JPY 7.4 billion of one-off expenses was generated in reality. So the actual operating income decline was approximately JPY 900 million.

So HDD Heads sales volume increased 8% from the third quarter. But due to the decline in the sales prices and decreased sales in the HDD assembly business, sales in this business was more or less flat from the third quarter. In the HDD Suspension business, sales for Nearline hard disk drive decreased slightly. Sales of applied products for smartphones declined as well, leading to an overall decline in sales for this business. Sales of magnets were basically flat from the previous quarter.

As for operating income, on an actual basis, excluding the impact of one-off costs, as development costs increase for new technology development for hard disk drives, overall operating income decreased slightly.

Next is the Energy Application business. Sales went down by JPY 8.1 billion or 4.1%, while operating income decreased by JPY 17.8 billion or 41.6%. Sales of Rechargeable Batteries for smartphones declined due to seasonality, while sales of industrial power supply went up due to increased demand. EV power supply saw an increase as well.

Operating income declined sharply due to the volume decline of Rechargeable Batteries, cost increase caused by the factories in China continuing operation during the Chinese New Year and materials cost inflation. Profit increased slightly for the industrial power supply and loss for the EV power supply shrunk.

As for micro actuators for smartphone camera modules in Others business, sales with a major Chinese customer decreased substantially. So this business is continuing to generate loss. Due to the situation impairment loss of the [ TDK ] production line was booked in the fourth quarter, this led to an increase of loss by JPY 5.3 billion. That has been the full year results from my side. Thank you.

[Unknown Executive]

Next, in terms of the consolidated financial year outlook, Mr. Ishiguro is going to speak.

[Shigenao Ishiguro, executive]

This is Ishiguro speaking. Thank you very much for participating in this call. So for the fiscal year March 2022, I'm going to explain about the outlook. First, let me explain about the market forecast that we'll be using for the assumption of our projections.

The global economy suffered negative growth due to COVID-19 in fiscal year 2021. But for fiscal year 2022, our assumption is that the growth will be plus 6%. There's still geopolitical and COVID-related risks in the market. But we are assuming that the production of automobiles and smartphones will grow year-over-year, while production of PCs and tablets is going to be at the same level last year due to the trend for working from home to continue.

Furthermore, we are assuming demand will be growing in Passive Components and Rechargeable Batteries as energy transformation is going to be promoted further through the spread of electric mobility and a shift to renewable energy.

For this fiscal year, we acknowledge that we should accelerate our activities to enhance our contribution to the society by firmly grasping these trends in DX and EX. Based on this understanding, we'll actively make investments in our core business to accelerate our growth.

In the Rechargeable Batteries business, which is our core business, we will realize full-scale launch of the power cell business and ramp up our Indian production site as it will serve as a key foothold towards markets outside of China.

For Passive Components, where we can expect demand growing for 5G and automotive, we will invest for capacity expansion. In the Heads business, technological conversion to microwave-assisted recording and thermal-assisted recording heads will be an opportunity. We will invest in this technology and production.

We have started to see results in the sensor business as we have strived to expand the customer base and product lineup. We will work to improve profitability substantially this year in this business. We will reform and build our organization and system so that we can realize growth.

We will strive to become an organization that will deliver more value to the society by shortening the time to market and time to volume. More specifically, we are going to establish a new corporate marketing function, operate a manufacturing and sales integrated business company and aim for enhanced manufacturing capability by utilizing digital technology.

Sustainable business management enhancement of governance continues to be a top priority for us to contribute to resolving social issues and secure transparency. We are projecting to increase our dividends by JPY 10 to JPY 190 per year, in line with our earnings growth.

Next, I will explain about the demand assumptions for the major devices where we are involved. For automotive sector, our projected market size including commercial vehicles in fiscal year 2022 is 83 million units, which is a 5% increase year-over-year. Since the second quarter in the previous year, demand started to recover sharply and is currently at the pre-COVID levels.

However, production adjustments are occurring due to the lack of semiconductors for automobiles. So it is important to keep an eye for the future demand trend. Auto companies around the world are accelerating their focus on environmentally friendly cars and our assumption for the xEV market against the previous year is a 21% growth.

As for smartphones, which represents the ICT market, we assume that it will grow by 1% year-over-year to 1.37 billion units. Although Chinese smartphone makers production levels will be high, we feel that we should decide about order taking level by carefully observing the sales trend in the Chinese market.

Volume of 5G phones will continue to grow and reach 470 million units. Although the overall HDD market will continue to shrink, one bright spot will be the Nearline drives that are used in data centers. We also assume that the PCs and tablets will continue to show robust demand as they will be widely used for remote work and remote education.

Overall, we are anticipating a stable recovery, but there are still uncertainties about the impact of COVID-19 and the actual demand. We feel it necessary to decide about production plan while closely observing the sales trend of finished products. Based on these assumptions, the outlook for the overall sales will be -- compared to the previous year will be JPY 1.6 trillion and 8% growth.

For Passive Components based on the increased demand for the automotive market, more specifically for xEV and 5G-related markets, the range of increase will be between 4% to 7% against the previous year. In the Sensor Application Products, we project a 22% to 25% increase due to the increased demand for the automotive market and enhanced customer base for the TMR and MEMS Sensor, and a more comprehensive product lineup.

For the Hall Sensors with automotive applications and existing Temperature and Pressure Sensor sales should increase, benefiting from demand recovery for the automotive sector. At the same time, we expect high growth in TMR Magnetic Sensors, MEMS microphones, and we are anticipating a high demand.

We have been able to secure a record high level of sales in the fourth quarter. And based on this level, we think that we'll be able to realize strong sales growth through increased sales of new products and sales increased led by stronger demand.

Going to the Magnetic Application Products, total demand for hard disk drive is going to shrink by 3% as the market for 2.5 inches and 3.5 inches is going to shrink further. With this, constant production of HDD Heads and 3.5-inch drives for PCs is going to decline. However, sales are projected to grow in volume due to the growing demand for the Nearline HDDs. So we are anticipating increased sales for the magnetic products due to the expansion of the new xEV related projects. Overall, sales increase is projected to be between 9% to 12%.

In the Energy Application Products, rechargeable batteries will show a steady growth in the smartphone and PC tablet market. Further sales growth is anticipated by the doubling sales of power cells, increased demand for the power supply business for semiconductor equipment market and for the infrastructure market as well, and the start of mass production for the already approved new project for EV power supply. In this business, we project sales to increase between 8% to 11%.

As I have explained, based on the global economic outlook and the projected demand for the main finished goods, the projection for the fiscal year is shown in this slide. Exchange rate assumptions are JPY 105 to the dollar and JPY 124 to the euro. Based on these assumptions, our sales outlook will be JPY 1.6 trillion, which is an 8% increase from last year.

Operating income and income before income tax forecast is JPY 150 billion, respectively, while net profit is JPY 100 billion and EPS JPY 791.62. Dividends for the second half of fiscal year 2021 is JPY 90 as already announced, bringing the annual dividend payment to JPY 180. For fiscal 2022, the planned dividend is JPY 95 for both the first and second half and it will be JPY 190 for the full year. CapEx projections JPY 300 billion; depreciation and amortization, JPY 160 billion; and R&D, JPY 140 billion.

That is all for me. Thank you very much for your attention.