TDK Corp

TSE:6762

Earnings Call Transcript 2021-Q1

[Tetsuji Yamanishi, executive]

So this is Yamanishi speaking. Thank you very much for attending this consolidated results for the first quarter of fiscal year March 2021 briefing, despite your busy schedule. And as before, this will be a remote meeting. And sorry to inconvenience you, but thank you for your support. So I would like to explain about the consolidated results. This is a key point about the earnings. The COVID-19 pandemic has spread around the world, heavily impacting the real economy. Against this backdrop, the demand environment for our business for the first quarter is showing deviation from what we have forecasted at the beginning of this fiscal year. In the automotive and HDD, hard disk drive markets, our major clients have suspended operations at their plants. This has had a major impact on our business, and our sales towards these markets is substantially lower than our initial market -- forecast, excuse me. In the ICT market, smartphone demand has declined sharply than our initial forecast. That is basically in line with the initial forecast. However, due to digital transformation, DX has accelerated through remote working and remote learning. And this led to an expansion of demand in mobile devices and 5G-related products, which was higher than our expectations. The demand trend in our key markets has changed against our outlook, and there are differences in the performance by each segment. However, overall, year-over-year, net sales decreased 8.1%, and operating income declined 26.4% year-over-year.

Although the market environment has been tough, sales and operating income for rechargeable batteries has increased as we were able to tap in to demand. Demand expanded for PCs, tablets and 5G base stations through the acceleration of DX.

Sales of rechargeable batteries, MLCCs and high-frequency components increased. This led to higher sales year-over-year, and performance exceeded the initial forecast. As a result, these businesses drove the first quarter earnings, despite the fact that we were assuming weak earnings for this quarter.

On the other hand, due to the weak demand in the automotive market, we saw a lower-than-expected sales in passive components and conventional sensors, which have a high sales composition to the auto markets.

Sales of HDD Head decreased more than expected as the shutdown of our major client has had a major impact. As a result, sales volume was lower than expectations. Earnings deteriorated sharply than expected.

As for the consolidated results, due to the strong yen against the dollar and other currency, there was a negative impact on sales of JPY 11.3 billion, JPY 1.3 billion positive impact on operating income. Including this factor, net sales was JPY 309.4 billion, down JPY 27.4 billion or 8.1% decline year-over-year. Operating income was JPY 18.4 billion down JPY 6.6 billion or 26.4%. Income before income tax was JPY 20.7 billion. Net income was JPY 13.2 billion. Earnings per share was JPY 104.43.

Sensitivity against the currency is unchanged. On an operating income level, if yen fluctuates by JPY 1 against the dollar, it will have a JPY 1.2 billion impact annually. The yen/euro impact is about JPY 200 million.

Let me explain the results by segment. Net sales for the Passive Components segment was JPY 84.4 billion, down 14.1% year-over-year. Operating income was JPY 7.7 billion, down 25.2%. OP margin was 9.1%.

In the automotive industrial equipment markets, demand has continued to be weak from last year, particularly in the auto market. As our major client suspended operation of their plants due to COVID-19, demand dropped further than we expected.

On the other hand, in the ICT market, demand for 5G terminals and base stations was very strong, especially in the Chinese market. There also was front-loaded demand in this area, as clients move to secure stock for components. This led to a higher-than-expected sales for the ICT market. As a result, in products that have a higher proportion of sales to the auto and industrial equipment markets, such as capacitors, inductors, piezoelectric material products and circuit protection components and aluminum electrolytic film capacitors, both sales and profit declined.

However, in this first quarter, as demand grew strongly for 5G base stations, sales of capacitors for base stations increased substantially. Consequently, although profits declined, we were able to maintain profitability at the same level of the previous year.

As for high-frequency components, which has a high sales ratio for the ICT market, both sales and profit increased, thanks to the robust sales of 5G-related products. Profitability has improved substantially as well.

Next is the Sensor Application Products segment. Net sales was JPY 14.7 billion, down 18.8% year-over-year. Operating income continued to be in the red at the same level as last year.

As about 50% of our sales for the segment goes to the auto market, specifically for conventional sensors, it has been severely impacted by the weak demand in the auto market.

In this first quarter, our major auto customers mainly in the U.S. and Europe, have suspended the operation of their plants. This has had a direct impact on our temperature and pressure sensors and hall sensors, where sales declined sharply and earnings worsened as well.

On the other hand, TMR sensors have been faring well, stably generating profit, as sales has been robust due to increased share of our products for smartphones.

In MEMS Sensors, sales of microphone MEMS declined due to the shrink in demand for microphones for IoT devices, reflecting the weaker consumer sentiment under COVID-19. Sales of motion sensors have gone down as well, as less smartphones models are using motion sensors. For MEMS Sensors, overall, as the top line did not grow, it is still loss making, although the level of loss is improving. Going to the Magnetic Application Products segment. Net sales was JPY 38.3 billion, a 31.0% decline year-over-year. Operating loss was JPY 3.8 billion. As for the overall market environment for the quarter, total demand for hard disk drives went down by 20% year-over-year. But total demand for HDD Heads was about the same as last year due to the increase of nearline HDDs. However, our major clients suspended operation at their plant due to COVID-19. This led to a situation where shipment of HDD Heads fell by 45%, which was worse than our initial forecast. As a result, although there was earnings improvement for HDD suspension assemblies year-over-year, for the HDD Heads and HDD suspension assemblies business overall, both sales and profit dropped sharply.

Most of the sales of magnets go to the auto industrial equipment market. And as such, sales dipped and the loss level is about the same as last year due to the overall weak demand in these markets.

Next, Energy Application Products. So that's net sales was JPY 156.9 billion. Operating income was JPY 31.3 billion, 8.6% increase of net sales, and that's a substantial increase of operating income of 18.1%. And that the operating income margin was 19.9% and the improvements of the profitability.

For the rechargeable batteries, due to the decrease of the smartphone productions, and although we could slightly over that initial forecast, but now it has negative growth year-on-year. So -- but with expansion with -- of teleworking and tele-learning, now we observe that's a substantial increase of demands of the tablet and notebook, PC and that we have -- and sales volumes have boosted. And also for that application, like the gaming consoles or the mini cell for -- that's available devices like a wireless phone have steadily expanded. So that as a whole, now we could achieve and exceed that -- the initial forecast, and we have a significant increase in both net sales and that operating income. For the industrial use of power supply, and it was adversely affected by the decline in demand, and we have the negative growth in both net sales and operating income.

Next slide, we'll talk about quarter-on-quarter changes of the net sales and operating income by segments. First off, Passive Components segment. The sales declined by JPY 12.6 billion, 13.0% from the Q4. Operating income was increased by JPY 1 billion, 14.9%. When it comes to the net sales, particularly due to the increase of 5G-related businesses, now we have increase in the sales for the ICT markets. Also, we have the incremental business for the distributors.

But on the other hand, now our customer in Europe for the automotive market suspended its factory operations, and that significantly lowered our net sales, and -- except for that high-frequent components, which have been flat from Q4. All in all, our net sales was negative. And when it comes to operating income, excluding JPY 2.1 billion of that impaired loss from the last quarter, and actually, on an apple-to-apple basis, JPY 1.1 billion down. For that high-frequency component products has been favorable in ICT market and have been significant increases to income, also for the capacitors now. And decline in business in automotive have been more than offset by that base station businesses, so that we could improve their profitability. Although the sales have started to decline.

All the other products that were vastly affected, that's the decline of demand. When it comes to the sensor application products, the sales declined by JPY 4 billion, 21.4% Q-on-Q basis, and then we have this more JPY 3 million of more operating loss.

Again, due to the suspension of factory operation of our European automotive customers have vastly affected the sales of the temperature and pressure sensor and hall sensor.

But on the other hand, MEMS motion sensor have been favorable. And due to that, as sales for the gaming consoles, they can more than offset all the negative impacts of other sensors and have been flat from the Q4.

When it comes to the operating performance, temperature and pressure sensor had declined its income due to the decline in sales. And now -- but now -- and magnetic sensor and TMR sensor have been steady and have been offset. And also for the MEMS sensors, now we could shrink and trim down the loss due to a cost reduction.

Next, Magnetic Application Products. Sales have declined by JPY 13.5 billion, 26.1% decline from the previous quarter. And excluding the JPY 14.4 billion of the impaired loss in Q4, on apple-to-apple basis, it was declined by JPY 6.7 billion. The sales of this segment have affected by the declining the sales volumes of HDD Head, about 44%. And also HDD Head suspension as a whole declined by 28% than previous quarter. And also the magnets have declined 12% in terms of net sales. So this is for now I continue the Magnetic Application Products, for the operating performance of this segment. Now HDD Head have that -- the operating loss due to that decrease in the sales volumes and also the magnets, now we could trim down the margin and loss due to the cost reduction.

Next, Energy Application Products segment. The sales was JPY 38.6 billion, a 32.6% increase. Operating income was JPY 16.6 billion. It's about close to significantly and increase about a double. And when it comes to rechargeable batteries now it had increased in a form that seasonally declined the demand over Q1 -- for the Q4, I'm sorry, but also, we have the incremental demand of the tablet and PC. And industrial power supply have slightly lowered than the previous quarter.

Next, let me talk about breakdown of the operating income changes from a year-on-year basis. It is about JPY 6.6 billion down. First of all, for the -- due to the change in sales mainly for the passive components and HDD head, have the negative JPY 9.7 billion, the sales price reduction have negatively -- also affected JPY 2 billion. But on the other hand, now with the cost reduction efforts, in order to absorb the impacts of COVID-19 have produced JPY 5.3 billion of benefits and also now a JPY 500 million is also for the positive due to the restructuring benefits and JPY 300 million of the loss for the M&A expenses for the expenses. And now the SG&A, for example, when it comes to rechargeable business, we need to have more R&D expenses and also the termination of the future fee pushed up by JPY 2.3 billion. This is for the SG&A. And the JPY 1.3 billion of the exchange fluctuations. And all in all, JPY 6.6 billion, minus from the previous year.

Next, let me talk about the projections on change in sales in Q2. In the Q1, due to the automotive industry, which was vastly affected the suspension of plant operations in Europe, and still, some of the net performance have improved in value from the region to region, we think that will be recovered to the level a bit lower than the initial forecast.

And when it comes to ICT markets, and now we expect that the smartphone production needs will also be recovered to that a little over to that initial project. And the PC and tablet demand will be steady.

So taking all this into consideration, now we like to look at the projections of the sales in each segments. So when it comes to passive components, we expect that it will be also on the par with Q1. And we expect that the sales in the automotive markets will increase. But when it comes to smartphone-related markets, we expect reaction to fall of the piled up inventory in the Q1. And also, we think that the demand in the base station will slowly decline. And also the inventory adjustments derivatives will vastly effect.

When it comes to sensor application products, we expect that the restart of the factory operations of the European automotive customers, it will push up that our business model temperature and pressure sensors and TMR sensor and the MEMS microphone will increase from the Q2.

When it comes to the magnetic application products, when it comes to the HDD head, we expect that our major customer will fully restart their factory operations, and we expect the recovery of that HDD Head volumes to the -- our initial forecast. And HDD suspension will also be pushed up for the demand for nearline solutions. And magnets will also increase due to the increasing in the demand in automotive markets.

When it comes to Energy Application Products, not -- on top of that demand for the smartphones and the PC and tablets, demand will further surge, and we expect about the mini cell demand for the wearable devices. And taking all these into considerations, the sales in Q2 will increase by 11% to 14% from Q1, as a whole. This is our projection. Last of all, let me talk about the projections for the full year forecast. So we do not change from that forecast we announced the last time in May. In Q1, now we have the observed that and they've boosted the demand for the digital transformations and also so the supply chain have increased and inventory. So that the performance was exceeded the forecast. But now still, it's uncertain that what kind of impact we have to expect from that COVID-19 on the business, and the 3 major markets, automotive, ICT and industrial equipment.

Now when I look at our forecast, still that these markets varies from the market to market when it comes to that demand. And also, we are looking at the changes and the difference and that's the each segment forecast, but all in all, we expect that -- and our projection still stay the same, and we don't change our forecast. And in the moment of time. That's all my presentation. Thank you very much. Thank you for your attention. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]