TDK Corp

TSE:6762

Earnings Call Transcript 2022-Q1

[Tetsuji Yamanishi, executive]

I'm Yamanishi. Thank you very much for joining us today with our performance briefing on the Q1 of FY March 2022. We really appreciate that all of you that joined today, and I am going to present about the consolidated business performance. I'll start with the key points. In Q1 last year, due to that -- the expansion of the infections and the COVID-19 pandemic, each country had a lockdown and that would slow down to the global economy and leading to the major impacts on the business too. But after the Q2 last year, that the social and production activity in each country have gradually opened.

And now we observed that the recovery of the electronics demands, particularly in the digital transformations and energy transformations later demand have been steady, so that our sales was grown by 35.8% year-on-year. Operating income have grown by 67.4% from the year earlier. Now going towards the last Q2, that the automotive markets demand have slowed down due to some the shortage of the semiconductors, orders have been and -- have been really good until the Q4. But now the further accelerations of the electrifications of the EV or that increases the component accounts and the vehicles have pushed up and the demand and now -- and have been -- order is steady, and we could expand the sales of Passive Components and Sensors. And for the ICT market, due to the shortage of the semiconductors and also the resurge of the COVID-19 pandemic and they will lead to the part of the lockdown, the production of smartphone was lower than our initial projections. But on the other hand, the demand on the PC and the tablet will continue to be on a high level, and investments in the data center have recovered, leading to further demand expansion for the servers. And the result of that and the sales of Rechargeable Battery, Sensors and HDD Heads have increased. Also for the industrial equipment markets. Now the Power Supplies for the industrial equipments or the Passive Components, the sales have included -- have expanded due to that -- the more the corporate CapEx based on the recovered production activity. Next, let me talk about that outline of our business. Now the impact of the currency fluctuations and the impact on the JPY 21.4 billion in sales and JPY 1.7 billion of minus impact on the operating income. But all in all, the sales was JPY 420.1 billion, JPY 110.7 billion or 35% increase year-on-year, and operating income was JPY 30.8 billion, or JPY 12.4 billion or 67.4% increase from the year earlier. Income before tax was JPY 32.2 billion. Net income was JPY 26.7 billion. Earnings per share was JPY 211.09. When it comes to sensitivity to the currency, there was no any change. Now impact on the operating income, the JPY 1 change to the dollar have the JPY 1.2 billion impact and the JPY 200 million to euro. Next, let me talk about the segment-wise, the overview of the business in the Q1. Sales of Passive Components was JPY 121.2 billion, 43.6% increase from the year earlier. Now this is still that the very high level of that demand for the automotive markets contributed and also in industrial equipment markets. Now it have been really favorable in the renewable energies or the industrial equipment. In ICT markets have now, although we have just a little less demand for the base stations last year, but now the total 5G, later the demands are really steady, so that we could recognize all the increases in the revenues and all in the businesses. Operating income was JPY 18 billion. It was 2.3x the margins of last year, a substantial increase. And operating income margin was at 14.9%, making a big contribution to the profitability. Excluding the High-Frequency Components business, all of the business recognized the increase in both sales and profit. But in High-Frequency Components products, it was a little less than the last year due to that -- the R&D expenses for the new products. Next, Sensor Application Products. Now the last Q4, we had the record high sales, but we have also further substantial increase in the sales this quarter, and sales was JPY 26.8 billion, 82.3% of increase year-on-year. Operating income also open profit, we could substantially reduce the operating loss. And when it comes to TMR Sensors, have been expanding the business with ICT markets. On the other hand, on the MEMS Sensors have successfully expanded the customer on an application basis, and then we're starting to deliver on all of these efforts. In Motion Sensors and MEMS Microphones, the sales have been remarkably increased. Now we have the improvements of the performance, and we could substantially reduce the loss. And there's a conventional products like a Temperature and Pressure Sensors and Hall Sensors and will also be recovered due to the good demands in the automotive markets, and we could improve that profitability. And on top of that, now we have improved that profitability and the performance, including that structural reform we have implemented the last quarter. Next, Magnetic Application Products. Sales was JPY 60.6 billion, 58.2% increase year-on-year. And net operating income turned to be profitable from the big loss we have last year. HDD Heads business have been favorable due to that recovery of that investment in the data centers. And last summer, the demand has increased, and the sales volumes of Nearline HDD have doubled from the last year. And also -- and it has been over -- over 70% more than we have initial projections of the Q1.

And so that we could eliminate that negative impacts of the closure of the factory of one of the major customers in Q1 have -- we don't have any data negative, the effect show that we have about a substantial increase in the sales and the profits. And for HDD suspension, and now Nearline HDD for our major primary customers' data centers have been very favorable, and we could secure an increase in both sales and profit.

And with Magnets, our sales for the automotive markets have remarkably recovered, and the sales for the industry equipments have also pushed up our sales and we could substantially reduce the loss. Next, Energy Application Products. Sales was JPY 199.6 billion. Operating income was JPY 23.4 billion, and 27.2% increase in the sales and 25.2% in a less operating income from the year earlier. As for the Rechargeable Batteries, the smartphone, tablet, note PC and another mobile devices, the businesses have been steady and the mini cell products, e-bike or that's in home power storage systems, and we also in the market are favorable and we have been good business power cell products. When it comes to operating income, now we have that and the positive growth of the income due to that increase in the volumes. But now we need to make the upfront investment for the power cell products and also with the increase of the raw materials like cobalt, and operating income was lower than the previous year. When it comes to industrial equipment, products in Power Supplies, now we could secure that with an increase in both the revenues and profits. Next is explanation of the reasons for changes in sales and operating income by segment from the first quarter of the previous year to the first quarter of the current year. In the Passive Components segment, sales increased by JPY 7.3 billion or 6.4% from the fourth quarter, and operating income increased by JPY 4.8 billion or approximately 36%, excluding JPY 3.7 billion in onetime expenses incurred in the fourth quarter. Sales increased in all markets, including the automobile, ICT and industrial equipment markets as well as distributors, and all businesses posted higher sales and operating income.

Next, in the Sensor Application Products segment, sales was JPY 2.9 billion, a 12.1% increase. Operating income improved by JPY 2.4 billion, excluding JPY 4.1 billion in onetime expenses incurred in the fourth quarter. Sales of Temperature and Pressure Sensors and Hall Sensors increased due to strong demand from the automotive industry, while TMR Sensors sales volume increased for smartphones and MEMS Sensors sales increased for Motion Sensors for smartphones in China and game consoles.

As for operating income, TMR Sensors, which have good profitability, greatly expanded its revenue, and Motion Sensors profitability improved substantially due to a favorable turnaround in the customer and product mix, which greatly contributed to the reduction of the overall loss. Next, in the Magnetic Application Products segment, sales increased by 11% to JPY 6 billion, and operating income increased by JPY 1.9 billion, excluding the JPY 5 billion in onetime expenses incurred in the fourth quarter. Sales increased due to a 17% increase in the sales volume of HDD Heads and an increase in HDD assembly sales from the fourth quarter. Sales of HDD suspensions remain almost unchanged due to a decrease in application products for smartphones, despite an increase in sales volume for Nearline HDDs. Sales of Magnets increased slightly. Operating income for HDD has improved significantly due to an increase in sales volume, while the operating loss for Magnets increased slightly due to the impact of higher raw material prices. In the Energy Application Products segment, sales increased by 6.6% to JPY 12.3 billion, and operating income decreased by 6.4% to JPY 1.6 billion. Sales of secondary batteries decreased, including the impact -- excluding the impact of foreign exchange rates related sales increase, an increase in sales due to the passing on the rise of the raw material cost to the selling prices, so-called surcharges. Sales in real terms decreased on a volume basis due to a decline in smartphone products volume, while sales of industrial power supplies increased to a higher demand. Operating income decreased due to a lower sales and profit of Rechargeable Batteries, including deterioration in capacity utilization due to lower volume and the residual impact of higher material prices. Operating income increased slightly in industrial power supplies.

Next is the breakdown of the operating income changes of JPY 12.4 billion. The increase in sales volume in all segments, including Passive Components, had the effect of increasing operating profit by JPY 32.5 billion despite the impact of higher material prices. There was a negative impact of JPY 7 billion due to a sales price reduction, but this JPY 2.4 billion contribution came from cost reductions through rationalization and the effect of structural reform that was conducted in the fourth quarter. In addition, SG&A expenses increased by JPY 13.8 billion, mainly due to the SG&A expenses associated with the expansion of the Rechargeable Battery business and increased development expenses from accelerated power cell development. Foreign exchange fluctuations reduced profits by JPY 1.7 billion, resulting in a total operating income increase of JPY 12.4 billion. Next, I would like to give you an idea of the changes in sales for the second quarter of the current year and comparing that against the first quarter. Sales to the automotive market are expected to remain strong on the assumption that car production will increase from the first quarter. Sales to the ICT market are expected to increase significantly on the assumption that smartphone production volume will increase from the first quarter and that PC and tablet demand will remain strong despite the lingering effects of semiconductor supply shortages.

Demand from the industrial equipment market is also expected to be strong, based on the above-mentioned trends in the demand in the main markets and excluding the impact of exchange rate differences between the first quarter and second quarters. For the second quarter, we were using the assumption that we have announced in the -- initially, so this is what we are showing in terms of those changes. So if we exclude the exchange rate differences, for the Passive Components, sales are expected to increase by between 0% and 3% overall. Sales to the automotive market are expected to remain strong. Sales to the smartphone market are expected to increase significantly in line with the increase in smartphone production, and sales to industrial equipment and distributors are expected to decline slightly.

In Sensor Applications, sales to the automotive market are expected to remain strong, while sales to the smartphone market are expected to increase by 11% to 14% on the back of a significant increase in the number of TMR Sensors used and the launch of new products. For Magnetic Application Products, we expect HDD Heads for Nearline HDDs and suspensions to performed well due to strong demand from data centers. We also expect sales of Magnets to increase by 0% to 3%, in line with rising demand for automobiles. We expect Energy Application Products to grow 28% to 31% on the back of increased demand for smartphones, strong demand for PCs and tablets and further growth in Power Cell products. Based on the abovementioned factors, we expect overall sales to increase by 14% to 17% in the second quarter compared to the first quarter.

Finally, I would like to explain our full year consolidated forecast, which remains unchanged from the previous forecast we announced in April. In the first quarter, smartphone production volume was lower than the initial forecast, and the Rechargeable Battery earnings were significantly lower than the initial forecast due to the impact of rising raw material prices. On the other hand, Passive Components, Sensors and Magnetic Application Products supported the overall performance of the company. Looking at the demand trends for the full year, demand from the automotive and industrial equipment markets is expected to remain strong, while demand from the smartphone market is also expected to gradually recover in the second half of the year. Passive Components, Sensor Applications Products and Magnetic Application Products will trend above our initial forecast in the second quarter following the trend of the first quarter. We expect this to support Rechargeable Batteries, which are still affected by high raw material prices. However, we expect the impact of shortages in the supply of semiconductors and the spread of the coronavirus infection as well as the raw material price trends to remain uncertain. As such, we are maintaining a full year forecast announced at the beginning of the year. Exchange rates, capital expenditure, depreciation and amortization and certain development costs remain unchanged from the second quarter onwards. The company Board of Directors today approved the 3-for-1 stock split of the company's common stock effective October 1, 2021. As a result of the stock split, the interim dividend forecast remains unchanged at JPY 95 per share as initially announced, but the year-end dividend forecast has been changed to JPY 32 per share after the stock split. On a pre-split basis, the full year dividend forecast is JPY 191 per share, an increase of JPY 1 from the forecast announced at the beginning of the year. That is all for me. Thank you very much for your time. [Statements in English on this transcript were spoken by an interpreter present on the live call.]