TDK Corp

TSE:6762

Earnings Call Transcript 2022-Q2

[Operator]

So I'd like to start the TDK's 2022 Fiscal Year 2022 March First Half Results. We have Mr. Ishiguro, our CEO and the Senior Executive Officer, Mr. Tetsuji Yamanishi. We have 2 from TDK. Thank you very much. So first of all, in terms of the performance briefing for the first half, Mr. Yamanishi will give you a briefing.

[Tetsuji Yamanishi, executive]

This is Yamanishi speaking. Thank you very much for attending despite busy schedule for our performance briefing for the first half of fiscal year March 2022. I would like to start by giving you the outline of our consolidated, touching upon the key points of the first half. From the second quarter of the previous year, socioeconomic and production activities at each countries around the world have gradually restarted. And with the progress of the vaccination for COVID-19 mainly in detail of countries, social and economic activities normalized. Production activities continued to recover and demand for electronic components continues to remain on the recovery trajectory. Specifically DX and EX related demand remained strong, leading to a 29.4% increase of net sales and 28.2% increase of our operating income compared to the previous year. Net sales and operating income achieved record highs for both quarterly and half year results. In the automotive market, due to the impact of semiconductor shortages, production output did not recover to pre covered levels. However, through the acceleration of electrification such as xEV, the number of components installed per vehicle is increasing. This has led to a continued robust sales to the automotive market with sales of passive components and sensors increasing. In the ICT market, the shortage of semiconductors and the resurgence of COVID in some Asian countries has led to a situation where the production of smartphones was the same level as last year, which is under our initial forecast. However, those sales for smartphones was under our initial plan, demand for PCs and tablets continue to be strong. And investments for data centers remained robust, leading to an increased demand for service. So sales of rechargeable batteries, sensors and HDD Heads increased. In the industrial equipment market, with the recovery of production activity, capital expenditure from corporate stayed at a high level, and sales for Power Supplies for industrial equipment and passive components increased. Next, going to the financial highlights. Due to the ForEx fluctuation against the dollar, sales has increased by JPY 45.4 billion and operating income has declined by JPY 1.8 billion due to this impact. Sales was JPY 894.2 billion year-over-year plus JPY 203.1 billion, 29.4% of increase. Operating income was JPY 80 billion year-over-year, an increase of JPY 17.6 billion, an increase of 28.2%. Profit before tax was JPY 84.5 billion. Net income was JPY 68.2 billion. So for all the items, we have been able to achieve a record high level.

The earnings per share was JPY 180.03. In terms of ForEx sensitivity, it's the same as before against the dollar. If the -- JPY 1 fluctuation through the year is a JPY 1.2 billion impact in terms of the yen-euro situation, it's a JPY 200 million impact. Next, let me explain about the buy segment results for the first half. Passive Components net sales was JPY 248.5 billion, 35.2%, up year-over-year. Demand for automotive markets continues to be strong. In the industrial equipment market, demand for renewable energy and production equipment maintained a high level. In the ICT market, although demand for base stations, which increased substantially in the previous year, decreased. However, demand for smartphones stayed strong. As a result, net sales increased in all markets and all businesses. Operating income was JPY 39.4 billion, 2.3x year-over-year. Operating margin improved significantly to 15.8%. By business, net sales and profit increase across the board, excluding High-Frequency Components, especially improved profitability of capacitors, inductive devices contributed to the overall improvement of profitability for the passthrough components. In the High-Frequency components, profit declined slightly as they were spending in advance for development for new products. Going to Sensor Application Products. The first quarter booked a record high quarterly sales, but the second quarter went even higher than that. First half net sales was JPY 59.5 billion, 72.5% up year-over-year. Operating income went into the positive territory in this quarter, thanks to top line growth and improvement of product mix. Profits have improved substantially with the first half becoming very close to breakeven. Temperature pressure sensors saw an increase for both sales and income due to the robust demand in automotive and home appliances market. Whole sensors sales increased significantly for the automotive market, leading to a strong improvement in profitability. TMR sensors saw a large increase in both sales and profit as more and more products in the ICT market are taking up this product. As for MEMS sensors, the expansion of the customer base and applications has steadily started to show results, such as increased sales of Motion Sensors and MEMS microphones. Earnings improvement has been boosted and the amount of loss shrunk. Next is the Magnetic Application Products segment. Net sales was JPY 126 billion, 42% up year-over-year. Operating income was positive, though it was loss-making last year. For HDD Heads, demand for service increased due to recovery in data center investments. Sales volume of Nearline HDD Heads increased by 2.5x year-over-year. Volume-wise, compared to our initial outlook, it grew by 18%. Moreover, in the first quarter in the previous year, sales volume plunged due to the planned closure of our major client. This impact was eliminated this year, which led to a significant increase in both sales and profit. As for HDD Suspensions, Nearline HDDs for data centers for our major client showed strong sales and earnings expanded. However, in the second quarter, we booked a one-off expenses of JPY 4 billion related to antitrust litigations. So the first half was loss-making. The magnet business net sales has increased as sales for the automotive market was robust. The amount of loss is shrinking as well. In the Energy Application Products segment, net sales was JPY 435.1 billion and operating income was JPY 57.7 billion, while net sales increased 21.7% year-over-year, profit declined by 27.5%. If we exclude the sales increase of rechargeable batteries influenced by ForEx fluctuations and pass-through of material cost increase to the price, sales for smartphone-related products stayed flat year-over-year as the production volume of smartphones was virtually the same as last year. However, sales of tablets and laptop PCs were good. And sales of power cell products for electric motorcycles, which we think will grow and residential energy storage systems expanded leading to an overall increase of sales in this business. As for operating income, the lingering impact of profit decreased in the first quarter due to skyrocketing raw material prices and upfront investment for power cell products and royalty payment of JPY 5 billion in the second quarter led to a decline in profit. However, pass-throughs of increased raw material prices has proceeded in the second quarter and cost improvement is being accelerated. Although they are loyalty payments, profitability will improve substantially from the first quarter. Power Supplies for industrial equipment booked increase for both net sales and operating income as demand for industrial equipment such as semiconductor production equipment was good. Next, the breakdown on JPY 17.6 billion year-on-year growth of operating income, boosted profits by sales increase of Passive Components, substantial reduction of loss on sensors as well as recovery of profits in HDD Head, all pushed up operating income by JPY 49.6 billion, even with material cost increase. The negative impact of JPY 7.6 billion caused by the sales price discount was offset by JPY 11.9 billion generated by cost reduction efforts with operational streamlining and the structural reform implemented in the Q4 last year. SG&A went up by JPY 34.5 billion, mainly due to the sales administration expenses for secondary battery as well as development expenses for power cell and the incremental logistical cost and the COVID-19 pandemic. And JPY 5 billion of loyalty concerning secondary battery and the recognition of JPY 4 billion related to the antitrust case as one-off cost. When the Japanese yen depreciated to the dollar, the currency fluctuation, including the appreciation to renminbi reduced income by JPY 1.8 billion. And taking all these factors into account, operating income has grown by JPY 7.6 billion year-on-year. Just for your information, the royalties cost for secondary battery, which was recognized in Q2 and tend to be in the development expenses in SG&A was -- this was JPY 50 billion annually. However, it has already been included as the incremental cost in the business forecast at the beginning of the fiscal year and had no impact. Next, please let me explain the consolidated business performance of Q2. Net sales were JPY 474.1 billion or 24.2% increase from the year earlier. Operating income grew by 11.9% to JPY 49.2 billion. Income before tax was JPY 52.2 billion, and the net income was JPY 41.6 billion. All these results were all-time high as the quarterly performances. Next, I would like to explain the factors for increasing and decreasing net sales and operating income by segment quarter-on-quarter basis. Starting with Passive Components. Sales increased by JPY 6.2 billion or 5.1% from Q1 and operating income increased by JPY 3.3 billion or 18.5%. Sales for the automobile market remained almost flat, while sales of ICT and industrial equipment business as well as in distributed channel increased, and the sales and operating income both went up for all businesses, except for High-Frequency Components. Sales of High-Frequency Components recognized unchanged, with operating income slightly declined due to upfront costs for new product development. Next, as for Sensor Application Products, net sales were JPY 5.9 billion, an increase of 21.8% and operating income grew by JPY 3.4 billion, having turned to be profitable on a quarterly basis for the first time. Sales of the temperature pressure sensors and the whole sensor increased due to strong demand for automobiles.

Sales of TMR sensors also increased significantly due to the expansion of adoption in new products by major customers for the smartphones and the sales of Motion Sensors and MEMS microphone grew steadily, too. As for operating income, TMR sensors have greatly boosted the profits and Motion Sensors have improved profitability due to the improvement of customer mix and product mix, making a great contribution to the profitability as a whole. Next, in the Magnetic Application Products segment, sales were JPY 4.7 billion or 7.8% increase quarter-on-quarter, and operating income increased by JPY 3.2 billion, excluding the Q2 onetime expense of approximately JPY 4 billion. Sales volume of HDD Heads increased by about 11%, mainly for the Nearline heads.

And HDD assembly sales remained almost flat, recognizing positive growth in sales. While sales of HDD suspensions for Nearline HDDs increased, overall sales increased only slightly due to a decrease of sales in smartphone applications. Demand for magnets for automobiles is steady and net sales increased slightly. Operating income has improved significantly with the increased sales volumes of HDD Heads and the suspension and an operating loss of magnets has shrunk. Next, in the Energy Application Products segment, sales were JPY 35.9 billion or increased by 18% and operating income was JPY 10.9 billion, up by 46.8%. Sales of secondary batteries increased with a favorable business for smartphones due to the increased production units of smartphones and enhanced sales of power cell products, even excluding the impact of the currency fluctuation and the price hike by passing material cost hike onto the products. Excluding these factors, now it has grown -- positively grown from Q1. On the other hand, the shortage of semiconductors for industrial machinery sector adversely affected the shipments of industrial Power Supply products and pushed down net sales. Operating profits -- operating income has almost absorbed the impact of soaring material prices in Q1 for secondary batteries. And with the cost reduction, profitability has substantially recovered, offsetting JPY 5 billion of recognized license expenses. That's -- now that's the business performance in the first half. Okay. Next, Mr. Ishiguro is going to talking about the full year forecast.

[Shigenao Ishiguro, executive]

This is Ishiguro. Thank you very much for joining us today. Thank you very much. I'd like to explain the full year forecast for the fiscal year ending March 2022. First of all, I would like to talk about the key points in making a full year outlook. In the automotive markets, aside from the end customer demand, sufficient production is not possible due to the lack of supply of semiconductors and other components. Therefore, and unfortunately, that -- we think that's in automobile, the production units is -- unfortunately, is only in -- on the par with the last year's level, it's not more than that. As for smartphones, the demand for smartphones is expected to be slightly lower than the initial forecast due to the COVID-19 pandemic in the India and the Southeast Asian markets, again, with the bottlenecks on supply chain of materials and the components. So on a global basis, now that the demand will be a little bit lower than we had expected. As for hard disk drives, demand for data center continues to grow, and we expect strong demand and steady demand. And we also expect that the PCs and tablets will exceed the levels expected at the beginning of the turn throughout the year. As far as the demand for the electronic components are concerned, the production of automobiles and smartphones is sluggish, but the demand for the new models equipped with the EXV (sic) [ xEV ] and advanced driving system is expanding. And the market for electronics such as industrial equipment and medical equipment is being diversified, leading to their further expansion, the demands and what's better the investment and the 5G-related facilities and the devices have gradually grown, although the pace has a little bit slowed down. With all these factors, we conclude that the demand will be steady for the time being. Based on this market background and the status of promotion of expansion measures taken so far, for each business to date, we have decided to revise our full year earnings forecast upwardly for both net sales and profits and incomes. Along with this, the interim dividend and the year-end dividend forecast have also been revised upward. With the interim dividend increasing by JPY 5 to JPY 100, the year-end dividend forecast increasing by JPY 12 to JPY 100 -- JPY 108 and the full year dividend will be JPY 208, both on before the stock split basis. Next, I would like to talk about the sales forecast by segment from October to December. So this is the forecast in this quarter -- in the quarter. Overall, we expect net sales to be on the par with the second quarter, although the positive and negative aspects vary from segment to segment. As for Passive Components, the forecast is based on assumption that the demand will continue to be rather stable with a negative trend, including some seasonal factors. But I feel that there may be almost just 1 to 4, but it will be based on something a little bit slightly negative. But I feel that it may be almost flat until this quarter. Regarding market inventory, we recognize that the pipeline is filled with more inventory than before. However, looking at the flow of goods, such as [ VMR ] warehouses, and when I look at those information for we think that level of inventory might not be excessive yet.

As far as Sensor Application Products are concerned, they will be more susceptible to seasonal fluctuations and specific customer demand, and we expect 2% to 5% minus. Regarding magnetic application products, we do not expect any significant negative impact against the backdrop of steady data center demand although there are some uncertainties ahead. Regarding Energy Application Products, our forecast assumes that the Chinese smartphone market will somewhat recover from the previous 2 quarters. Not so much favorable in the past 2 quarters, but they will slightly recover. We continue to expect high demand levels for Power Supplies, too. And I would think that's the high level of demand we expect on the Power Supplies. Finally, I would like to explain that the forecast of our consolidated business results for the fiscal year ending March 2022. We have revised upwardly our sales forecast to JPY 1.80 trillion, operating income to JPY 157 billion, pretax income to JPY 162 billion and the net income to JPY 110 billion. The expected increase from the year earlier is to be 21.7% in sales, 40.8% for operating income and 38.6% for net income, respectively. Assuming the exchange rate is JPY 109 to the dollar and JPY 120 to euro, respectively, the said upward revision of sales includes the impact of push up of the top line by depreciation of yen as well as a selling price hike due to material cost increase. So those factors will be also included. The development costs will be increased by JPY 20 billion, but as Mr. Yamanishi explained earlier, that development expenses include the royalty costs of secondary batteries, and it does not affect the business performance per se. That's all my presentation. Thank you very much for your kind attention. Thank you.