TDK Corp

TSE:6762

Earnings Call Transcript 2020-Q3

[Operator]

I would like to start the performance briefing of third quarter of fiscal year March 2020 of TDK. First, I would like to introduce you today's participants: Senior Vice President, Mr. Tetsuji Yamanishi; Senior Vice President, Mr. Noboru Saito; Corporate Officer, Mr. Shigeki Sato; Corporate Officer, Mr. Fumio Sashida. So these are the 4 people.

So in terms of the outline of the third quarter of the consolidated results and consolidated full year projection, Mr. Yamanishi, Senior Vice President, will give a presentation.

[Tetsuji Yamanishi, executive]

So hello, ladies and gentlemen. My name is Yamanishi. Thank you very much for attending our performance briefing of the third quarter fiscal year March 2020.

So from my side, I would like to talk about the outline of our consolidated results. So in terms of the highlight of our earnings, from the second quarter, the U.S.-China trade frictions have become serious with major repercussions on the global economy. This third quarter, the world economy echoed in China is uncertain. And in terms of the major markets that we do our business in, there has not been a major change in the demand environment. The environment continues to be tough.

For the third quarter, year-over-year, although with that kind of situation, we have been able to see both increase in sales and profit year-over-year. In terms of the sales of the third quarter, year-over-year, it increased by 1.4%. In terms of the operating income, year-over-year, it grew by 23.2%, a major increase. On a 9-month accumulative basis, sales declined against the previous year. However, operating income, profit before tax and profit after tax has record -- has been a record high. In terms of operating income, on a 9-month basis, we have been able to exceed JPY 100 billion for the first time in our history.

In terms of the demand trend, overall, the same trend is continuing as the previous quarter. However, in the ICT market, the 5G demand has started to ramp up. So for 5G smartphones and for base stations, we have started to see sales increase for Rechargeable Batteries, High-Frequency Components, MLCC and inductors, and these products has been contributing greatly to our increase of the earnings. Specifically for Rechargeable Batteries, we have been leveraging a broad customer base. And in the previous second quarter, even after the peak season of the smartphones, we have been able to maintain a high level of earnings, and this has been driving our business.

In terms of automotive, industrial equipment market, the overall demand globally, including China, has been slow, and the demand level is below our initial projections. Year-over-year, the sales has declined in this area. As a result, excluding the increased sales, increased profit of the High-Frequency Components, in the other Passive Components business year-over-year, we saw a decline both in sales and profit.

In the Sensor Application Products, TMR sensors and MEMS sensor, which are strategic growth products, these products -- sales has grown in these products, but the conventional products, such as temperature sensors and Hall Sensors. Due to the sales to the automotive industry has been slow, the overall earnings improvement is delayed.

In the short term, we are assuming that we cannot see a rapid recovery of the global economy. So in terms of the DX advancement, the so-called digital transformation that can be represented by the 5G, ramp-up of the 5G, and in terms of the acceleration of its funds to the energy, so this is called energy transformation, these trends are going to advance further. Against this backdrop, we should always be ahead of the curve to capture market needs, and we will continue to prepare to grab the growth opportunity for us in the future. Going to our performance outline. Against the dollar, against the euro, the yen has been strong. And due to this situation, the sales has been impacted negatively by JPY 14.5 billion. The operating profit has been declining by JPY 1.5 billion. But in terms of sales, JPY 355.6 billion. This has been a 1.4% of increase. Operating income was JPY 40.4 billion year-over-year has been 23.2%, a substantial increase. We have been able to maintain increase both in sales and profit. The profit before tax is JPY 41.2 billion, net profit is JPY 29.5 billion, EPS at JPY 233.35.

In terms of the sensitivity against the currency, it's same as before. Operating income in terms of the relationship between yen to the dollar, there will be a JPY 1.2 billion impact for the year. In terms of the euro, it will be an impact of JPY 0.2 billion for the year.

Then let's go to the by segment status update. So from this term, some of the products in Inductive Devices has been reclassified as other Passive Components. In this third quarter, compared to the previous year, for Inductive Devices, the sales has gone down by JPY 2.2 billion, operating income has declined by JPY 0.4 billion. So the Passive Components sales was JPY 98.3 billion. This has been a year-over-year decline of 7.9%. Operating income was JPY 10.6 billion year-over-year, a 27.9% of decline. Operating margin is 10.8%.

So if you look at the market condition that impacts the Passive Components, automotive and industrial equipment market, the demand has been stagnant. The Europe and U.S. major distributor is conducting inventory adjustment and that has been impacting business. And we have seen a ramp-up of 5G in China, and there has been more active business trend in the 5G-related products. For Ceramic Capacitors, the automotive demand has been slow. But even so, our sales to the automotive business has been increasing steadily. So in the ICT business, overall, has been flat. But that said, you're seeing an increase of sales to the 5G base stations. However, the sales to the distributors has gone down substantially. So that has been a 12.6% decline of sales overall. Because of the decline in sales, the operating income has declined as well. But we have been able to increase the product mix of sales of the high added-value products, and we have seen ASSP increase. The profitability is still at a high level.

Although the Aluminum Electrolytic and Film Capacitors, same as the last quarter, the automotive and the renewable energy-related industrial equipment for these areas, the sales has gone down. So we're seeing a decline both in sales and profit. For Inductive Devices, we have seen the increase for 5G-related products. And sales to the ICT market has grown. However, for the automotive, industrial equipment, sales has been at a low level. And overall, we have seen the decline in both sales and profit. For High-Frequency Components, with the increase of 5G demand for the 5G smartphones and the base stations, the sales has increased, and we have been able to see increase both in sales and profit in this area. For Piezoelectric Material Products and Circuit Protection Products, because of the kind of the demand of automotive and the ICT market, sales has declined. So in this area, we saw both a decline in sales and profit. Next, going to the Sensor Application Products. Sales was JPY 20.3 billion year-over-year. This is a 3% increase of sales. Operating profit has been JPY 5.5 billion of loss, which is the same level as the last year. The InvenSense-related acquisition expenses has declined by JPY 0.2 billion against the previous year. And overall, it is JPY 1.4 billion. Globally, in the automotive and the industrial equipment market, we have not started to see a recovery in the demand. So the conventional sensors, such as temperature sensors and Hall Sensors, the sales, continuing from the previous quarter, it has been slow. And from the previous year, the sales has gone down substantially, and the profitability has -- profit has worsened, and this is putting a big drag on overall business.

On the other hand, in terms of strategic products that we are expecting high growth. For the TMR sensors for the automotive market, there are more volumes because it has been taking up new applications. And because of this, sales has increased steadily. With smartphones, we are seeing an increase with the new models, and this has been greatly contributing to our sales expansion.

For the MEMS sensor, well, the motion sensors had a new client, so sales has been growing steadily. And for the MEMS microphone, we are increasing sales for IoT and smartphones.

Because of the unfavorable macroeconomic situation, the overall earnings is stalling and the improvement of the earnings is delayed. But structurally, we think we have been able to have a foundation to improve our earnings. Next, Magnetic Application Products business, the sales was JPY 57.9 billion, 12.8% minus from year-on-year. Now operating income was JPY 5.2 billion, 33.3% minus year-on-year, and operating income margin was 9.0%. HDD and Suspension business, when it comes to the demand, well, the -- the demand trend have dramatically changes from the year earlier. First of all, for the 2.5-inch HDD for the PC, consumer PCs, now has -- the recording density is going up. And on the other hand, the volume have declined for the HDD Head for the PC. Now the demand have been dramatically declined, but on the other hand, the HDD demand for the data center have recovered. So now we expect about the HDD Head for the nearline have gradually recovers and increasing. And HDD and recording density of the nearline HDD have been phased up. In this circumstance, when it comes to HDD Head, now as the entire segment, it have grown by 6% in terms of that sales volumes. But on the other hand, about the part of that, the HDD Assembly products discontinued, so that's why an entire segment have declined about 40% of the sales year-on-year, and the total HDD have declined 15% as a whole. Then when it comes to HDD Suspensions, the sales have been almost flat in terms of the volume and value of the sales. But on the other hand, application product of the Suspensions have been declined in the sales for the ICT market. And so that's why that entire Suspension business have dropped in sales by 6% year-on-year. And result of that, the HDD Head and Suspensions and the entire operating income was due to the decline in top line and the profits for the Suspension Application Products and also as well as the HDD Head, the declining top line and profits. And also, the lowering of the average selling price and due to the switch to the product mix and in the entire segment have declined in profits. When it comes to Magnet, we withdrew from the HDD Magnets. And now the business and industrial equipment for the machine tools and to industrial robotics and automotive markets have been slow, that's why the sales have dropped by 14% year-on-year. And operating incomes, they have been supported by the effects of our improvements in productivity, and we could maintain the same level of loss from last year.

Next, let me talk about the Energy Application Products. The sales was JPY 161.2 billion. Operating income was JPY 40.5 billion, 10.9% increase and 64.6% of dramatic increase of the income, and operating income margin was 25.1% as we have observed the big improvements in profitability. When it comes to secondary markets, now sales for that smartphone in China have pushed up by the favorable effects of that 5G network launch. And also, we have the very good business for that major customers in other regions and pushed up. The whole of the sales for the smartphone business have substantially increased and booming. And also for the sales for this tablet and notebook have steadily have increased. On top of that, some wearable, the mini cell phone wearable devices like wireless and also have steadily expand. So that now we have a 15% of sales increase year-on-year.

And on top of this increasing in the top line, we have the very favorable switch of the product mix and expansion of volumes have contributed to that improvement of the productivity and in the pushup that also for that sales. Now we can expect further improvements of the productivity.

So this is the reason why we expanded the sales and profits. When it comes to that, the power supply for industry equipment, still, it's adversely affected by the slowdown in economy and now -- and we experienced and recognized both -- a decline in both the sales and the profit.

Next, let me talk about the quarterly results by segment from the Q2 to Q3 for both the sales and the operating income. The first of all, for Passive Components segment, the sales have declined by JPY 3.6 billion, 3.5% minus from the previous quarter in the Q2 to Q3. When it comes to Ceramic Capacitors, although the sales have increased for the 5G base stations, but on the other hand, sales for distributor -- to the distributors have dropped. And so an entire sales have gone into the declining trend. So -- and eventually, we have experienced that, the decline in sales.

When it comes to Aluminum Film Capacitors, although we have a slight increase in the business of renewable energy, that -- whole of the business with industrial equipment have declined in sales and also declined another -- in the market like automotive. So that the capacitor business as a whole, we experienced about JPY 2.3 billion minus, 5.8% decline on the quarter -- on Q-on-Q basis. For the Inductive Devices, sales have declined by JPY 900 million, 2.5% decline from the previous quarter. And although the sales for that 5G and the handset devices have increased, but ICT as the whole is almost flat. And the sales of automotive markets had also been flat from the Q2. But on the other hand, for the business, the sales for the industrial equipment had been very slow and poor. That's why whole of the -- entire segment experienced that declining the sales.

When it comes to other Passive Components, the sales have declined by JPY 300 million, 1.1%, a slight decline. High-Frequency Components have increased the sales for the 5G handset devices as well as the base stations. But now although, again, the slow in industrial equipment and now the automotive, the sales now try to make up for the decline in business with Piezoelectric Components and the Circuit Protection Components. When it comes to the operating income for the Passive Components have declined by JPY 800 million, [ 7.9% ] minus from the previous quarter.

Ceramic Capacitors and Aluminum Film Capacitors and Inductive Device, it had a -- the decline in the profits due to that decline in top line. And High-Frequency Products, it had been pushed up by the top line and the profit due to that increased productivity. And when it comes to Piezoelectric Components and the Circuit Protection, it have been and absorbed that kind of decline trend by the cost reductions.

When it comes to Sensor Application Products, sales have declined by JPY 500 million and 2.4% from the previous quarter. When it comes to the Temperature and the Pressure Sensors, Temperature Sensors still had adversely affected by the slow market in automotive and had a declining in the sales. And when it comes to Magnetic Sensors, now it seems like that the Hall Sensors have just a little bit come back. And -- but on the other hand, TAMR sensor have peaked out its sales in the Q2 for that ICT market and almost flat.

Then when it comes to MEMS sensor, now in the business with the microphone is almost flat, but on the other hand, the motion sensor have suffered from some declining demand in the smartphone manufacturers in China, particularly in SMEs in China. So that's why it's dropped a little bit from Q2. Operating income was about almost the same level of the loss of JPY 5.5 billion this quarter. The Temperature and Pressure Sensor have decreased in sales and profit a little bit. And Magnetic Sensor and Hall Sensor have -- also have a lot better margin but have been shrunken from the Q2. MEMS sensor have also have -- still have a rise. But now -- and that's the margin of what's happened, just a little bit improved due to that product mix and the cost reduction.

Next, let me talk about Magnetic Application Products segment. Sales have increased about JPY 3.4 billion, 6.2% from the -- Q-on-Q basis from the previous quarter. HDD Head sales, when I look at the sales, the sales index have improved from 89 to 92 in Q3. It means about 3% increase. And the sales of the HDD Assembly also have increased by the 5% from the previous quarter, Q2. And when it comes to HDD Suspensions, they had this drive Suspension, but nearline sales have substantially boomed and Suspension Application Products have auto declined but now and it have been more than offset that. And all in all, we have the 14% of increase. Sales of Magnet have declined by 3% Q-on-Q.

Operating income for the Magnetic Application Products have increased by JPY 1.7 billion, 48.6% from the previous quarter. HDD Head and Suspensions, those have increased top line and profits on a Q-on-Q basis. Now for the Magnetic Products, and we have just shrink a little bit of the margin of a loss due to that cost reduction.

When it comes to Energy Application Products segment, the sales have declined by JPY 12.5 billion, 7.2% minus from Q2. [ Secondary party ] have -- although it pushed our business sales for the 5G handset devices. But now when it comes to sales, and that's North America and Korea and have been, and only peaked out in Q2 then slightly declined. And also, and it's almost the same as for that industrial supplies.

Then when it comes to operating income, it was declined by JPY 2 billion to JPY 40.5 billion. But this is due to mainly that and poor business for the [ secondary party ].

Next, let me talk about breakdown of operating income changes. JPY 7.6 billion, that's the bottom line here. But this -- when we look at the changes due to that declining, the change in the sales for the Passive Components, it have pushed down the profit. But now we have about the increase of profit for the secondary party, and we have JPY 11.2 billion of increase of the profit. Then when accounts, JPY 4.3 billion is -- would push down for a -- by that declining and reduction in sales prices, but that can be then offset by that and the improvements in productivity of the Passive Components and in other rationalizations and cost -- the effect of JPY 4.1 billion.

The other one is that JPY 200 million for that restructuring efforts in the business and the other M&A and the cost have reduced by JPY 200 million, but including the JPY 2.3 billion increase of SG&A and JPY 1.5 billion of minus effects of that ForEx. And in total, now we have JPY 7.6 billion.

Next, let me talk about the overview of the consolidated results through Q3 of FY March 2020, the 9 months basis. Now sales was JPY 1,062,700,000,000. 0.9% of decline. And operating income was JPY 109.2 billion. And JPY 14.3 billion, 15.1% increase. And income before the tax was JPY 109.8 billion. Net income was JPY 74.4 billion, a 7.2% (sic) [ 17.2% ] of increase. But with the all, better sales, operating income and for all this net -- income before the tax and all and post tax was all record all-time high. Let me talk about the full year projection for the FY March 2020. There's not any changes made from that we -- the forecast we previously made in October.

So in October, the last time, we have downwardly revised only for the net sales due to this major change of the demand in the market. But after that, now and the launch of the -- full launch of the 5G and projects and also recovery of the semiconductor-related business, but on the other hand, we have a negative impact by the trade war between the U.S. and China and have a adversive effect on the ICT markets. And now when you look at any uncertain and slow demand in the automotive and industrial equipment, and now we have experience about the inventory adjustment for that major distributors in the U.S. And taking all these into consideration, we did not change the forecast. Operating income, income before tax and net income, there is not any change in the forecast. When it comes to foreign exchange rate for the Q4, as we have announced last time, JPY 108 to the dollar, then JPY 122 to euro, there's not any change.

So when it comes to dividends, and again, it's JPY 90 for the second half and JPY 180 for the full year basis. Although there was uncertainty in the global economy and -- well, anyway, we'd like to do at most to achieve that, our target profit. And we're carefully watching about the changing of the demand in the economy, right, to just grab the opportunity for this growth, and we'd like to do it steadily and implement our actions so that we can have the further growth after the year-end of the next -- fiscal year and the next fiscal year onwards.

That's all my presentation. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]