TDK Corp

TSE:6762

Earnings Call Transcript

[Tetsuji Yamanishi, executive]

I'm Yamanishi, and first of all, thank you very much for taking time out of the busy schedule today for joining us in the business performance, the briefing for the first quarter of the fiscal year March 2025.

First of all, I'd like to now give an overview of our consolidated business results. First of all, I will explain the highlights of the first quarter results. During the first quarter, the global economy remained unstable with the continued strength in North America and the signs of economic recovery in Europe, while China continued to show economic slowdown and the uncertainty in the Middle East also had an impact.

In addition, the yen continued to depreciate significantly against the U.S. dollar and the euro. In the Electronics market, which affects our business performance, the production trend for ICT-related products such as smartphones and notebook PC showed a recovery trend on a year-on-year basis due to increased replacement demand and so forth. Besides demand for nearline HDDs for data center is also clearly recovering. On the other hand, in the automotive markets, demand for the battery EV showed signs of slowing down, resulting in a lower demand for components than we had expected at the beginning of the period, resulting in a 3.1% increase in our first quarter sales. Sales of rechargeable batteries, the passive components and sensors increased due to a recovery in the demand for the components in the ICT market, while a slowdown in the sales of battery EV led to slowdown in the sales growth of passive components and sensors for the automotive market.

Consolidated sales of the medium-sized batteries for that industrial equipment market decreased from year earlier due to the fully shifting of the business to that JV from the current fiscal year, while the sales of passive components and sensors declined. Operating income increased 120% year-on-year due to the significant depreciation of the yen and increased sales of products for the ICT market as well as the effects of streamlining and structural reforms implemented in the previous fiscal year. Next, I will provide an overview of first quarter business results, including the impact of exchange rate fluctuations of approximately JPY 53.8 billion on net sales and JPY 11.1 billion on operating income and net sales increased by JPY 50.4 billion or 3.1% year-on-year to JPY 518.8 billion. Operating income increased by JPY 31.6 billion or 120% to JPY 57.9 billion, and income before income taxes increased by JPY 48.6 billion or 3.3x from the year earlier to JPY 69.6 billion, including approximately JPY 8 billion in foreign exchange rate -- exchange gains.

Net income was JPY 59.6 billion or about 4x as much as the year earlier. Earnings per share is JPY 157.15. As for the sensitivity to exchange rates, we estimate that a JPY 1 change in the yen-dollar exchange rate will result in an annual impact of approximately JPY 2 billion, JPY 1 change and the yen-euro exchange rate will result in an annual impact of approximately JPY 300 million, slightly lower than last year.

Next, I will now explain the first quarter results by segment. First, I start with the Passive Components. The sales were JPY 143.1 billion, a slight increase of 1.6% from the previous year, and operating income was JPY 13.9 billion, a slight decrease of 1.5% due to continued sluggish demand in the industrial equipment market and the slowdown in sales to the automotive markets, including the battery EV vehicles despite increased sales to the ICT market, including smartphones. The sales and profits of ceramic capacitors decreased due to the lower sales to the industrial equipment market and increased fixed costs in response to increased production despite higher sales to the automotive markets and the sales and the profits of aluminum film capacitors decreased due to lower sales to the industrial equipment market and the automobile market.

Sales and profits of inductive devices increased due to favorable sales to the automotive and ICT markets, while the sales and profits of high-frequency components increased due to higher sales to the ICT market and improved profitability. Piezoelectric material components and the circuit protection components recognized lower sales due to -- lower sales to the automotive market, but higher profits due to foreign exchange gains.

Next, the Sensor Application Products. Net sales were JPY 44.1 billion, up by 13.6% from the previous year, and operating performance turned to be a loss of JPY 700 million. Sales of temperature and pressure sensors increased due to higher sales to the automotive industry, but income decreased excluding the onetime gain from the sales of assets in the previous year. In the MEMS sensor business, while the profitability and the microphone improved due to increased sales in the ICT markets, overall sales and profits of MEMS sensors.

Also MEMS sensors and also the motion sensors have been just sluggy, so about the motion sensor, therefore industrial equipment. Next, the Magnetic Application Products business. Net sales were JPY 55 billion, a significant increase of 43.9% from the previous year, and operating income was positive, including a onetime again -- onetime gain of approximately JPY 2.3 billion from HDD heads. In HDD heads and suspensions, demand for nearline HDDs for data center increased by 1.5x year-on-year and HDD heads and suspensions as a whole returned to be profitable even under the basis excluding onetime earnings, as I mentioned earlier. Although head sales volume was 1.9x that of the same period last year, it was slightly below the breakeven point volume after the restructuring. So leaving that the company slightly ended the red, excluding onetime gains, but suspension sales volume exceeded the breakeven point volume and returned to be profitable. Magnet sales declined due to lower sales to the automotive market, but profitability improved.

In Energy Applied Products, sales declined by 4.4% to JPY 262.9 billion, while operating income increased by 71.9% to JPY 55.3 billion. In the rechargeable battery business, sales volume of small batteries for smartphones and other applications increased due to higher demand in the ICT market. But on the other hand, sales decreased due to the impact of lower selling prices resulting from the falling material prices and a decrease in our consolidated sales as a result of the completion of the transfer of the business of the medium-sized batteries to the joint venture. Overall, sales decreased slightly from the previous year. On the other hand, operating income increased significantly due to the increase in volumes, rationalization effects and foreign exchange gains.

Both sales and profits of power supplies for industrial equipment declined due to lack of recovery in the demand for the industrial equipment, while profitability of power supplies for EVs improved despite the lower sales.

Next, I will explain the variance in sales and profit from Q4 last year to Q1 this year. First, Passive Components segment. Sales increased JPY 4.5 billion or 3.3% from Q4 and OP increased 30%, excluding onetime expenses of JPY 7 billion incurred in Q4.

As for ceramic capacitors, sales volume fell mainly due to a decline in demand for BEVs and profit fell due to a decrease in sales volume and increase in expenses for increased production. As for aluminum film capacitors, sales and OP increased despite lower sales of automotive, thanks to higher demand, mainly in the industrial equipment market related to solar or photovoltaic. Inductive devices saw an increase in sales in all markets, resulting in higher sales and profits. Sales and profits of high-frequency components and piezoelectric and circuit protection components remained almost unchanged. In Sensor Application Products, sales fell by JPY 1.1 billion and OP declined slightly.

Sales of magnetic sensors increased slightly due to increase in sales to the smartphone market, compensating for lower sales to the automotive market. However, OP remained flat due to increase in fixed costs in response to increased production. In MEMS sensors, sales of microphones for the ICT market increased, while sales of motion sensors for drones and automotive markets decreased and losses decreased due to improved profitability of microphones.

Next, in the Magnetic Application Products segment, sales increased by 6.1% to JPY 3.2 billion, and operating profit increased significantly, excluding onetime cost of JPY 4.7 billion in Q4 and a onetime gain of JPY 2.3 billion in Q1. Because of the recovery of nearline HD, the volume increased about 9%. Well, thanks to the recovery of the -- in total demand for nearline HDD, sales of HDD heads increased by 9%. Sales of nearline HDD heads increased by 26%. Sales volume of suspensions increased by 2%, leading to overall increase. The magnet business was able to reduce the amount of losses year-on-year. In the Energy Application Products, segment sales increased by JPY 24.7 billion and OP increased by JPY 12.9 billion, excluding onetime cost of JPY 2 billion recorded in the fourth quarter.

In rechargeable batteries, sales volumes of small batteries to the ICT sector increased due to higher demand and higher spot orders related to customers' new product launches, while sales and profits for midsized batteries also increased due to an increase in sales to e-bikes. Sales and profits of power supplies for industrial equipment decreased, while losses of power supplies for EVs were reduced year-on-year. Next, variance analysis for the increase in OP of JPY 31.6 billion in Q1 will be explained. First, sales factor was positive JPY 12.2 billion, including increase in sales volume of rechargeable batteries, increase in sales volumes of HDD heads and suspensions.

The decline in OP of JPY 4.8 billion due to selling price fluctuation was offset by the benefit of cost reduction and restructuring of JPY 10.2 billion. SG&A expenses decreased by JPY 2.9 billion, including JPY 2.3 billion in onetime gain in HDD heads. FX impact was positive, JPY 11.1 billion, resulting in an overall increase of JPY 31.6 billion. Next, I would like to explain the projections by segment for Q2 this year. Q2 foreign exchange rate assumption is JPY 140 to the U.S. dollar, unchanged from the beginning of the fiscal year.

For the sake of comparison, however, I will explain the impact -- the performance, excluding the FX assumptions. In passive components, sales to industrial equipment are expected to remain sluggish, while sales to automotive market should increase slightly, sales to ICT market increased, especially in inductive devices, leading to an overall growth of 2% to 5%. In Sensor Application Products, Sales of temperature and pressure sensors are expected to increase for the automotive market. Sales of magnetic sensors for smartphones are expected to increase significantly due to seasonality and the sales of MEMS sensors are expected to increase by 13% to 16% due to an increase in microphones.

Next, in magnetic application products, HDD production volume is up 5% and the nearline HDD production volume is up 8%. That's the assumption. The expectation is a solid performance in HDD heads and suspensions. Magnet sales are also increasing. All in all, 0% to 3% growth is expected. Finally, Energy Application Products. Sales of rechargeable batteries small ones for smartphones are increasing dramatically, partly due to seasonality. Sales of medium-sized batteries for ESS also increased. Sales of industrial power supplies are declining due to continued weak demand. Sales of power supplies for EVs for automotive sector are increasing. Overall, this segment is expected to grow by 21% to 24%.

Finally, I would like to explain our full year forecast for FY '25 ending March '25. Although we expect first and second quarter results to exceed our initial forecast, we believe it is necessary to assess demand conditions in key markets in the second half of the year and beyond. And at this point in time, we are remaining -- maintaining our full year forecast as announced at the beginning of the fiscal year. The exchange rate assumptions for the second quarter onwards remain unchanged from the assumptions made at the beginning of the fiscal year, JPY 140 per dollar and JPY 156 to the euro. That concludes my presentation. Thank you.