TDK Corporation
Q2 2022 Earnings Call Transcript

Published: 1 Nov 2021

[Operator:]

So I would like to start the TDK's Fiscal Year 2022 March First Half Results. We have Mr. Ishiguro, CEO; and Senior Executive Officer, Mr. Tetsuji Yamanishi. We have two 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:]

This is Yamanishi speaking. Thank you very much for attending despite your busy schedule for our performance briefing for the first half of fiscal year March 2022. I'd like to start by giving you the outline of our consolidated results. Touching up on the key points of the first half. From the second quarter of the previous year, social, economic and production activities at each countries around the world have gradually restarted. And with the progress of the vaccination for COVID-19 mainly in the developed 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 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-COVID levels. However, through the acceleration of electrification, such as xEV, a 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 at the same level as last year, which is under our initial forecast. However, the 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 corporates 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 ¥45.4 billion and operating income has declined by ¥1.8 billion due to this impact. Net sales was ¥894.2 billion year-over-year plus ¥203.1 billion, 29.4% of increase. Operating income was ¥80 billion year-over-year increase of ¥17.6 billion, an increase of 28.2%. Profit before tax was ¥84.5 billion. Net income was ¥68.2 billion. So for all the items, we have been able to achieve a record high level. The earnings per share was ¥180.03. In terms of forex sensitivity, it's the same as before against the dollar as the ¥1 fluctuation through the year is ¥1.2 billion impact, in terms of the yen-euro situation, it's a ¥200 million impact. Next, let me explain about the by segment results for the first half. Passive components net sales was ¥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 at 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 ¥39.4 billion, 2.3x year-over-year. Operating margin improved significantly to 15.8%. By business, net sales and profit increased across the Board excluding high-frequency components, especially improved profitability of capacitors inductive devices contributed to the overall improvement of profitability for the passive 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 quarter to net sales, but the second quarter went even higher than that. First half net sales was ¥59.5 billion, 72.5% up year-over-year. Operating income went into the positive territory in this quarter. Thanks to topline growth and improvement of product mix. Profits have improved substantially with the first half becoming very close to breakeven. Temperature and pressure sensors saw an increase for both sales and income due to the robust demand in automotive and home appliances market. Hall 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 ¥126 billion, 42% up year-over-year. Operating income was positive though it was loss-making last year. For HDD Heads, demand for servers 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 plant 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 one-off expenses of ¥4 billion related to anti-trust litigations. So the first half was loss-making. The Magnet business net sales has increased the sales for the automotive market was robust. The amount of loss is shrinking as well. In the Energy Application Products segment, net sales was ¥435.1 billion and operating income was ¥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 costs increased to the price, sales for smartphone-related product 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 ¥5 billion is in the second quarter led to a decline in profit. However, price 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 increased for both net sales and operating income as demand for industrial equipment such as semiconductor production equipment was good. Next, the breakdown on ¥17.6 billion year-on-year growth of operating income boosted profits by sales increase of passive components, substantial reduction of loss on the sensors as well as recovery of the profits in HDD Heads all pushed up operating income by ¥49.6 billion even with material cost increase. The negative impact of ¥7.6 billion caused by the sales price discount was offset by ¥11.9 billion generated by cost reduction efforts with operational streamlining and the structural reform implemented end of the Q4 last year. SG&A went up by ¥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 in the COVID-19 pandemic, and ¥5 billion of royalty concerning secondary battery and the recognition of ¥4 billion related to the anti-trust case as one-off cost. While the Japanese yen depreciated to the dollar, the currency fluctuation including the appreciation to Renminbi reduced income by ¥1.8 billion. And taking all these factors into account, operating income has grown by ¥17.6 billion year-on-year. Just for your information, the royalties cost for secondary battery, which was recognized in Q2 tend to be – and the development expenses in SG&A that is versus ¥15 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 ¥474.1 billion or 24.2% increase from the year earlier. Operating income grew by 11.9% to ¥49.2 billion. Income before tax was ¥52.2 billion and the net income was ¥41.6 billion. All these results were all time high as the quarterly performances. Next, I'd 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 ¥6.2 billion or 5.1% from Q1 and operating income increased by ¥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 distributed channel increased and the sales and operating income both went up for all business except for high-frequency components. Sales of high-frequency components recognized and changed and with operating income slightly declined due to upfront cost for new product development. Next, as for Sensor Application Products, net sales were ¥5.9 billion, an increase of 21.8% and operating income grew by ¥3.4 billion having turned to be profitable on a quarterly basis for the first time. Sales of the Temperature and Pressure Sensors and Hall Sensors 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 to. As for operating income, TMR Sensors have greatly boosted the profits and the Motion Sensors have improved profitability due to the improvement of customer mix and the product mix, making great contribution to the profitability as a whole. Next, in the Magnetic Application Products segment, sales were ¥4.7 billion or the 7.8% increase quarter-on-quarter and operating income increased by ¥3.2 billion excluding the Q2 one-time expense of approximately ¥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 increased sales volumes of HDD Heads and Suspension and operating loss of magnets has shrunk. Next, in the Energy Application Products segments, sales were ¥35.9 billion or increased by 18% and operating income was ¥10.9 billion up by 46.8%. Sales of secondary batteries increased with 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 to hike on to the products. Excluding these factors, now it has positively grown from the 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 income has almost absorbed the impact of the soaring material prices in Q1 for secondary batteries and the cost reduction profitability has substantially recovered offsetting ¥5 billion of recognized license expenses. That’s now – that is the performance in the first half. Okay. Next, Mr. Ishiguro is going to talk about the full-year forecast. Mr. Ishiguro, thank you very much for joining us today.

[Shigenao Ishiguro:]

Thank you very much. I'd like to explain the full-year forecast for the fiscal year ending March 2022. First of all, I’d like to talk about the key points and making a full-year outlook. In the automobile markets, aside from the – and the customer demand, sufficient production is not possible due to the lack of supply of semiconductors and other components. Therefore – and unfortunately, we think that's an automobile, the production unit is a – unfortunately is only in on the par with the last year's level, is 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 India and Southeast Asia markets again, where 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 a strong demand and steady demand. And we also expect that the PCs and tablets will exceed the levels expected at the beginning of the time 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 xEV and advanced driving system is expanding and the market for electronics, such as industrial equipment and medical equipment is being and diversified leading to their further expansion, the demands ended much better. The investment in the 5G-related facilities and the devices have gradually grown although the pace has little bit slowed down. With all these factors, we concluded 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 ¥5 to ¥100, the year-end dividend forecast increasing by ¥12 to ¥108 and the full-year dividend will be ¥208 both on before the stock split basis. Next, I'd like to talk about the sales forecast by segment from October to December. So this is the forecast in the quarter. Overall, we expect net sales to be on the par with the second quarter, although the positive and the negative aspects vary from segment-to-segment. As for passive components, the forecast is based on assumption that demand will continue to be rather stable with a little negative trend, including some seasonal factors. But I feel that there maybe almost just a one to four, but it will be based on some a little bit slightly negative, but I felt that they maybe almost flat until this quarter. Regarding market inventory, we recognized that the pipeline is filled with more inventory than before. However, they are looking at the flow of goods, such as VMR Warehouses. And when I look at those information, we think that the level of inventory might not be excessive yet. As far as the Sensor Application Products are concerned, they will be more susceptible to seasonal fluctuations in a specific customer demand, and we expected 2% to 5% minus. Regarding Magnetic Application Products, we do not expect any significant negative impact against the backdrop of a 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 two quarters, had not so much favorable in the past two quarters, but they will slightly recover. We continue to expect the high demand level for power supplies too. And we think that's the high level of demand we expect on the power supplies. Finally, I’d like to explain that the forecast of our consolidated business results for the fiscal year ending March 2022. We have revised widely our sales forecast to ¥1.82 billion, operating income to ¥157 billion, pre-tax income to ¥162 billion, and the net income to ¥110 billion. The expected increase from the year earlier is to be 21.7% with sales 40.8% for operating income and 38.6% for net income, respectively. Assumed exchange rate is ¥109 to the dollar and ¥120 to euro, respectively. As I said, upward revision of sales includes the impact of push up of the topline by the depreciation of yen as well as the selling price hike due to material cost increase. So that's an old factor where they also included. The developmental cost would have increased by ¥20 billion. But as Mr. Yamanishi explained earlier, that the development expenses include the royalty cost of secondary batteries, and it does not affect the business performance per se.

[Q -:]

[Shigenao Ishiguro:]

That's all my presentation. Thank you very much for your kind attention. Thank you.