TDK Corporation
Q4 2022 Earnings Call Transcript

Published: 12 May 2022

[Tetsuji Yamanishi:]

We will now likely to start the Financial Results Briefing for FY March 2022 for the TDK. If I may, I'll take a moment to introduce the participant from our side. We have Saito Noboru; and also we have Yamanishi Tetsuji, Executive Vice President; Corporate Officer, Sashida Fumio; and also Corporate Officer, Ikushima Taro; and Corporate Officer, Tsutsui Takao, and they are the members from TDK side. Thank you again for your time and contributions. This is Tetsuji Yamanishi. I'd appreciate your precious time despite your busy schedule to attend our full year financial performance briefing for the fiscal year March 2022. I'm so happy to have so many of you. If I may, now I'd like to go through the financial key points for the consolidated numbers. During the period under review, the respread of the new coronavirus infection and concerns about the political conflicts include tensions between the U.S. and China, resulted in the prolonged supply chain restrictions on parts procurement and sluggish growth in automobiles and smartphones and others. But the economic and the social activities are started to become normalize. Production activities continued to recover, resulting in a firm demand for electronics, which further resulted in the growth in revenue in all the segments. Passive Components expanded itself and the sensors became profitable. We enjoyed really good balance overall. Net sales was up 28.6% year-on-year and operating income was up 49.4% year-on-year, reaching record highs in both net sales and operating income. In the automotive market, although the production volume remained at the same level as the previous year due to the supply chain constraints in parts procurement, the demand remained strong due to an increased parts installed and the customers' efforts to secure parts inventories as a result of the further development of the xEVs and accelerated electrification such as ADAS and the sales of passive components and sensors expanded. In the ICT market, demand for the laptops, PCs and tablets remained strong in the period under review. Well, demand for the data centers recovered and the production of HDDs for servers remained strong. Sales of personal computers, tablets and HDDs increased as a result of the strong production of those products, HDDs for servers and recovery in demand for data centers. In the smartphone market, production volume was lower than the previous fiscal year due to the impact of re-expansion of the new coronavirus infection, but sales of rechargeable batteries, sensors and HDD has expanded. In the industrial equipment market, CapEx remained strong and the sales of products for semiconductors and other manufacturing facilities, renewable energy and in other applications increased. We are so happy given these initiations because we're able to move to – and expanded sales of passive components and power supplies for industrial equipments, while rechargeable batteries, including household use ESS sales of medium-sized batteries grew. Net income increased significantly in the fourth quarter due to the approximately ¥60 billion gain on valuation of investment securities and income on an actual basis, actual business basis, excluding valuation gain, also increased from the previously announced full year forecast. We have revised up our year-end dividend forecast by ¥9 per share in light of the improved earnings per share. Next, I will explain the highlights of the performance. Due to the dollar and other FX changes, net sales was up ¥125.7 billion and operating income was up about ¥6.9 billion, so net sales was ¥1,902.1 billion, up ¥423.1 billion or 28.6% year-on-year. Operating income was ¥166.7 billion, up ¥55.1 billion or 49.4% year-on-year. As has been already announced on April 27, we put about ¥60 billion unrealized value from the investment of securities into non-operating income. With this done, income before income taxes and the net income grew dramatically. The numbers are ¥234.2 billion and ¥177.5 billion respectively. TDK was able to renew those profit numbers. Earnings per share became ¥468.36. The FX sensitivity has not changed much. For operating income in the U.S. dollars and the Japanese yen with the ¥1 fluctuation, it was about the ¥1.2 billion the same from the previous year in the year. In the Yen and Euro, the impact was estimated to be about ¥200 million. Next I’ll go through the highlights for the full year by segment. Passive components sales was ¥505.2 billion, up 24.1% year-on-year. The automotive production units level of from the previous year, but due to the increase on number of parts used, automotive sales have continued from in its growth. In the industrial equipment, the demand for the renewable energy, as well as the manufacturing facilities turn out to be firm. The demand for an IC market, the system had a slight increase due to the declining number of the smartphone products open income was ¥77.7, billion up about 1.9x year-or-year. Operating margin became 15.4% showing a dramatic growth and profitability. By business segment, excluding our high frequency center components in the segments where the automotive and ratio is high, particularly in the capacitors and inductive devices made great contributions to the improved profitability for the entire segment as a whole. Next, I will cover our sensor application product segment. This sales was a record high of ¥130.8 billion or up 60.8% year-over-year. Operating income side we had one time on spend of ¥2 billion year in the fourth quarter. For the full year basis, we achieved the profit of ¥2.7 billion on the full year basis. Temperature and pressure sensors grew for the automotive market and for the home appliances, home sensors, also grew for the automotive market. With this earnings improved quite significantly. TMR sensors enjoyed a great growth in sales and profit. Thanks to the increased demand in the ICG market, as well as a new adoption of the product. As for the MEMS sensors on the expanded customer basis and the applications they benefited our motion sensors and the MEMS microphone business helped us to improve our earnings. So we're able to reduce the loss number quite dramatically. Next, I will touch up on magnetic application product segment. This sales was ¥248.4 billion or 24.7% increase year-on-year. Operating income was a ¥4.6 billion becoming profitable from the last year's loss. HDDs, since the beginning of the fiscal year, the demand made a good recovery, which the servers for data centers. Near-line HDDs had robust sales excluding a one-time spend. This business grew in profit. So, 30% in volume given us a good profit opportunities. HDD, suspension, near-line near suspension actually has sell so turn out to be acquired firm. We enjoyed the increase in the revenue, excluding how the one-time spend actually on the substantial basis, we became profitable. As for the magnets for the automotive for markets actually turned out to have been quite strong. So we are able to actually increase revenue better due to the rising cost of the raw materials. Actually, we are still having loss situations. Next I'd like to talk about the energy and application sector billion operating profit and ¥123 billion. Year-on-year basis, actually 30.4% increase 16.4% the loss in terms of profit. And as for the rechargeable battery, FX change and also the rising cost of the raw materials, which has been transferred into our enterprise excluding that smartphone actually growth and actually on year-on-year basis actually declined. But in ICT sales actually stayed at relatively the slight an increase, but rechargeable batteries and also in home appliances, particularly in the energy storage, actually help us to expand in sales opportunities. In the actual home, the substantial business, actually, we are able to enjoy the 90% growth. As for operating income for the ICT actually, even though we are not able to increase the real numbers but starting from the third quarter. And actually we suffered from the high rise in the raw materials, pushing us – pushing down the profit and also the ¥15.4 billion and as a royalty, so all-in all, we suffered from the loss from previous year. Then powerful, the industrial equipments, actually semiconductor equipments and other structure, there has been a strong demand for these segments. We enjoyed both growth in revenue and the profit. Next, I'd like to move on to the operating profit of ¥51.1 billion analysis behind this number. The first and passive of the components, sensors became profitable and given us good opportunities and also interested in the hedge in put a filter actually in the recovered, all-in-all, actually, even though we had some impact from the rechargeable batteries and actually ¥85.9 billion – the benefit actually has been still with us. So we actually went ahead in the stream learning in our cost and the structure. And also now, we had the structure reform actually given us the good opportunity for ¥28.9 billion, and actually the ¥64.5 billion increase, major factors tying to that is rechargeable batteries and licensing fee about ¥15 billion increase and also in the passive, in the component cells, initiatives actually they increased on our sales costs and also how COVID-19 actually resulted in the acquired taxation system distribution cost and also in power pack and our costs actually went up. Then our structure hold, the reform in the fourth quarter of course, one-time I spent actually ¥17.6 billion versus we have done ¥9.6 billion from the previous fiscal year. So it was down, actually in the ¥3.9 billion improvement in the profit. So total actually on the improvement was ¥51.1 billion. Next, I will go through the quarter three and quarter four segmentations and the changes. And also now I'd like to talk about operating income improvements and also then the decline. First in passive components, starting from the third quarter, actually ¥2.3 billion, 1.8% decline. Operating income ¥15.7 billion, 30.6% decline. As for the net sales for automotive actually business was quite firm, I see it in a market, smartphones and the sales actually went down and also the high frequency and components that are actually declined. Operating income in the fourth quarter, we had about ¥2.1 billion in one-time costs and also due to the Chinese New Year, we suffered these declines. Next sensor application products, the revenue of ¥1 billion, 2.8% decline. Operating income of fourth quarter, we had about a ¥2 billion and one-time cost that actually we suffered from the decline of ¥2 billion. The temperature of the pressure sensors, actually, thanks to the good businesses in the automobile market. We had a slight increase and also we had the TML sensor and smartphone, the business, particularly the major customers and the new products launch. Actually, they went down due to the seasonality and also motion sensors starting from the third quarter and actually – number actually leveled off. Operating income TMR sensors actually went down resulted ending declined in the profit MEMS sensors while they due to the increase R&D cost, the slight decline in profit and also the energy on the cost with that and resulted end – decline end in the profit. Next magnetic application, ¥5.6 billion revenue, 8.7% decline. Operating income fourth quarter, we had one-time spent about ¥2.8 billion that actually we suffered from the ¥3.4 billion. Revenue actually data center demand went down and is it in the hedge on sales volume actually now for near line and also know for personal computers again went down about 19% HDD and assembly or sales volume actually that went down about 70%. So we suffered from this major declines HDD suspensions, actually slight decline. As for the magnetic business for automotive market, we had an firm business given us in a slight increase. Operating income was declined a volume and also in the Chinese New Year, again, our business had been they often so now given us a decline the numbers and suspension actually do have some slight decline and magnetic businesses are actually one-time cost that still we suffer from the more the last. Energy and application segment next, the – this was ¥17.9 billion, 7% increase operating income ¥12.5 billion, 32.1% decline. As for the rechargeable battery and the revenue smartphone production and volume went down because of that, well, we suffered somewhat, but again on FX changes and also they were able to actually transfer the surge prices into enterprises. So the result in the certain increase industrial equipments and actually first applied actually now we had slight increase. As for the operating income rechargeable batteries and actually raw materials, actually in the first quarter, all the materials, the cost went up further and pushing us our the profit. Industrial equipments, and actually due to the expanded production, actually, we’re able to actually increase the number to some extent. I went through the highlights and of the full databases. Thank you. As of April 1, in addition I began present, this is a title, I’d like to thank you for your process time and participation. Here now, I would like to explain our full year forecast for the fiscal year the ending March 31, 2023, as well as the progress of our medium-term plan. First of all, I would like to explain our consolidated earnings and dividend forecast for the fiscal year March 2023 and the market background on which they are based. In the fiscal year on ended March 2023, the global economic growth rate was 6.1% due to the recovery in from the Corona pandemic and the growth rate and forecast for the fiscal year ending on March 2023 was revised from 4.4% down to 3.6% in April. Although the production activity is recovering from the pandemic and the economy is accelerating its normalization. We believe that there are still concerns about further macroeconomic downside risks in the future due to the risk of higher than 50 interest rates and the situation in Russian and the Ukraine and the lockdown caused by the respread of the corona infections in some regions. As for the production volume of each major set of product, the production volume of automobiles expected to increase from the previous year and the production volume of smartphones is expected to remain unchanged, but the production volume of PCs and tablets, which have been rather at high level, but are going to the decrease from the previous year. Far more, we expect the impact of the sourcing energy and the materials prices due to the heightened geopolitical risks to continue. Based on the production volumes and an orders received for these some major devices, we project fully in our net sales of ¥2,200 billion, operating income ¥185 billion, income before income taxes of ¥190 billion, and net income of ¥145 billion. The assume exchange rate are ¥120 to the U.S. dollar and ¥130 to the Euro. Based on the increase in earnings per share, we expect to increase the annual dividend from ¥78 per share after a three for one split in the fiscal year March 2022 to ¥106 per share in fiscal year March 2023. Capital expenditure expected to be ¥300 billion, depreciation and amortization ¥200 billion and R&D expense is ¥190 billion. As we have already announced, we will voluntarily adopt the international financial reporting standards, IFRS for the fiscal year March 2022, instead of conventional U.S. GAAP. The full year focus for the fiscal year March 2023, which we have just explained is calculated based upon IFRS and the figures for the fiscal year ending March 2022, which will be used as a basis for comparison as shown as reference for the values, after being placed by the IFRS standards. The ¥6.2 billion gain on the validation of investment securities recorded in the fiscal year ended on March 31, 2022 is included in the non-operating income and the U.S. GAAP, but under IFRS, it is included in other comprehensive income on the balance sheet, not an operating income. Next, I will explain the demand and production volume for major devices related to our company. We assume that the automobile markets, including commercial vehicles all reach 83 million units in the fiscal year March 2023 are 5% from the previous year. Despite this, investment in EVs and eco-friendly vehicles, which have a large impact on our business performance, is accelerating and we have assumed the 43% increase in ex-EV in markets to 14.4 million units. I believe that the situation is going to continue for some time to come. On the other hand, smartphones which represent the ICT market are expected to reach 1,319 million units, the same level as the previous year. And the number of 5G smartphones is expected to continue to expand reaching 663 million units. In addition, the overall HDD market is shrinking. Near-line HDDs for data centers to grow by 3% to 77 million units. As for PCs and tablets, which have been performing well in the corona pandemic due to the work and study starts at home, we expect them to remain negative year-on-year. In general, we believe it is necessary to monitor component demand trends, while keeping a close eye on the sensors trends as the macroeconomic and trends remain uncertain. Next, let me talk about the image of changes in sales by segments end of March 2023. I start with that passive component segments and a business with an automotive markets will exceed the gross rates of that their automotive vehicle production units grow itself. And also we expect that the increase and the revenues in the industrial equipment markets and passive component segment as a whole, we expect 7% to 10% of growth of revenues year-on-year and we also expect that the further expansion of the demand in the mid and long-term, so they like to make that aggressive investments so that we can capture this opportunity and make investment and developments and the production capability. As for the sensor application segments and magnetic sensor, mainly for the TMR sensor for the ICT use, or that MEMS microphone have expanded it options and also that temperature and the pressure sensor for the whole sensor will be an increase and based on the further electrification of the vehicles and all in all, we expect a 13% to 16% revenue growth. For that Magnetic Application Product segment, although the production units of HDD have been struggling, now the investments in the data center is still active and we expect some steady demand for that near line HDD and a total, the volumes of HDD will increase. And we expect that about the revenue growth over 15% to 18%. We also expect that the magnet business will increases revenues and with that expansion XEV business. As for the Energy Application Product segments, although the production units of the smartphone will be flat, we expect that an increase of the business for the medium size of the batteries and for the ESS or the e-bike usage. And the standard power supply business will increase with that – the demand increase demand of a semiconductor manufacturing equipment, so infrastructure, and we expect all in all, 17% to 20% of revenue growth. Next, let me talk about the value creation for 2022 that’s our med-term plan and let me talk about the progress of this med-term plan. As we have explained last year, we’d like to achieve that the improvements of the corporate values and by making the contribution to the EX and the DX that is their social trend. So this is our major objective. The KPI, or I guess the sales of the profits or the capital allocation plan is shown here on this slide. But in the next page of slide, I’d like to talk about the points of the progress of our mid-term plan. First of all, for the progress of the growth strategy and for the passive components and both for the revenue and the profitability, it will exceeded the objective so far and the sensor business have it now making recover its profitability faster than we’ve expected, and we can achieve that. And profitable business and full your basis and for that, the power cell business of the secondary battery have now been on plan. And also in HDD head business have recovered its profitability, and we have launched the MAMR that is the next-generation technology. When it comes to capital allocations, initially, we investments – we make an investments of 60% of allocation out of ¥750 billion of CapEx in the next two years to the Energy Application segment, but we have changed the strategy due to the change of the business strategy and the market. And now we have to reduce it too that allocation to the energy application, from 60% to 40%. On the other hand, we have boosted our investments from that to Passive Components from the 20% to 30%. We try to just capture that opportunity for the growth for the next-generation head or the TMR sensor. So that’s why we have dramatically changed the allocation plan. When it comes to the financing and cash flow, now we have invested ¥100 billion for this stable procurement for the battery related materials. And this is implemented as part of the strategy and as a result of that, it was given and was difficult to achieve that about the positive free cash flow after return to the shareholders in this mid-term plan, but we needed this investment from the mid- and long-term perspectives. And this is the needed upfront investment for the sustainable competitive power. On the other hand, and cost increase of materials and transportation, it must have affected the finance, but now we are trying to do utmost to minimizing impact by passing the cost onto the price or the improvement of the productivity. So, now we’re also trying to focus on making the unprofitable business to be and improve its profitability. Next, please go to the right-hand side of the slide, this is about our efforts to improve the social value from the perspective of ESG. I’ll start with the E, Environment. And for the first time in November 2021, we had issued the ¥40 billion worth of sustainability-linked bond. Shown here on the slide, in order to attain to the objective by the FY2025 and in the lower energy and renewable energy, we are with both of the pillars for making that reduction of CO2 emission. Next, let me talk about S, Society. Starting from March 2018, we have been opened several operations and global HR had office in Munich and Germany, including section planning and diverse activity. And also, we try to enhance more female engagement projects for achieving the 15% ratio of female managers. Last of all; let me talk about the G, Governance. Now, we have laid out that the global common rule they complied by old and good companies and at the same time, we’d like to promote the environment and the transparency for the employees and in operations. So, we’d like to have about this autonomous and the distributed type of organization structure. So, we would like to achieve that as an agile and proper decision-making and the front line of the business in each region and the company. Next, let me talk about the key points of the future initiatives by segments. When it comes to the Passive Components business, about the 40% of the business is based on the automotive market. But in there, we experienced about the dramatic change in that the interest rate and customer structure change, and we have to deal with it flexibly. So although the production of the automobile is struggling, we were focusing on the EV and ADAS related to the products, and we’ll try to keep expanding our sales and profits. And at the same time, really, we have announced in the . Now we have decided to build a new factory for the MLCC. Now, let me explain about overview of this new plant and new factory building plant. So this is the one we have that the new, the factory within the land of the Kitakami factory, which is one of the manufacturing base of MLCC. The construction will be completed on June, 2024. And we will start the operation in the September the same year. This is that the new factory that cover end to end productions from the materials to that finished products, and also given to the conservations to that energy conservations and CO2 reduction, mainly manufacture this factory manufacture for the automotive related products. For example, that’s the high voltage convergent units like ADAS and EV, and would be just the product will be the smaller size it, and also the high performance high liable products will be manufactured in its plant. So combining both this new factory and also then existing announcement capacity enhancement plant. By the end of the 2024, we will expand that's the production capacity 190% compared to the March, 2021. Next, let me talk about sensor application segments. We could achieve that to the making the business profitable last year, but now in order to further achieve that the midterm business plan objectives, and would like to continue our expansion of a customer base and application base. Now temperature and then pressure sensor and automotive, the whole sensor will expect that the steady increase of revenues and also for the magnetic sensor, mainly for the TMR, MEMS Microphone and the application for the digital transformations will be that the new areas would explore to expect the farther expansion of the business and revenues. And when it comes to the magnetic application product segments, although that production units of HDD happens and declining and still that the investment and the data center is active. And we expect that steady demand in near line HDD and as an HDD as a whole that total production units will increase. And we expect that the incremental revenue. And this year, we start the mass protection of MAMR technology that is next generation head. And then also for, and would like to just expand that the suspension application products to the areas other than HDD. Also for the magnets, we like to make our utmost to improve that profitability with the improvement of the productivity. So when it comes to energy application products, now we expect that, and still the smartphone of production is a flat, so that we would like to explore that the new areas of the – made it medium size of the batteries like ESS and e-bike, and with some joint venture with CATL, we like to make the approach and the investments and the gross. And we like to explain about more details about joint venture from Mr. Sashida. That's all my presentation. Thank you very much. Thank you.

[Fumio Sashida:]

Okay. Next. The joint ventures with the CATL in energy application products business. I'm Sashida. Thank you very much. I'm going to explain this joint venture. With it comes to that, the establishment in joint venture with CATL, we already announced in April last year, but let me explain about the current progress of this joint venture operations, and also our future perspective. First of all, let me talk about the background of this, and breaking into this market of the medium size of the battery as well as the background of this and business alliance with TATL . We have super focusing and that's the small size of battery for the ICT, and we could achieve it at very high growth, but now we expect that this and the ICT market, the demand for the small battery would decline on the other hand about the line size, the battery for the EV or that this medium size battery for the ESS and the e-bike will increase. So that on our end the estimates and about the medium size of the battery market will become the – about 4 times of the small size batteries in 2025. So in order to become the winner and will be successful in this rapidly going markets. We needed to just take advantage of that the technological and management resources in a timely manner, time to market, time to volume, this is the key for the success. Our battery business have – have become an current size of the business in the past 20 years, standing from the ATL. And the medium sizes, the battery market will expand to the larger size than that the more higher than to the small size of the battery market. So that we know the winner in this rapidly changing, rapidly going market we needed to – we need more the tremendous technological and also management resources. So now we already have started a business that by the standalone operation by the TDK, by ourselves alone but now in order to make that more efficiently and the faster grows in a very shorter period of time, and at the same time the long-term procurement of materials or that – and synergy for this development efforts. Do we have determined to have this business alliance whether it's CATL? We have the similar corporate culture with CATL, and also we have the experience and partially some joint development program in the past. So that I think we think that we expect that the synergy must speedily and faster. At the same time Cross-License Agreement with CATL, not only for that the medium size of the battery, the technological resources of the medium size battery but also we can take advantage of this cross-license to the small size of the battery too. So we think that this is the essential for, and further growth of the business and the battery. Next, let me talk about the holding company and each joint venture, and then the capital compositions of these companies. 27th last month we have announced about the establishment of this new company. The company name is Xiamen Ampeak Technology Limited, and this is a holding company of the two joint ventures, and, so that we can have a more agile and managements of the companies. Now it's located in the Xiamen, Fujian Province in China. Now TDK JV, now we have the 70% of a stake is now named Xiamen Ampack Technology Limited. And the Cell JV , then we have a stake of 30% is named Xiamen Ampcore Technology Limited, and these two joint ventures are located in the Xiamen, Fujian Province. Ampcore manufactures cells and Ampack manufactures pack. But now when it comes to the contact of the customers that will be within the scope of the responsibility of the Ampcore, the cell manufacturer. Next, let me talk about our strategic directions on a mid- and long-term basis with these joint ventures. Left top part of the slide represents that our assumptions of our – the market size of – that's the medium-sized battery market. And now we expect we're about 100 gigawatt-hour. But now in 2030, the market size will be tripled from the current level. So based on this assumption that this is rapidly growing market for the medium size of the battery, so now first of all, let me just explain about the image of the business going for business ourselves alone in March 2022 that's the medium-sized battery business will account for the 10% in March 2022. On a value basis, it will grow to be the size of ¥90 billion. As for the long-term basis object, we'd like to have a market share of 10% or higher. And by 2030, we'd like to have, on the capacity basis; we'd like to make the business on par with the current ICT business. So if it's in the case, our assumed sales of that medium-sized battery will be ¥400 billion to ¥500 billion. Based on this stand-alone business operation scenario, the most important advantage of this joint venture is, as mentioned earlier, we can have the synergy, having complemented with each other. First of all, from the product side, now we have a very good at a pouch type cell. And at the same time, the CATL can give that about the square and the slim to the type of – cell. And we can combine them together so that we can cover the broader needs of the customers. And now in order to make the aggressive expansion of the market share, we are valuable in this highly expanded markets. when it comes to the technology and not only for the technology but also we can secure that resource, human resources as well as that also for that – our also that we can have the taking advantage of the other intellectual properties. When it comes to operations, we can expect a scale minute for procurement materials and manufacturing and scale manage and also we can have the synergy of that joint manufacturing technology development. Based on these synergies, we expect to have the one-on-one in not two, but over two, this is what I like to realize. And in the mid- and long-term basis, we'd like to have the top market share in the global market that means that 30% to 40%. So when it comes to that revenue reflected on our consolidated business performance. Now – that would be just related to the exactly the same level as we – based on a stand-alone business operation scenario. But on the other hand, the profit, now we can expect the synergies so that we can have the higher profitability compared to the stand-alone business operation model scenario. When it comes to the investments, since we think that's about in proper and shared the burden under the investments between the joint venture so that we can achieve the actual and the proper growth and the balance was between investment and the growth. Just like this, we're going through the joint venture operations and proceeding with the medium size of the battery business, we can expect to realize that the further growth and high growth.

[Q -:]

[Tetsuji Yamanishi:]

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