TDK Corporation (OTCPK:TTDKY) Q2 2023 Earnings Conference Call November 1, 2022 4:30 AM ET
Company Participants
Tetsuji Yamanishi – Executive Vice President
Noboru Saito – President and Chief Executive Officer
Conference Call Participants
Operator
Okay. Thank you very much. Now it’s on time. So, let’s get started. And the performance briefing First Half of Fiscal Year, March 2023 of TDK Corporation. Let me introduce today’s attendees, Mr. Noboru Saito, the President CEO; and Mr. Tetsuji Yamanishi, Executive Vice President; Mr. Fumio Sashida, the Corporate Officer; Corporate Officer, Mr. Taro Ikushima; Corporate Officer, Mr. Takao Tsutsui. That’s all. Thank you very much. I hope for your kind of cooperation. Thank you very much.
Tetsuji Yamanishi
This is Yamanishi speaking. I would like to thank you for your precious time despite your busy schedule to attend our performance briefing for the first half of FY March 2023. Now allow me to go through an overview of the consolidated financial results for the first half. Major points for the business performance, in the first half of the fiscal year, while China showed signs of recovery from the lockdown caused by the spread of the new coronavirus infection.
The global economy has slowed down mainly in the ICT market due to the growing concerns about an economic slowdown in the world economy caused by the heightened geopolitical risk associated with Russia’s invasion of Ukraine. Although there was a slowdown in demand, mainly in the ICT market, the accelerated demand remained strong, and rapid depreciation of the yen contributed to a 25.5% increase in net sales and a 47.4% increase in operating profit, compared to the previous year. This was the highest ever recorded on a half year basis.
In automotive market, although supply chain constraints continued such as semiconductor supply shortages, but gradual recovery was seen in China and other regions as a whole. Demand for new components remained strong due to the increase in [indiscernible] xEVs and the progress of ADAS. As a result, sales of [passive components] [ph] and sensors expanded.
On the other hand, in the ICT market, demand for notebook PCs and tablets, which have been strong due to the corona pandemic slowed down significantly and demand for data centers also slowed down sharply due to the economic slowdown and inventory adjustments in the supply chain. Demand for the smartphones was also sluggish overall with no recovery seen in the Chinese market, but the sales of rechargeable batteries and sensors for new models from our major customers increased. So [indiscernible] the experiences we had in our first half.
Sales of the medium-sized rechargeable batteries continued to increase partly due to the rapid expansion of the demand for residential energy storage systems, which has been affected by the energy supply instability and the price hike worldwide as a result of heightened geopolitical risks. Sales of power and supplies for the industrial equipment the passive components for use in renewable energy and energy saving facilities are also growing.
As explained so far, the demand for the components is undergoing rapid changes. I mean, growing uncertainties about the global economic outlook. We will continue to improve the sales and an operating profit by – firmly capturing EX demand by expanding our business base and expanding sales by continuing to offer distinctive DX products.
Next, let me now go through the highlights of the business performance, mainly driven by the FX fluctuations into the U.S. dollar. Net sales was up about JPY164.1 billion, up in profit, up about JPY36.9 billion making a positive profit. Net sales was JPY1,122 billion, up JPY227.8 billion or up 25.5%. Operating profit was JPY120.3 billion, up JPY38.7 billion or up 47.4% year-on-year.
Profit before tax was JPY119.9 billion. Net profit was JPY87 billion. Earnings per share was [JPY229.39] [ph]. As for the FX sensitivity, due to the rapid depreciation of the yen and the euro, now to the dollar, as well as due to the change in the earnings structure, with one end fluctuated, it was about JPY2 billion per year vis-à-vis the U.S. dollar and it was about JPY600 million to the euro. So, the sensitivity has increased since the first quarter.
I will now explain the initiation by segment for the first half of the fiscal year. Passive components were JPY294.3 billion in sales, up 17.8% year-on-year. Automotive markets in particular, activities and ADAS components continued to be firm in demand. Demand for industrial equipment was firm, particularly for renewable energy and production facilities.
In the meantime, in the ICT market due to the decline in demand for smartphones, except for the high frequency components, with the higher ratio in the smartphone, yes, it suffered, but all the other businesses and enjoy the growth both in revenue and profit, particularly MLCC is continuing its full production and thanks to the improved product mixture, profitability has improved sharply.
Next, in the Sensor Application Product business, net sales was JPY84.9 billion, a significant increase of 42.7% year-on-year and operating profit was JPY7.1 billion, a significant improvement from the previous year’s loss due to the effect of significantly improved earnings. Net sales and operating profit of the temperature and pressure sensors decreased due to the supply chain restriction and automotive parts caused by the problems in Russia and Ukraine, which resulted in decline in orders, mainly from European automotive manufacturers.
On the other hand, sales of a whole sensors for smartphones expanded in addition to the automotive market and sales of TMR Sensors for smartphones increased significantly due to the increased adoption in addition to the steady sales for the automotive market, resulting in a significant increase in overall profit for magnetic sensors.
Sales MEMS Sensors increased even in the ICT market where demand has been somewhat sluggish and the sales to the automobile market game machines and industrial equipment such as drones also increased due to the expansion of customer base and applications.
Next, in the Magnetic Application Products business, net sales were JPY109.8 billion, down 12.8% year-on-year, and operating profit was a loss of JPY2.5 billion. In the Hard disk drive and suspension business, we had expected a further decline in demand for hard disk drives for the personal computers, while demand for the new line of hard disk drives was expected to recover from the second quarter onward. But the economic slowdown and other factors include a decline in the datacenters investment and rapid hard disk drive inventory in adjustments.
All-in-all, it resulted in a decline in sales volume for nearline hard disk drives in the first half. As a result, the sales volume of Nearline hard disk drives has in the first half declined approximately 13% from the previous forecast and the hard disk drive suspension volume also fell approximately 18% resulted in a significant decrease in both sales and profits.
Sales of magnets increased due to the increased sales of xEVs and earnings improved in real terms, excluding the effect of exchange rate fluctuations, despite the ongoing deficit. In the Energy Application Products, net sales were JPY602.4 billion and operating profit was JPY80.9 billion, up 38.5% and 40.1% respectively year-on-year basis. Sales of rechargeable batteries for mobile applications such as smartphones, tablets, and notebook and PCs declined, but sales of small batteries increased due in part to an improved product mix and sales of medium sized batteries, mainly for residential energy storage systems expanded steadily.
Sales in real terms also exceeded the level of the previous year, excluding the impact of the FX rates and surcharges. Operating profit increased on a real basis, excluding the impact of the foreign exchange rates due to the overall cost efficiency improvements, including SG&A expenses and improved profitability of medium sized batteries, despite the negative impact of the decline in volume of small batteries.
In power supplies for industrial equipment, demand for industrial equipment such as semiconductor manufacturing equipment remained stronger, resulting in increased sales and profit.
Now, do you allow me now to go through the details of the growth of JPY38.7 billion in operating profit. Excluding the FX impact of JPY36.9 billion increase, I would like to expand on the factors for the JPY1.8 billion in profit. Although there was a JPY5.3 billion decrease in operating profit, mainly due to a decrease in sales volume of hard disk drive heads and suspensions and impact of selling price discounts.
Rationalization and cost reductions mainly in the rechargeable batteries and the passive components, as well as the effects of the structural reforms implemented in the fourth quarter of the previous fiscal year. We were able to absorb the impact of the decrease and contribute to the increase in the operating income, although SG&A expenses increased by JPY3 billion from the previous year.
The license fee of approximately JPY4.1 billion for CATL was not recorded in the first quarter of the previous year. Thus actual SG&A expenses decreased contributing to the increase in profit. I mean, the uncertain demand environment, we are not striving to improve profitability by enhancing management efficiency.
Next, I would like to provide a summary of consolidated business results for the second quarter. Net sales increased 29% year-on-year was JPY611.5 billion. Operating profit increased 50.5% to JPY75.7 billion. Profit before tax was JPY76 billion and net profit was JPY55.5 billion, reaching a record high in all categories on a quarterly basis.
I will now explain the factors behind the increase or the decrease in sales and operating profit by segment from the first quarter to the second quarter of the current fiscal year. And in our Passive Components segment. Sales increased by JPY11 billion or 7.8% from the first quarter and operating profit was JPY5 billion, up 20.3%. Sales increased in all the markets, mainly in the automotive and industrial equipment markets and both sales and profits increased in all the segments.
Sales of sensor application products. It [was up] [ph] JPY6.9 billion in sales, up 17.7%. Operating profit rose 56.7%, up JPY1.6 billion. Sales and the profits of the temperature and pressure sensors increased as a result of recovery in demand for automotive applications, especially in the China. In Magnetic Sensors, both TMR sensors and the whole sensors increased due to the seasonal factors, including the large increase in new models from major customers in the second quarter, and operating profit increased despite a one-time expenses related to the launch of new models in TMR.
In MEMS Sensors, sales of Motion Sensors for smartphones in China declined, but sales of microphones increased resulting in almost the same level of sales, while the deficit in operating income narrowed, due to the increased sale of high value added products. In the Magnetic Application Products segment, sales declined 0.8% or the minus JPY400 million and operating profit declined JPY1.1 billion. Although we had previously forecast a 40% increase in overall hard disk drive and sales volume in anticipation of recovery in demand for nearline HDDs, the sharp slowdown in demand occurred and resulted in an increase of only about 8% in sales volume.
HDD Assembly sales also declined, resulting in only a slight increase in overall head sales from the first quarter. [Indiscernible] drop while the suspension sales also declined due to a sharp drop in demand from major customers as was the case with heads resulting in the lower and overall sales and profit sales of magnets increased due to the higher sales for xEVs.
Next, in the Energy and Applied Application Products segment, sales increased 31.6% to JPY82.2 billion, and operating profit increased 1.9x to JPY26.2 billion. In rechargeable batteries, well, sales volume of small batteries for ICT applications remained at the same level as in the first quarter for smartphones in China. Sales increased actually for new models from the major customers and sales medium sized batteries increased mainly for the residential and energy storage systems resulted in a significant increase in overall sales.
Operating profit increased significantly as a result of the [indiscernible] and the cost improvements that absorbed the impact of the higher prices. Profitability of industrial power supplies also improved significantly due to the increase in sales. This concludes our March foundation. Thank you indeed for your kind attention.
Noboru Saito
I’m Saito. Thank you very much for joining us today. I would like to explain our full-year earnings forecast for the fiscal year ending March 2023. To begin with, I would like to explain our consolidated earnings and dividend forecast for the full-year ending March 2023, as well as the market background as the assumption. As of April, the global economic growth rate assume it for the market focus was revised downward to the 3.6% and further downward to 3.2% in October.
While production activities showed signs of a gradual recovery from the lockdown caused by the resurgence of COVID-19 and some regions continued geopolitical risk associated with the situation in Russia and Ukraine, and higher than expected pace of interest rate hikes, raised concerns about the slowdown and the global economy.
In light of this macroeconomic environment, we have reviewed our forecast for demand in the production volume for major devices related to our business, and based on the current order status, now we have revised our full-year sales and [JPY2.22 billion] [ph] to JPY200 billion for operating income and JPY200 billion for the income before tax and [JPY147 billion] [ph] for the net income that owed at upward revision.
From the previous announcement, the exchange rate assumption for the second half of the fiscal year is [JPY135 billion] [ph] to both U.S. dollar and euro. The company plans to pay an interim dividend of JPY53 and the year-end dividend of JPY53 and for an annual dividend of JPY160 as planned at the beginning of the fiscal year. And the capital expenditure are reviewed based on macroeconomic and demand trend that remain and change it from the beginning of the fiscal year, due to the depreciation of Japanese yen, R&D expenses had been reduced from JPY190 billion to JPY180 billion Depreciation expenses is expected to be JPY210 billion.
Now, I will explain the demand and production volume for major devices, which is the assumption for the full-year forecast. As for automobile production, we expect a slight increase from the forecast at the beginning of the period to taking into account an increase in xEV vehicles, although the shortage of materials and components has eased slightly that 84 million unit is at the latest forecast.
On the other hand, the production of smartphones, which lead the ICT market was expected to remain flat year-on-year at the beginning of the fiscal year, but now is currently forecasted at 1.184 billion units, down 10% from the previous fiscal year. The production of PCs and tablets has been revised downward significantly from the forecast at the beginning of the fiscal year to 205 million units down 21% year-on-year and 147 million units down 11% from the year earlier for tablets.
Accordingly, HDD production, which was expected to be minus 8% of the previous year’s level at the beginning of the period, but is now expected to be farther drop of demand at the PC not only for the data center, currently minus 36% of the previous year’s level of 161 million units.
Next, I will explain the projected increase and decrease in sales by segment for the third quarter. Total sales are expected to be as I mentioned earlier. And assuming the macro environment and exchange rate assumptions explained earlier of JPY135 to the dollar and a euro, [so now] [ph] expects to be between flat to minus 3% from the second quarter, for passive components, although vehicle production is recovering and the demand is strong due to the shift to EVs and ADAS, we forecast a negative 1% to negative 4% taking into account seasonal factors.
For Sensor Application Products, taking into account the trends in the major markets, our [profit forecast] [ph] is [plus minus 0%] [ph]. For Magnetic Application Products, as I’ve explained earlier, due to that the sluggish demand for HDD and PCs and data centers, we expect between the negative 14% to the negative 17%. For energy application products, well, midsize the batteries are expected to remain strong, taking into the counter the ICT market trends and our forecast is plus minus 0%.
Next, I’d like to explain the key points of the future actions and measures for each segment. First of all, with regards to passive components, as a result of the acquisition of [indiscernible], the business structure reforms centered on MLCC, as well as the subsequent development investments and the sales expansion activities focused on automotive and industrial equipment, automotive sales now account for 43% of the passive components business sales and industrial equipment sales account for 30%.
We believe that and we have established a product portfolio that can respond to the automotive markets, especially EVs, which are expected to spread rapidly amid the trend toward decarbonize society, as well as the renewable energy and energy saving related markets and the system that can supply these products on a global basis.
As for Ceramic Capacitors, we will enhance our product competitiveness in areas such as high temperature and high voltage support and we will implement the investment for increasing the production capacity announced at the beginning of the fiscal year as planned in order to respond to the increase in demand.
And also for that investment increase the production of not only ceramic capacitors, but also – and about all this, we’d like to take advantage of all about just like capacitive and EV and ADAS, so that in order to deal with that, the demand for the market, we would like to invest for that, their developments and their enhanced capacity.
Next, Sensor Application Products business. ICT account for 47% and Automotive 33%, and Industrial Equipment accounted for 17% respectively of sales in the Sensor Application Products business. Sales of TMR Magnetic Sensors increased over smartphones and the demand is expected to further increase in the future as camera become more highly functional in addition.
In addition, TMR Magnetic Sensors are beginning to be not only in smartphones, but also in an electric power steering system for the [mobiles] [ph] and then as [indiscernible] current sensors for motors and [the breakers] [ph] and the like, where we continue to make aggressive investments to increase production to meet the growing demand. Demand for the temperature, pressure and whole magnetic sensor is expected to increase in-line with the EVs electrification and automatic driving and we will continue to aim for further sales expansion.
And we will also continue to expand our customer base and application base for MEMS, motion sensors and MEMS microphones as we did in the past. In the Magnetic Application Products business, and head business, although HDD production volume is sluggish in the short-term basis, but on the other hand, we will expand the production of MAMR Heads and continue development of for the next generation technology, HAMR, we will continue that with the [indiscernible] business growth and medium to long-term.
In addition, we will continue to work on improving productivity in the magnet business, which is our challenging business. Finally, let me talk about energy application project business. And the joint venture, JV with CATL, for the mid-size of the [indiscernible] business is progressing with a delay. And the reason it has the demand for energy storage system for home use has been growing rapidly due to concerns about energy supply caused by the rising geopolitical risks triggered by the invasion of Russian into Ukraine. And we’re able to continue to expand of business by capturing demand for the batteries for electric motorcycles and drones, which are expected to grow in the future where we continue to expand the business. too.
Although there are ongoing concerns about the slowdown in the global economy in a short-term basis, but as I mentioned earlier, we will steadily implement the measures and actions I have explained and strive to increase our corporate value over the medium to long-term. That’s all my presentation. Thank you very much. Thank you.
Question-and-Answer Session
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