Earnings Call: Q4 2021

Apr 28, 2021

Now it's on time, so we'd like to start the performance briefing for FY March 2021 of TDK Corporation. First of all, let me introduce today's attendees and speaker, President and CEO, Shigao Ishiguro, Executive Vice President, Tetsuji Yamanishi. These are 2 speakers today. Thank you very much. Okay, Dan. First of all, Mr. Yamanishi is going to talk about the performance briefing for Today's consolidated results. Okay, thank you very much. I'm Yamanishi. Thank you very much for joining us today for this performance briefing On FY March 2021, thank you very much. First of all, I'd like to talk about the consolidated results for FY March 2021. First of all, that's the key points. Global economy this year, the last year was that Due to that's the COVID-nineteen pandemic and also that the conflict between the U. S. And China have adversely affected the economy, But after the Q2, each country have started and restarted the economy and the production activities Gradually and now the demand for the electronics has continued to recover, particularly for the digital transformation DX and the energy transformation EX. We have created the demand more than we have expected initially and also by dealing with this demand, now we could grow Net sales by 8.5% year on year and operating income have grown by 13.9% year on year and the both net sales and operating income could recognize the record high performance. And now rapidly recovery from the Q2 of The automotive markets have just contributed, so also for that with acceleration of the dextrotification of the autonomous vehicles like ADAS EV Have you pushed up sales for the passive component products and also in the ICT markets? Now de escalated demand have been very steady from that's The initial of the year and the secondary market secondary battery and passive components and also sensor products have been expanded, particularly for the PC, tablet and the 5 gs smartphone markets. Also in the industrial equipment markets, we have the boosted demand for the renewable energies And EX related demand have clearly recovered. Now the market environment around electronics have been in the big This lack of changes, so that we think that this trend for DX and EX will further accelerate it after this onwards in order to take this opportunity for sure. So that in order to operate that business and competitively in the market, so that's why we have implemented that Business side restructuring and then also for that and for the structural reforms including the assets and disposals in Q4. Next, let me talk about consolidated full year results. Now the currency fluctuations pushed down by 21,700,000,000 yen and 8,100,000,000 negative impact on operating income still taking all this into considerations and net sales was 1 point yen479,000,000,000 yen 116,000,000,000 yen or 8.5 percent growth year on year And also operating income including JPY17.6 billion of this onetime structural reform expenses, we have JPY11.5 billion or JPY13.6 billion or 13.9 percent of growth year on year. And Income before income tax was JPY 121,900,000,000 Net income was JPY 79,300,000,000 Earnings per share was JPY 628.08 Currency sensitivity, there was no any change and then 1 yen change to the dollar have about 1,200,000,000 yen Income on a full year basis and yen 200,000,000 for YN to the euro change. Next, let me talk about full year segment wise performance. Passive Components for Passive Components Products, sales was JPY 407,100,000,000, 2.9 percent And increase from the year earlier, the demand in the automotive market have rapidly recovered from Q2 and also in ICT markets. Now Hence demand have been very steady based on the mainly for the 5 gs and industrial equipment markets have also It's booming with particularly for the renewable energy. And my guess in all of the markets and it has been boosted and now the operating income was JPY40.2 billion, 2.8 percent growth from a year earlier. In Q4, we have spent onetime expenses for the restructuring That was JPY 3,700,000,000. So that's why that and operating income operating profit margin was on par with last year of the 9.9%. And business wise, ceramic capacitors has increased in sales, but now The profit has slightly declined due to that negative impact of the lockdown in Q1 and Automotive Markets. Aluminum, the thermal capacitors now have been dramatically increased in the sales and also the Profit increased due to the renewable energy markets and the industrial equipment market. Industrial devices have been and they increased in both sales and the profits Due to that, the favorable automotive market and the smartphone and ICT markets also pushed up. And high Frequency markets have also increased in both sales and profits due to 5 gs led markets and the piezo electric components and circuit protection components market And BIM also increased in sales and the profits because of the renewable energy as well as the stay at home demand for the industrial equipment like gaming consoles. Next is Sensor Application Products. Sales was JPY 81,300,000,000, 4.4% of growth from a year earlier. And now But we have the same level of operating loss. In the first half, the sales in automotive market have dramatically declined. But in getting into second half, This the market of automotive have been recovered and also our customer base for the strategic products and application have been expanded. Now it make a major make a comeback on demand recovery and we have the regular high sales and the quarterly basis in Q4. We have spent about JPY 4,100,000,000 for that asset disposal and the business based consolidations As a restructuring cost, but that's the improvements of the developments and also the cost reductions, although we still have the loss, but all in all, we can see that we observed the improvements and profitability. TMS sensor have been expanded and particularly in sales and in the ICT market sales and it has been growing its profits. MEMS sensor, when you got MEMS sensor and the expansion of the customer base for motion sensor and also Instead of the new business for the MEMS microphone, we could expand the sales. Next, let me talk about magnetic application products. The sales was JPY 199,300,000,000. It was 9.3% minus over JPY 2,400,000,000 of the operating loss was recognized. When it comes to HDD head, Since due to the closure of the plant operations by the one of the major customers in Q1 have pushed down dramatically that the sales volumes and also we did not have any launch of new products in this year. So That's why that will lead to that declining the price of The conventional products and whether it detail relates that's the profits. On the other hand, the HDD suspensions, now we have the airline HDD For that, major customers have been really booming and micro DSA products have been expanded that contributed to that increase in both sales and profits. When it comes to magnets, now industrial equipments, The market particularly for the renewable energy have increased, but on the other hand, and that's the decline in the demand in automotive markets and First half more than offset and with a decrease in sales and also with that shrinking of the impairment Assets and recognizing in the first half will reduce that the margin of loss. Next, Energy Application Products. Sales was JPY 7 JPY140,200,000,000 operating income was JPY147,400,000,000 23.8 percent increase in the year and 18.8% of increase also for operating income. The new power cell products startup of So we made an upfront investment for this new product for Paracel for the secondary battery. So that's why now and the margin of gross operating income to the sales, I'm a little bit lower. When it comes to the 2nd, the battery smartphone, tablet and the Note PC, these are for the application of mobiles And on this mobile device related market have been favorable and particularly for tablet and old PC business have been growing due to this demand increase for the stay in the home and the demand. And also the gaming console and the min cell products have expanded the sales And for example, that's residential power storage systems or the electric motorcycle products that will be for that. It's in the next generation promising products that have been expanded and from the last years that pushed up the power supply products. When it comes to power supply, So now the demand have recovered and that's industrial equipment including the semiconductor manufacturing equipments and we have secured the increase in both sales and profits. When it comes to EV power supply, now although the DCDC Combutter have been steadily increasing in the sales, but on the other hand, that's a decline of the sales and the invited products. So that in all in all, we have the decline in sales. And also for we have that we could absorb that this and the impact of the JPY 1,100,000,000, and that's afforded investments M and A related cost reductions and the SG and A have increased by that JPY 29,000,000,000 including that and the expansion of business for the secondary business and the power cell developments and also and the termination of future fees. So that's why all in all we have the 29,000,000,000 yen more of the SG and A. And impairment loss have decreased by JPY11 1,000,000,000 from the JPY18.3 billion last year to the JPY7.3 billion this year. And including taking all these one time expenses of JPY10.3 billion and also including JPY8.1 billion of Foreign currencies in total, JPY 13,600,000,000 of increase. Next, I want to explain about the quarter on quarter changes of Sales and operating profit of each segment from the Q3 to the Q4. First, for the passive components, sales increased By 4,400,000,000 yen 4 percent against the 3rd quarter. But operating income decreased by JPY 3,900,000,000, 29.1%. Sales for the automotive and industrial equipment market increased, while sales for the ICT market decreased Due to the seasonality of smartphone sales, which the Q3 is a peak. As a result, sales for inductive devices and high frequency components were flat. While other businesses, which have a high proportion for sales for the automotive and industrial equipment market, saw an increase of sales. For operating income, JPY 3,700,000,000 of one off Spence was booked in the Q4 for restructuring the site. However, excluding this item, the operating income was basically flat quarter over quarter. Going to the sensor application products. Sales increased by 900,000,000 yen or 3.9 percent, while operating loss increased by 4,400,000,000 yen. However, in the Q4, 4,100,000,000 yen of statutory form expenses was Booked for site restructuring and asset disposal. With the demand recovering in the automotive sector, sales of temperature, pressure sensors and hole Sensors increased. In MEMS sensors, sales of motion sensors grew due to increased demand for Chinese smartphones. Microphone sales increased with the start of new projects as well. However, sales of TMR sensors have gone down as Q3 is a demand peak for smartphones. Comparing the operating income on actual basis, excluding the impact of structural reform costs, Temperature and pressure sensors profit grew, led by the increase of sales, while for the magnetic sensors, sales in the EMR sensor Due to the new product development for microphones, for the MEMS sensor business overall, operating loss increased slightly. Going to the magnetic application products. Sales went down by 1,300,000,000 yen or 2.3 percent, And operating income declined by JPY 8,300,000,000. Impairment losses and cost for site restructuring of 5,000,000,000 was booked in the 4th quarter. In the 3rd quarter, 2,400,000,000 of gain was booked Due to the sales of the medical precision component businesses under the HDD suspension business, This means that net of 1 off expenses was generated in reality. So the actual operating income decline was approximately JPY 900,000,000. So HDT head sales volume increased 8% from the 3rd quarter, but due to the decline in the sales prices and decreased Sales in the HDD Assembly Business. Sales in this business was more or less flat from the Q3. In the HDD Suspension Business, Sales for nearline hard disk drive decreased slightly. Sales of applied products for smartphones declined as well, Leading to an overall decline in sales for this business, sales of magnets were basically flat from the previous quarter. As for operating income, On an extra basis, excluding the impact of one off costs, as development costs increased for new technology development for hard disk drives, Overall operating income decreased slightly. Next is the energy application business. Sales went down by KRW8.1 billion or 4.1 percent, while operating income decreased by JPY17.8 billion or 41.6 percent. Sales of chargeable batteries for smartphones declined due to Well, sales of industrial power supply went up due to increased demand. EV power supply saw an increase as well. Operating income declined sharply due to the volume decline of rechargeable batteries, cost increase caused by the factories in China containing Operation during the Chinese New Year and materials cost inflation. Profit increased slightly for the industrial power supply and loss for the EV power supply shrunk. As for micro actuators for smartphone camera modules in others business, Sales with our major Chinese customer decreased substantially. So this business is continuing to generate loss. Due to the situation impairment loss of the dedicated production line was booked in the Q4. This led to an increase of loss by 5,300,000,000 yen. Next, in terms of the consolidated financial year outlook, Mr. Ishiguro is going to speak. This is Ishiguro speaking. Thank you very much for participating in this call. So for the fiscal year March 2022, I'm going to First, let me explain about the market forecast that we'll be using for the assumption of our projections. The global economy suffered negative growth due to COVID-nineteen in fiscal year 2021. But for fiscal year 2020 2, our assumption is that the growth would be plus 6%. There's still geopolitical and COVID related risks in the market, But we are assuming that the production of automobiles and smartphones will grow year over year. Well, production of PCs and tablets is going to be at the same level last year due to the trend for working from home To continue, furthermore, we are assuming demand will be growing in passive For this fiscal year, we acknowledge that we should accelerate our activities to enhance our contribution to the Society by firmly grasping these trends in DX and EX. Based on this understanding, we will actively make investments in our core business to accelerate our growth. In the rechargeable batteries business, which is our core business, we will realize full scale launch of the Paracel business And ramp up our Indian production site as it will serve as a key foothold towards market outside of China. For a passenger components where we can expect demand growing for 5 gs and automotive, We will invest for capacity expansion. In the head's business, technological We will invest in this technology and production. We have started to see results in the sensor business as we have strived to expand our customer base and product lineup. We will work to improve profitability substantially this year in this business. We will reform and build our organization and systems so that we can realize growth. We will strive to become an organization that will deliver more value to the society by shortening our time to market and time to volume. More specifically, we are going to establish a new corporate marketing function, operate a manufacturing and sales integrated business company And aim for enhanced manufacturing capability by utilizing digital technology. Sustainable business management enhancement of governance continues to be a top priority for us to contribute to resolving social issues and secure We are projecting to increase our dividends by 10 yen to per year, in line with our earnings growth. Next, I will explain about the demand assumptions for the major devices where we are involved. For automotive sector, our projected market size, including commercial vehicles in fiscal year 2022 is 83,000,000 units, which is a 5% increase year over year. Since the Q2 in the previous year, demand started to recover sharply and is currently at the pre COVID levels. However, production adjustments are occurring due to the lack of semiconductors for automobiles. So it is important to keep an eye for the future demand trend. Auto companies around the world are accelerating their focus on environmentally friendly cars, and our assumption for the CEV market against the previous year is a 21% growth. As for smartphones, which represents TT market, we assume that it will grow by 1% year over year to 1,370,000,000 units. Although Chinese smartphone makers' production levels will be high, we feel that we should decide about the order taking Volume of 5 gs phones will continue to grow and reach 470,000,000 units. Although The overall HDD market will continue to shrink. One bright spot will be the near line drives that are used in data centers. We also assume that the PCs and tablets will continue to show robust demand as they will be widely used for remote work and remote education. Overall, we are anticipating a stable recovery, But there are still uncertainties about the impact of COVID-nineteen and the actual demand. We feel it necessary to decide about production plan while closely observing the sales trend of finished products. Based on these assumptions, the outlook for the overall sales will be compared to the previous year, will be JPY 1,600,000,000,000 and 8% growth. For Passive components based on the increased demand for the automotive market, more specifically for XEV and 5 gs related markets, The range of increase will be between 4% to 7% against the previous year. In the sensor application products, we project a 22% to 25% increase due to the increased demand for the automotive market Enhanced customer base for the TMMRMM sensor and a more comprehensive product lineup. For the whole sensors, for the automotive applications and existing temperature and pressure sensor sales should increase benefiting from demand recovery for the automotive sector. At the same time, we expect high growth in TMR Magnetic Centers, MEMS microphones, and we Anticipating a high demand. We have been able to secure record high level of sales in the 4th quarter. And based on this level, we think that we'll be able to realize strong sales growth through increased sales of new products and sales increase led by stronger demand. Going to the magnetic application products, Total demand for hard disk drive is going to shrink by 3% as the market for 2.5 inches and 3.5 inches It's going to shrink further. With this, constant production of HDD Heads and 3.5 inches drives for PCs is going to decline. However, sales are projected to grow in volume due to the growing demand for the nearline HDDs. So we are anticipating increased sales for the magnetic products due to the expansion of the new XEV related projects. Overall, increase is projected to be between 9% to 12%. In the energy application products, rechargeable batteries will show Steady growth in the smartphone and PC tablet market. Further sales growth is anticipated by the doubling sales of power cells, Increased demand for the power supply business for semiconductor equipment market and for the infrastructure market as well And the start of mass production for the ready approved new project for EV power supply. In this business, we project sales to increase between 8% to 11%. As I have explained, based on the global economic outlook and the projected demand for the main finished goods, The projection for the fiscal year is shown in this slide. Exchange rate assumptions of JPY 105 to the dollar JPY 124 to the euro. Based on these assumptions, our sales outlook will The JPY1.6 trillion, which is 8% increase from last year. Operating income and income before Income tax forecast is JPY 150,000,000,000, respectively. Our net profit is JPY 100,000,000,000 and EPS Dividends for the second half of fiscal year 2021 is as already announced, bringing the annual dividend payment to For fiscal 2022, the planned dividend is for both the first and second half and will be for the full year. CapEx projection is JPY 300,000,000,000 depreciation and amortization JPY 160,000,000,000 and R and D JPY 140,000,000,000.