Earnings Call: Q1 2021

Jul 30, 2020

This is a key point about the earnings. The COVID-nineteen pandemic has spread around the world heavily impacting the real economy. Against this backdrop, the demand environment for our business for the first quarter is showing deviation from what we have forecasted at the beginning school year. In Automotive And HDD Hardist Drug Markets, our major clients have suspended operations at their plants. This has had a major impact on our business. And our sales towards these markets is substantially lower than our initial market forecast, excuse me. In the ICT market, smartphone demand has declined sharply than our initial forecast. That is basically in line with initial forecast. However, due to digital transformation, Tx has accelerated to remote working and remote learning. This led to an expansion demand in mobile devices and 5G related products, which was higher than our expectations. The demand trend in our key market has changed against our outlook, and there are differences in the performance by each segment. However, overall, year over year net sales decreased 0.1% and operating income declined 26.4 percent year over year. Although the market environment has been tough, Sales and operating income for rechargeable batteries has increased as we were able to tap into demand. Demand expanded for PCs tablets and 5G based stations through the acceleration of DX. Sales of rechargeable batteries, MLCCs, and high frequency components increased This led to higher sales year over year and performance exceeded the initial forecast. As a result, these businesses drove the 1st quarter earnings despite the fact that we were assuming weak earnings for this quarter. On the other hand, due to the weak demand in the automotive market, we saw a lower than expected sales in passive components and conventional sensors, which has high sales composition to the auto market. Sales of HDD Heads decreased more than expected as the shutdown of our major client has had a major impact. As a result, sales volume was lower than cases, the earnings deteriorated sharply than expected. As for the consolidated results, Due to the strong yen against the dollar and other currency, there was a negative impact on sales of JPY 11,300,000,000. 1,000,000,000 positive impact on operating income. Including this factor, net sales was 309,400,000,000, down 1,000,000,000 or 8.1 percent decline year over year. Operating income was 18,400,000,000, down 6 point 1000000000 or 26.4 percent. Income before income tax was 20,700,000,000 net income was JPY 13,200,000,000. Earnings per share was JPY 104,430,000,000. Sensitivity against the currency is unchanged. On an operating income level, if yen fluctuates by 1,000,000,000 against the dollar, it will have a 1,200,000,000 impact annually. The yen euro in is about JPY 200,000,000. Let me explain the results by segment Net sales for the passive components segment was JPY 84,400,000,000, down 14.1% year over year. Operating income was 7,700,000,000, down 25.2%. OP margin was 9.1%. In the automotive industrial equipment market, demand has continued to be weak from last year. Particularly in the auto market, as our major client suspended operation of their plants due to COVID-nineteen, demand dropped further than we expected. On the other hand, in the ICT market, demand for 5 D terminals and base stations was very strong, especially in the Chinese market. There also was front loaded demand in this area as clients moved to secure stock for components. This led to a higher than expected sales for the ICT market. As a result, in products that have a high proportion of sales to the auto and industrial equipment markets such as capacitors, inductors, piezoelectric material products and circuit protection bonus and aluminum electrolytic and film capacitors, both sales and profit declined. However, in this first quarter, As demand grew strongly for 5G base stations, sales of capacitors for base stations increased substantially. Consequently, although profits declined, we were able to maintain profitability at the same level over the previous year. As for freaking high frequency components, which has a high sales ratio for the ICT market, while sales and profit increased, thanks to the robust sales of 5G related products. Profitability has improved substantially as well. Next is the Sensor Application Products segment. Net sales was JPY 14,700,000,000, down 18.8% year over year. Operating income continued to be in the red at the same level as last year. As about 50% of our sales with the segment goes to the auto market specific for conventional sensors, it has been severely impacted by the weak demand in the auto market. In this first quarter, our major auto customers mainly in the U. S. And Europe has suspended operation of their plants. This has had a direct impact on our temperature and pressure sensors and hole sensors, where sales declined sharply and earnings worsened as well. On the other hand, TMR sensors have been faring well, stably generating profit sales has been robust due to increased share of our products for smartphones. In MEMS sensors, sales of microphone MEMS declined due to the shrinking demand for microphones for IoT devices, reflecting the weaker consumer sentiment under COVID-nineteen. Sales of motion sensors have gone down as well as less smartphones models are using motion sensors from M sensors overall as a line cannot grow, it is still loss making, although the level of loss is improving. Going to the Magnetic Application Products segment. Net sales was $38,300,000,000, a 31.01 percent line, 31.0 percent decline year over year. Operating loss was JPY 3,800,000,000. As for the overall market environment, for the 1st quarter, total demand for hard disk drives went down by 20% year over year, but total demand for HDD Heads was about the same as year due to the increase of nearline However, our major client suspended operation at their plant due to COVID-nineteen. This led to a situation where shipment of HDD Heads fell by 45%, which was worse than our initial forecast. As a result, although there was earnings improvement for HDD suspension assemblies year over year, for the HDD Heads and HDD Suspension assemblies business overall, both sales and profit drop sharply. Most of the sales magnets go to the auto industrial equipment market as such sales dipped and the loss level is about the same as last year due to the overall weak demand in these markets. Next Energy Application Products. So that net sales was JPY 156.9 billion. Operating income was JPY 31,300,000,000, 8.6% increase of net sales and that's a substantial increase of operating income of 18.1% and that operating income margin was 19.9%. And have the improvements of the profitability for the rechargeable batteries and due to the decrease of the slougher productions and although we could are slightly over that initial forecast, but now it has negative growth year on year. So but with expansion of teleworking and tele learning, Now we observed that and substantial increase of demands of the tablet and notebook PC and that we had sales volumes have boosted And also for that application like the gaming consoles or the mini cell for that's available devices like a wireless phone and steadily expand it so that as a whole, now we could achieve and exceed that's the initial focus and we have a significant increase in both net sales and that offer the incomes for the industrial use of power supply and it was adversely affected by the declining demand and we have the negative growth in both net sales and operating income. Next, let me talk about a quarter on quarter changes of the net sales and operating income by segments. First off, Pacific Components segments, the sales declined by JPY 12,600,000,000, 13.0 percent from the Q4. Operating income was increased by JPY 1,000,000,000, 14.9 percent when it comes to the net sales, particularly due to that increase of 5G related businesses, Now we have increasing the sales for the ICT markets. Also, we have the incremental business for the distributors, but on the other hand, Now are the customer and the Europe for the automotive market suspended its factory operations and that significantly lower that's our net sales. And so the extent for that the high frequency components, which have been flat from Q4, the all in all, F and R net sale was negative. When it comes to operating income excluding 1,000,000,000 of that impaired loss, and from the last quarter and actually an ARPU to upper basis, JPY 1,100,000,000, up the down for that high frequency component products but it's been favorable in ICT market and have been significant increases to the incomes also for the capacitors now and declining business, Automotives have been more than offset by that base station businesses so that it could improve that profitability, although that's the sales have started decline. All the other products, whether it was affected, that's the decline of demand. When it comes to that, the sensor application products, The sales declined by JPY 4,000,000,000, 21.54 percent on a Q on Q basis and then we have the more EUR 300,000,000 of more operating loss. The end is due to the suspension of factory operation of our European Automotive customers and have the vessel affected the sales of the temperature and the pressure sensor and whole sensor. But on the other hand, the MEMS motion sensor have been favorable and due to that as sales for the gaming consoles, and they can more than that's all the negative impacts of other sensors and have been flat from the Q4. When it comes to the operating performance, temperature and pressure sensor has declined its income due to the decline in the sales and now, but now and magnetic sensor and TML sensor have been steady and have been offset. And also for the MEMS sensors, now we could shrink and trim down. That's the loss due to our cost reduction. Next, Magnetic Application Products sales declined by JPY 13,500,000,000, 26.1 percent decline from the previous quarter. And excluding the JPY 14,400,000,000 of that impaired loss in Q4 and apple based it was declined by JPY 6,700,000,000. The sales of these segments have affected by the declining the sales volumes of HDD Heads, about 44% and also HDD Heads Suspension as a whole declined by 28% country this quarter and also, and the magnets have declined and 12% in terms of net sales. So this is for now, I continue the Magnetic Application Products for the operating performance of these segments. Now 8 DD head have that the operating loss due to that's to decrease it, the sale volumes and also to make that Now we could true down the margin up loss due to the cost reduction. Next, energy, application, product segments, The sales was JPY 38.6000000000,321.6percentincrease operating income was JPY 16,600,000,000 is about close to significant entry and increase about double and when it can rechargeable batteries, and now, now it had increased the fund that the seasonally declined the demand over Q1 from the Q4 and sorry, but also we have the incremental demand of the tablet and PC and industrial power supply have a slightly and lower than the previous quarter. Next, let me talk about breakdown of the operating income changes from year on year basis. It is about JPY 6,600,000,000, down. First of all, for the due to the change in the sales, mainly for the passive components and HDD head, The negative JPY 9,700,000,000, the sales price reduction have negatively also affected JPY 2,000,000,000, but on the other hand, Now for all the cost reduction efforts in order to absorb the impacts that were COVID-nineteen have produced a JPY 5,300,000,000 of benefits And also now JPY 500,000,000 is also further positive due to the restructuring benefits. And 1,000,000 at the last 4, there's the M and A expenses for the M and B and S. G and A For example, when it comes to rechargable business, then we need to have the more R and D expenses and also the termination of the filter fee, will pushed up by JPY 2,300,000,000. This is for the SG and A and the JPY 1,300,000,000 of the exchange evaluations here and all in all, 6,000,000,000 to 6,000,000,000 minus from the previous year. Next, let me talk about that's the projections on changing the sales in Q2. And the Q1, due to that's a automotive industry, which was a faster affected suspension of front operations in Europe, and still some of the and that the performance will be very from the region to region. We think that's where we recovered to the level, a little lower than the initial focus. When it comes to ICT markets, and now we expect that the smartphone production needs will also be recovered to that a little over to that initial project. And the PCN tablet demand will be steady. So taking all this into considerations, now we like to look at the projections of the sales in each segments. When it comes to passive components, we expect that it will be also on the par I think Q1. And we expect that the sales and automotive markets will increase, but when it comes to smart fund related markets, we expect a reaction of 4 of the pilot inventory in the Q1. And also, we think that's the demand of the base station was slowly slowly decline and the non soldered inventory adjustments, our distributors will have vessel effect. But when it comes to sensor application products, We expect that to restart of the factory operations of the European Automotive customers, it will push that that our business will the temperature and pressure sensors and TMO sensor and MEMS microphone will increase from the Q2. When it comes to the magnetic application products, when it comes to the 8 dd head, we expect that our major customer will fully restart the factory operations, and we expect the recovery of that HD, the headwind volumes to the up to that initial focus, and AGG suspension will also be pushed up with for the demand for near line solutions. And the magnets will also increase and due to that increasing and the demand and automotive markets. And when it comes to energy application products, not on top of that demand for the smartphones, the PC and tablets, demands will further search, and we expect the vast and the miniso demand for the wearable devices and taken all this into considerations and the sales in Q2 will increase by 11% to 14% from Q1 as a whole. This is our projections. Last of all, let me talk about the projections for the full year forecast. So the we did not to change we do not change from that forecast we announced the last time in May. In Q1, now we have the observe we've observed that and the boosted the demand for the digital transformations and also so the supply chain have increased it and inventory. So that's the performance was exceeded our the forecast path. Now still it's uncertain what kind of impact we have to expect from that the COVID-nineteen and the business and the 3 major markets, automotive ICT and industrial equipments, Now a when I look at our forecast, still that Asian market varies from the market to market when it comes to that demand, And also, we are looking at the changes and the difference and that's each segment focused. But all in all, we expect that, and our projection is still stayed the same and we don't change our forecast. At this moment of time. That's all my presentation. Thank you very much. Thank you for your attention. Thank you.