Earnings Call: Q4 2020

May 15, 2020

Hello. This is Yamanesi. I do appreciate your precious time, this participant's schedule. Also, we are being connected on through the web systems. It's rather inconvenient. Again, I'm so happy to go through the highlights for the performance for the fiscal year and March 2020 on a full year basis. Thank you indeed for your precious time. That said, Again, I'd like to go through the highlights of the performance. And, first, key points. Economic slowdown in China and the rest of the world became so clear due to the Russian relationship between the U. S. And China day by day, as we move toward the year end, in fourth quarter, economic activities in each country stagnated due to the COVID, the 'nineteen pandemic, impacting the production of electronics and the demands for electronic components. Its impact was beyond our origination, back in the beginning of the year, net sales was down 1.4% year on year. Operating income was down 9.2% year on year. I mean, the severe macro demand globally, throughout the rechargeable batteries and enjoying the strong demand in the ICD market, performed well since the beginning of the year. Energy Application Products segment recorded its sales and profit by making efforts to expand it sells with the expanding applications. The U. S. And China on trade reflection had a major impact on the automotive and industrial equipment markets, creating a much the bigger sluggish demand than we had expected since the beginning of the year. Products and how the sensor and application products, particularly, the conventional sensor products were affected negatively. In contrast, the ICT market demand turned out to be a rather firm. Sales in the ICT market grew year on year. With the 5 gs demand and increasing, the rechargeable batteries and the high frequency components and drive overall earnings from the sales for smartphones and base stations. So I'm happy to report this to you. In the fourth quarter, we came to our conclusion that the sluggish demand for automotive and industrial equipment markets is here to stay. So it will be rather difficult for us to have a big recovery in profit So we posted about JPY 6,500,000,000 for impairment for the production facilities for the magnets and aluminum architectures. We also now booked about JPY 1,800,000,000 impairment loss for the idle facilities in light of the revised development operations. Next, the highlights of the numbers, the stronger yen against the U. S. Dollars and other currencies, We have the sales and operating income affected by JPY 40,700,000,000 and JPY 3,100,000,000, respectively. With this net sales was JPY 1,363,000,000,000, down JPY 18,800,000,000 year on year and significantly declined by 1.4%. So it went through nowadays and situations. Operating income, including the impairment loss of 18,300,000,000 and became 97,900,000,000 yen, down 9,900,000,000 were down 9.2 percent year on year. Income before income taxes was JPY 95,900,000,000. Net income was JPY 57,800,000,000. Earnings per share was JPY 457.47.47. COVID-nineteen outbreak on the start and some of the planned operations and the shipments. With this, we assumed that net sales and operating income were affected by about 1,000,000,000 12 1,000,000,000, respectively. As for the FX sensitivity, no change. With the U. S. Dollar and the Japanese yen, we 1 year fluctuation had its impact on operating income, about JPY 1,200,000,000 on the annual basis. Between the euro and yen, it was 100,000,000. Here, now I'd like to explain in results by segment, a passive component segment. Net sales was 1,000,000,000, down 8.7 percent year on year. Operating income was JPY 39,100,000,000, down 33% year on year. Operating income margin became 9.9%. With the controlling U. S.-China trade friction, contouring into the new fiscal year, automotive and industrial equipment market demand became source sluggish. Furthermore, was the inventory adjustment made by the major distributors both in the U. S. And Europe? Capacitors and inductors and piezoelectric components, factory, protection components, and aluminum and film capacitors, major items in the automotive and industrial equipment markets. Revenue had a tough time in sales, making the profit negative. For your further information, aluminum film capacitors became negative in the fourth quarter as much as 1,000,000,000 due to the declined demand. In contrast, ICT market demand continued to be firm since the beginning of the year. 5G ramp up centric around the China is gaining its momentum fully. The volume was down because of the COVID 'nineteen. But may I remind you that in high frequency components, the business and what was a to secure the growth both in revenue and the profit. Next since application products segment. Don, we positioned this segment and as our growth strategy business, and try to increase the sales since last year, but the total shows only a slight increase of 1.8%. And operating loss became bigger. To be more specific, there are 2 segments. In one segment, we were, affected by affected a lot by the economy and suffered from decline in sales. And in another segment, we were able to grow based upon our growth strategy. Globally, the demand for automotive and the threshold equipment to markets are becoming so low, our temperature sensors and the whole sensors, conventional types business became sluggish, resulting into a big decline in sales and its profit deteriorated from the last year. It is having a major impact on the overall business. In contrast, our strategy is going to have the products where now we do expect growth TMR has insertion for autos expanded its sales with the steady increase and the volume increase for smartphone business, a shift to new models and have a have surely advanced and given us and the growth in sales. As for MEMS sensors, our motion sensors have grown with our new customers. Maem's microphone is also growing rapidly, particularly for the smartphones and IoT. However, it is not that great to make a contribution to our profit. Next, Magnetic Application Product segment. Net sales was 219,700,000,000, down 19.5 percent year on year. Operating income was JPY 400,000,000, showing a major decline. HDD, lean ahead and HDD in the suspension. Well, how to describe HTD assembly, the volume went down by 4% due to the decline in the total HDD demand, partly due to the end of life of HDD and our assembly and the product HDD and R suspension as a whole was down about 18% in sales, resulting in a decline in a profit. However, thanks to the high value new products introduced its profitability and improved since last GR. We are so happy and as for this situation. When it comes, we are having we have been benefited, thanks to this and high valued the products and the nearline net products magnets. Sales decreased year on year due to the withdrawal of hard drive magnets and as well as the sluggish demand for industrial robots and machine tools and other industrial equipment markets. Was this, we are still faced with a tough situation as for the deteriorating profit? So we had impairment loss of about JPY 14,400,000,000 in the 4th quarter. Next, Energy And Application Products segment. Net sales was JPY 597,700,000,000, up 11.02% year on year, operating income was JPY 124,100,000,000, up significantly 36.4% year on year. Operating income margin was 20.8 percent, 20.8 percent profitability improved quite greatly. Rechargeable batteries have increased greatly for the smartphone business as a whole. Tablets and laptops business and also grew firmly. Furthermore, mini cell products for the wireless earphones and other wearables grew family in sales. It grew about a 15% year on year, showing the improved profitability. Power supplies on how for the industrial equipments were affected greatly by the lacklustre on capital, the investment demand, making the total sales for industrial equipment going down. Next, I will analyze the decline in operating income of JPY 9,900,000,000. Corporate 'nineteen impact was as much as a SEK12 billion 1,000,000,000, but we had on a profit of 1,000,000,000 backed up by the increased volume. Sales and price reduction impact was about JPY 15,000,000,000, but this was absorbed by rationalization of cost reduction of JPY 19,100,000,000 And the benefits from the restructuring was JPY 1,600,000,000. They have contributed to the improved profitability by improving our internal strength. As for InvenSense acquisition cost was JPY 5,400,000,000, no change from the previous year. Rechargeable Batteryener mentioned activities and costs, including SG And A and the development was up JPY 10,400,000,000, FX change the push down profit by JPY 3,100,000,000 impairment or loss increased JPY 13,600,000,000. All in all, it resulted in the loss of JPY 9,900,000,000 in profit. Next, I'm going to talk about that the reason of the changes of that a segment wise net sales and operating income changes on a quarter on quarter basis from Q3 to Q4. The first of all, passive components segment. Net sales have declined by 1.3% from Q3, but if we exclude the impacts of the COVID-nineteen, have grown by 2% positively. All in all, we can see that now the business in ICT and the industrial equipment business have declined, but on the other hand, that's the Islamic capacity and the high frequency components for the 5 g base stations have more than offsets. Now operating income declined by 37 percent Q on Q basis, but we're excluding the impact of COVID and that's and the impairment of aluminum capacitor, it had grown by 9% next sensor application products. Net sales have declined by 7.9% operating income and income operating income, the JPY 1,500,000,000 loss have increased. For the automotive markets, I'm slightly going up. But when it comes to the de closing, the volumes of the smartphone and all in all, we suffer from that's the negative the growth. For the due to the impact of the COVID-nineteen, we have to suspend the production line and due to these impacts about that excluding these impacts is that when the margin of decline was 14%. Next Magnetic Application Products and segments Now net sales when it comes to that due to the volume decline of by 6% of the HDD head from Q3 and also over the slow down of the assembly of the HDDD and also that the sales volume of HTD suspension by a 10.5%. This is an all in all decline in this and magnetic applications. The magnet net sales have declined by 5%. The operating income and then we have a JPY 14,400,000,000 of impairment loss and but excluding this and also for the COVID-ninety negative impacts and the margin of the decline of the Open Income was 35% next to Energy Application Products. Net sales have declined by 26.6 percent, 2 100 Cubases, 1Q3, but excluding the impact of the COVID, now margin of decline was 15%. When it comes to secondary battery, now due to that's the seasonal impact and also for the the industrial power supply have been the floods. When it comes to the operating income, 63.7 percent at negative, but excluding that impact of the COVID, natural margin of decline was 49% minus. That's all the performance. Okay. Next, for the message Shiguro is going to talk about about that the forecast the March 2021. I'm Ishiguro. We want to, 1st of all, like to appreciate all of you for you join this unusual, the style of that and, business performance, announcement meetings, and I highly appreciate all of you to join today. And I'd like to have a a face to face meeting with all of you as soon as possible. And then I sincerely hope that I can meet you again Now, and I have just take over from Mr. Yamanishi, but Mr. Yamanish actually, then speaking, is quite different separated room 4 having their social distancing. So now we have a working on the split team having their social distancing, all the executives working on that. I sincerely hope that Odie's problem were resolved. Then I'd like to talk about that the consolidated business performance forecast for March 2021. First of all, I'd like to talk about the assumption and about the macroeconomic trend and also and the demand for the major device markets. Now you're looking at the graphics. So this is about the global GDP forecast now on which we have come out with the forecast. On the 2020 calendar year basis, and this is called the calendar year basis. This is the annual forecast of the GDP gross. Wow. Forecast leaves minus 4%. Leisure wise, now that the China will already have under the bottom out although they have just hand suffer from the inspection in earlier stages. And now that they're going to recover from that's as early as possible, but on the other hand, then China will come back to that's the macro economy and just liked it before the COVID 19 infection in China. But other than China, including the Japan, now when it comes to the negative impact of the economy, where we bottom up bottom out in sometime in the Q2 and the gradually picking up, but it would be the impossible to and recover to the level of before the COVID-nineteen crisis. When it comes to the business our, of the impact on our business and due to that about the market inventory, in fact, now we expect that about actual impact would be the 2 to 3 months and after this impact, it comes up to the market. Next, let me talk about about the assumption of the demands of our major devices related to our business. When it comes to automotives, Now a the outputs of that's the vehicles including commercial, vehicles in the fiscal year 2020. Now our expected is the 75,000,000 units -14 percent outputs on a year basis. This is our assumption focus. Already part of the markets will suffer from that the father decline is argued on the other hand When you look at the market in China, they it they say that they are the business in China. Demand in the market in China have already have positive growth year on year as early as April. But anyway, we have to watch the market and demand that carefully But on the other hand, we think that ex EV market will expand by 11%. This is an assumption in Fergus. But on the other hand, the smartphone, which is the main state of ICT market, our effect is that 124,000,000 Minus 9% is that the total demands of the smartphones, and the units of a 5 g will be expected to be 376,000,000. And then the 5 g form demand in 2020, but expected to be 400,000,000 So that's why compared to that level, it will be just there and the weather devices. But then again, that the total smartphone demand we expect is 1,240,000,000. So the one that comes to the nearline drive user for the data center will to keep expanding, although there's a total HDD market will shrink. And at the same time, the PCs or tablets will be we expect that the demand will be flat or and slightly upward. On the other hand, the impact of the COVID-nineteen who not only for have the impacts on the market demand. And short term basis with this expansion of the the COVID nineteen inspection that would directly affect our supply chain. So they will also lead to that suspension of a manufacturing operations. But currently, we have some kind of a problem and part of the Indian and part of the Southeast Asia. And they failed to achieve 100% of utilization due to the regulation of the government's Now that will lead to this and the less than 100% of utilization for the Indian and part of the subsidy to Asia. But on the other hand, and most of the other regions, we have already almost the full capacity can be upgraded. So that's why an assumption of there's a forecast based on that, our a operation will be on a full capacity basis And then also at the same time, we expect some kind of there's no any further decline of the macro economy due to the can set a wave of infection. This is our assumption. Okay. Based on the assumptions, now in in March 2020 and about 5% decline from the March 2020 and March 2021, our sales and March 2021 is 1,292,000,000. Now for the passive components, now although there's some automotive and industry wide markets with some advanced effect, but now about the passive components, net sales will decline by 7 to 10%. So when it comes to passive components segments, And now, but all these and high frequency components, all the 5 gs later market will be steady. This is a I guess. When it comes sense application products, where the expansion of the customer base and it's a product lineup and the portfolios, we expect 8% to 11% positive growth. Even in this COVID-nineteen crisis and then when it comes to the temperature and a pressure sensor, that the whole ICUs and furthermore teams cannot be expected to grow so much substantially due to the negative impact in the market, but when it comes to the t m r TMR and magnetic sensor, microphone, MEMS sensor. These are the promising for the future market. Then we can expect that new and development of new customers and applications, we expect a positive growth. When it comes to the Magnetic Application Products, when it comes to the HDD head, 2.5 inch and 3.5 inch drive market with gradually and decline at the same time accordingly that's about the outsourcing manufacturing business of 3.5 inches drive will also will slow down With this background, we are forecast is that this net sales will also slow down. Now when it comes to the magnetic products, A 4, we can expect the expansion of the new project for XEV. But due to that slowdown of the automotive markets as a whole, we would be we expect it would be very difficult to expense substantially about. So that's why all in all, we recognize our forecast of 15% to 18% of minus When it comes to energy application products, the shrinking, a smartphone markets and also infrastructure market shrinking, which related to the power supply that on the other hand, we have very favorable, forecasted about this and the PC and tablets and then other. And the telecommuting and in the markets, when also the mini, mini cell and the power cell, do all those sales of these and steady and the business will gradually contribute. So that's why, and the energy application products forgets it's almost flat. Based on all these assumptions and the focus. Now just like we have this focus of the consolidates business performance March 2021, Assumption of the currency is at JPY105 to the dollar and JPY 117. And there was net sales forecasted this JPY 1,292,000,000, about 5% decline year on year due to that impact of COVID-nineteen. Now based on declining demand of the net sales is considered, but now we expects the VAS 180 BRL 180 billion as the net impact due to this kilometer and the virus in the COVID-nineteen. The one that comes to the negative impacts of this operating income, including this negative impact, our operating income will be JPY 70,000,000,000. And income before tax will be JPY 70,000,000,000 net income will be JPY 48,000,000,000 and and the 8.80 yen of earnings per share. And our dividend in the second half of March 2020, we already announced that we've been 90 and so that we can, they pay about 180 yen to the annual dividends. When it comes to the dividends of next fiscal year in March 2021, Do we have about now in this based on our target of the returned to the shareholders and this can't meet some business plans including to pay out less shares and amounts. That's why we paid at ATM for both of us and the and a half in total 160 yen and annual dividends. Capital expenditure 180,000,000,000 yen depreciation JPY 140,000,000,000 and R and D expenditures JPY 120,000,000,000. So we'd like to be aggressively continue about it in the oldies and the strategies in the growth area. So now in this segment and Mr. Yamanishi again, we'll talk about our strategy on the finance Okay, then. I'm Yamashi again, and I'm going to talk about our how we can improve financial strengths in this uncertain environments of the business. Now So now when it comes to the business focus for March 2021, next fiscal year, and as the RCO claim due to that impact of the COVID-nineteen and our forecast of the net sales and operating income will also lower than the previous year. And as we have announced in 2018 that this is this is the current Midtown business plan and this is Benny last year of the current mid year visibility on terms, but it's very difficult to achieve the target of finance strengths. But now but we can achieve that free cash flow plus for each of this in the year, but now due to that declining and the incomes of this in the March 2021, and we need to postpone that's the year to achieve the targets of financial strengths. So also in March 2021, But still, we will the put the priority on making investments for the future growth areas. At the same time, we try to recover that the results of this gross investments and aggressively so that the weekend they be sure to and secure the free cash flow expansion so that the weekend achieve that's the financial strength target as early as possible. On the other hand, in order to deal with this, it's not absolutely changing that the demand in the market situation we needed to secure we already have to secure the funding capability including the commitment line and also we can deal with that's any and uncertainty in the markets and with that's the financial strengths and including this this specific and equity on hand. But when it comes to the return to shareholders, as she also have, mentioned earlier, when it comes to return to shareholders, Then we failed to achieve the target of a a earnings per share. So that's why and we needed to decrease the 20n from the 180n as an amount of dividends and, the plan in the March 2020, but anyway, based on the policy of the dividends and also based on the free cash flow level of the mid term plan, we we we think that we could still maintain that 30% of the payout ratio going through all of the the periods of the current Mediterranean business plan. That's all my presentations of our financial strategy and elastable Mr. Shiguro again will explain about our basic ideas for the postal post COVID-nineteen crisis. Okay. Now and when it comes to expansion of the infection of the COVID-nineteen crisis and this for example, that will have the very brutally impact including supply chains and also have a a visceral effect that the consumer markets and the business markets, that's still when it comes to electronics market, which is our end of, main battleground for TDK, we still have very good potential for the future growth. As also explained in the, the last time, and energy transformation EX and the digital transformation DX. These 2 major trends and the market than the society. We think that these are that areas the TDK had make the bigger contributions to change the society and the world. And energy transformation EX. 1st of all, we would like to transform in TDK to solidly equal TDK Also by taking advantage of digital technologies, we like to try to secure that's the maximum output with the minimum inputs and also would like to more aggressively and transforming into using the renewable energy and I'd like to make a big contribution to the energy conservation and the low carbon side d and to become the sustainable TDK. And when it comes to DX, digital transformations, the first of all, I like to make our own TDK itself transform into as much digitalized as possible. With this pandemic of COVID, that many of the working style and many of the of the the normal life of the the world have changed it. And also the telemarketing will become all the more prevalent practice. And digital marketing industry for that hour AI and material informatics RPA. There's no debts and the technologies and the practices that will be all the more realized it in an actual market in the field. We don't deny that the importance of the face to face human communications, but If we can make use of the digital technologies, we can go beyond that's the temporal and spatial limit so that we can have the better communication. We cannot realize before. Without having to have the physical movements and transportation, we can have the communications with each other. So that including all the tasks with the design, development, manufacturing, marketing, and all of the Naspers, we like to promotes the digitalization of TDK. At the same time, the life on the health that this the society would digitalize it more. So that we can solve that, social problem with our digitalization. That's all my presentation. Thank you very much.