Earnings Call: Q3 2020

Jan 31, 2020

We would like to start the performance briefing of third quarter fiscal year March 2020 of TDK. First, I would like to introduce you to these participants. Senior Vice President, Mr. Tetsuya Manishi. Senior Vice President, Mr. Noburu Saito, Corporate Officer Mr. Siggiki Sato. Operate Officer is to Jumio Sasheda. So these are the 4 people So in terms of the outline of the 3rd quarter of the consolidated results and consolidated full year projection, Mr. Yamanishi's Senior Vice President will give a presentation Hello, ladies and gentlemen. My name Sam and EC, thank you very much for attending our performance briefing of the third quarter fiscal year March 2020. From my side, I would like you to talk about the line of our consolidated results. So in terms of the highlight of our earnings, from the second quarter, the U. S.-China trade frictions have become serious with major repercussions on the global economy. This third quarter the world economy, including China, is uncertain. And in terms of the major market, that we do our business in, there has not been a major change in the demand environment. The environment continues to be tough. For the third quarter year over year, although of that kind of situation, we have been able to see a both increase in sales and profit year over year. In terms of the sales of the 3rd quarter, year over year increased by 1.4% in terms of the operating income year over year. It grew by 23.2%, a major increase. A 9 month, a cumulative basis, sales declined against the previous year. However, borrowing income profit before tax and profit after tax has record the, has been a record high In terms of operating income on a 9 month basis, we have been able to exceed 1,000,000,000 for the first time in our history. In terms of the demand trend overall, the same trend is continuing as the previous quarter. However, in the ICT markets, the 5G demand has started to ramp up. So for 5G smartphones and for base stations, we have started to see a sales increase for rechargeable batteries, high frequency components, MLCC and inductors. And these products has been contributing greatly to our increase of the earnings. Specifically for rechargeable batteries, we have been leveraging a broad customer base. And in the previous second quarter, even after the peak season of the smartphones, we have been able to maintain a high level of earnings and this has been driving our business. In terms of automotive industrial equipment market, the overall demand globally, including China, has been slow. And the demand level is below our projections year over year, the sales has declined in this area. As a result, excluding the increased sales increase profit of the high frequency components and the other passive components business year over year, we saw a decline both in sales and profit. In the sensor application products, KMR sensors and MEMS sensors, which are a strategy of growth products, these products, sales has grown with these products, but the conventional products, such as temperature sensors and whole sensors, due to the sales to nonwative industry has been slow, the overall earnings improvement is in delay. In the short term, we are assuming that we cannot see a rapid recovery of the global economy So in terms of the DX advancement, the so called digital transformation that can be represented by 5G, ramp up the 5G and in terms of the acceleration of response to the energy. So this is called the energy transformation. These trends are going to fans further against this backdrop, we should always be ahead of the curve to capture market needs, and we will continue to prepare to grasp the growth opportunity. For us in the future. Going to our performance outline, Against the dollar against the euro, the yen has been strong. And due to this situation, the sales has been impacted negatively by JPY 14,500,000,000. Operating profit has been declining by 1,000,000,000, but in terms of sales, 1,000,000,000, this has been a 1.4% increase, operating income was JPY 40,400,000,000 year over year, has been a 23.2 percent, a substantial increase, we have been able to maintain increase both in sales and profit the profit before tax 41,200,000,000 and profits 29,500,000,000, EPS at 2 33.35. In terms of the sensitivity against the currency, it same as before, operating income in terms of the relationship between the end of the dollar, that will be the billion impact for the year terms of the euro, it will be in fact of 1,000,000,000 for the year. Then let's go to the buy segment status update. From this term, some of the products in inductive devices has been reclassified as other passive components. In this third quarter, compared to the previous years with active devices, the sales has gone down by 1,000,000,000. Operating income has declined by 4,000,000,000. So the passive components sales was JPY 98,300,000,000. This has been a year over year decline of 7.9 percent. Operating income was 1,000,000,000 year over year, 27.9 percent of decline, operating margin is 10.8%. So if you look at the market condition that impacts the passive components, automotive and industrial equipment market, the demand has been stagnant. The europe and U. S. Major distribution distributor is conducting an inventory adjustment that has been impacting business. And we have seen a ramp up of 5G in China and there has been more active business in the 5G related products. For ceramic capacitors, the automotive demand has been slow. But even so, our sales to the automotive business has been increasing steadily. So in the ICT business overall, been flat. But that said, you're seeing an increase of sales to the 5G base stations. However, the sales to the distributors have gone down substantially. So that has been a 12.6% decline sales overall. Because of the decline in sales, the operating income has declined as well, but we have been able to increase the product mix of sales of the high added value products and we have seen EASP increase, the profitability is still at a high level. Hello, the aluminum, electro electric and film capacitors, same as the last quarter, the one about and for the renewable energy related, industrial equipment for these areas, so itself has gone down. So we're seeing decline processing sales and profit. We inducted devices. We have seen increased 4, 5G related products. And sales with ICT market has grown. However, for the automotive industrial equipment sales has been at a lower level. And overall, we have seen the decline both sales and profit with high frequency components, with the increase of 5G demand, with the 5G smartphones and the base stations, the sales has increased. And we have been able to see an increase both in sales and profit area for piezoelectric material products and circuit protection products because of the kind of demand of automotive and the ICs team market sales has declined. So in this area, we saw both a decline in sales and profit. Next going the Sensor Application Products. Sales was JPY 20,300,000,000 year over year. This is a 3% increase of sales, operating of it has been a it's been JPY 5,500,000,000 of loss, which is the same level as last year. The instance related acquisition expenses has declined by 1,000,000,000 against the previous year. And overall, it is 1,400,000,000. Globally, in the automotive and the industrial equipment market, we have not started to see a recovery in the demand. So the conventional sensors such as temperature sensors and the whole sensors, the cells continuing from the previous gone down substantially and the profitability has profit has been worsened and this has put in a big drag on overall business On the other hand, in terms of the strategic products that we are expecting high growth for the TMR sensors, for the automotive market, they are more volumes because it has been taking up new applications. And because of this, the sales has increased steadily, but smartphones we are seeing a increase with the new models, and this has been greatly contributing to our sales expansion. For the MEMS sensor, for the motion sensors at a new client, the cells has been growing steadily, And for the MEMS microphone, we are increasing sales for IoT and Smart loss. Because of the unfavorable macroeconomic situation, the overall earnings is installing. And the improvement of the earnings is delayed. For structural we think we have been able to have a foundation to improve our earnings. Product business, the sales was JPY 57,900,000,000, 12.8 percent minus from year on year Now operating income was JPY 5,200,000,000, 33.3 percent minus on year on year and operating income margin was 9.0%. HDD Heads Suspensions business when it comes to the demand world, the demand trend have dramatically changes from the year earlier. 1st of all, for the 2.5 inches HDD for the PC, consumer PCs now has the recording density is going up. And on the other hand, the volume have declined for the HDD head for the PC. Now, it's the demand have been dramatically declined, but on the other hand, and ATDT demand for the data center have recovered. So now we expect about the ATD head for near line have gradually recovers and increasing. And ATDD and recording SSD of the nearline, HDD happened, frees up. In this circumstance, when it comes to HDD head, now as an entire segment, It have grown by 6% in terms of that sales volumes. But on the other hand, about the part of that's the ATDD assembly products and discontinued. So that's why an entire segment have declined about 40% of the sales year on year. And the total of ATDT have declined in 15% as a whole. Then when it comes to ATDT suspensions, the sales have almost flat in terms of the volume and the value up to the sales, but on the other hand, application product of the suspensions have been declined in the sales for the ICT markets. And so that's why that the entire suspension business have dropped it in sales by 6% year on year. And with all of that, the HDD head and suspensions under the entire operating income was the due to that's the decline in top line and the profits for the suspension application products and also as well as the ATD Heads the declining top line and profit and also the lower loading of that average selling price and due to this the product mix and in the entire segment and have declined in profits. When it comes to magnets, the way we drew from the HTTP magnets And now that the business and industrial equipments for the machine tools, industrial robotics and automotive markets have been slow That's why the sales have dropped by 14% year on year and operating incomes. They have been supported by the effects of our improvements productivity and we could maintain the same level of loss from last year. Next, let me talk about the energy application products. The sales was 1,000,000,000. Operating income was 1,000,000,000, 10.9% increase and 64.6 percent of a dramatic and increase of the income and operating income margin was 25.1 percent is we have to observe the big improvements of profitability. When it comes secondary markets, now Salesforce, that's a smartphone in China, have pushed up by the favorable effects of that 5G network launch. And also, we have a very good business for that major customers in the other regions and pushed up a whole lot that the sales for the smartphone business have substantially increased in booming and also for the sales for this tablet and the notebook have steadily have increased it on top of that some well above the mini cell for the well above devices like wireless and all have we and steadily expand so that now we have a 15% of sales increase year on year. And on top of this, increasing in the top line, we have the very favorable switch of the product mix and expansion volumes have that contributed to that improvement of the productivity and if the push up that's also for that's the sales. Now we can expect the further a improvements of the productivity. So this is the reason why we expanded that sales and profits when it comes to that the power supply for industry equipments, still it's adversely affected by the slowdown in economy and now and we experience and recognize it both in decline in both the sales and the profits. Next, let me talk about the quarterly results by segment from the Q2 to Q3 for both the sales and the operating income. 1st of all, with passive component segments, the sales have declined by JPY 3.6000000000,3.5percent, the minus from the previous quarter. In the Q2 to Q3, when it comes to Islamic capacitor, although the sales have increased the 4 to 5G base stations, but on the other hand, ourselves where the distributor to the distributors have profit. And so and the entire ad and sales have coming into the declining trend. So eventually, we have experienced that the declining sales when it comes to aluminum thermal capacitors, although we have a slight increase in the business of renewable energy, but whole lot the business for the industrial equipments have declined in sales and also declined another end market like automotive so that the capacity whole, we experienced about the JPY 2,300,000,000 minus 5.8% decline on the quarter on a Q on Q basis the inductive devices sales have declined by 1000000, 2.5% decline from the previous quarter. And although the sales for that 5G and the handset devices have increased that and ICD as a whole, it's almost obviously flat. And the sales for automotive markets have also been flat. And from that Q2, but on the other hand, for the business, the sales for the industry equipments had been very slow and 4. That's why and the whole of the entire segment experienced that declining the sales. And when it comes to other passive components, the sales have declined by 1,000,000, 1.1 percent, a slight decline. High frequency components have increased the sales for the 5G handset devices as well as the base stations, but now although again this loan and industrial equipments and now the automotive the sales and now try to make up for the decline in business for PIE's electric components and the circuit protection When it comes to the operating income for the passive components have declined by JPY 800,000,000 percent at the minus from the previous quarter. Ceramic capacitors and aluminum film capacity are inducted device It had a the decline in the profits, and due to that decline top line that went down high frequency products, has been pushed up by the top line and the profit due to that increased productivity. And when it comes to the a piezo electric components and the circuit predictions and have been and absorbed that kind of decline trend by cost reductions. When it comes to sales of protection products, sales have declined by JPY 500,000,000 2.4% from the previous quarter. When it comes to that the temperature and the pressure sensor. Temperature sensors still had adversely affected by the slow market in automotive and have been declining and and when it comes to magnetic sensors, now it seems like that's the whole sensor have just a little bit come back. And but on the other hand, TMR Sensa have picked out its sales in the Q2 for that ICT market and almost a flat. When it comes to NEM sensor, now and the business with the microphone is almost flat, but on the other hand, the motion sensor have soft from some declining demand in the smartphone manufacturers and the China, particularly in SMEs in China. So that's why it's and drop it a little bit and from Q2. Operating income was about almost the same level of the loss of 5,500,000,000 this quarter. The temperature and pressure sensor have and decreased and decreased the sales and profit a lot better than the magnetic sensor and the whole sensor have also have a lot better margin now for us have been shrunken from the Q2. MEMSENSE have also sped now and that's the margin of what's happened just a little bit improved due to that's the product mix and the cost reduction. Next, let me talk about Magnetic Application Private segment, Sales have increased by JPY 3,400,000,000, 6.2 percent from the Q on Q basis from the previous quarter. At HDD Heads sales, when you look at the sales and the sales index have improved from $89,000,000 to $22,000,000 in the Q3 is means about 3% increase and the sales of the ATDD assembly also have an increase by and the 5% from the previous quarter, Q2. And when it comes to ATTD suspensions, they had this drive suspension for nearline sales have substantially boomed and suspension application products have also declined that now and it can more than offset that is and all in all, we have the 14% of increase. Sales of magnet have declined by 3% Q on Q. Operating income for the Magnetic Application Products have increased by JPY 1,700,000,000, 48.6 percent from the previous quarter. HDD head and suspension for those hub and increased top line and profits on a Q on Q basis now for the Magnetic products. And we have just shrink a little bit of the margin of a loss due to this cost reduction. When it comes energy application product segments, the sales have declined by JPY 12,500,000,000 7 0.2 percent, the minus 1Q2. Secondly, bad news, although an pushed app is a sales the 5G handset devices, but now when it comes sales in, that's a Afghan and Korea and have been and only peaked out in the Q2 and slightly declined and then also. And it's almost the same as for that's a industrial power supplies. Then when it comes to operating income, it was declined by JPY 2,000,000,000 to JPY 40,500,000,000. But this is due to mainly that and poor business for the secondary battery. Let me. Next, let me talk about breakdown and operating income changes. 1,000,000,000 as that's the bottom line here, but this when you look at the changes due to that declining change in the sales for the passive components, it have pushed down the profit, but now we have about the increase of profit for the secondary battery and we have 11 point 1,000,000,000 of increase over profits. The well accounts 1,000,000,000 is for the push down by that declining and reduction of sales prices, but the can be then offset by that and the improvements of productivity of the passive components and in other vesselized the effect of JPY 4,100,000,000. The other one is that JPY 200,000,000 for that restructuring efforts in Vansense and the other M and A and the cost of reduced by JPY 200,000,000 when including the JPY 2,300,000,000 increase of SG and JPY 1,500,000,000 of the minus effects of that ForEx. In total, now we have 1,000,000,000. Next, Let me talk about the overview of the consolidated results now sales was JPY 1,000,000,000,000,001,000,000,000,000,001,000,000,000,000,000. 1,000,000,000 and JPY 14.3 1,000,000,000, 15.1% increase and the income before the tax was JPY 109,800,000,000. Net income was the JPY 74,400,000,000,000 and 7.2% of increase in and the increase, whether they're all by the sales operating income. And for all this, a income before the tax center or and post tax was off the record all time high. Ex let me talk about the full year projection for the by March 2020. There's no any changes made from that we the focus we previously made in October. So In October, the last time, we have then widely revised only for the net sales due to this major change of the demand in the market. But after that, Now in the launch of that full launch of the 5G and projects and also recovery of the semiconductor related on the other hand, we have the impact why that's the trade war between the U. S. And the China and have a adverse effect ICT market And now when you look at this, any uncertain and the store, the demand in the automotive, industrial equipments and Now we have a experience about inventory adjustment for that major distributed in U. S. And taken all this into considerations. We did not change and the focus. Open income, the income before tax and net income, there's no any change in forecast. When it comes to foreign exchange rate for the Q4, as we have announced last time and JPY 108,000,000 to that's the dollar than JPY 120,000,000. There's no any change. So when it comes to dividends and again, it's JPY 19 for the second half 180 for the full year basis. Although there's uncertainty and corporate economy and by we would like to do at most to achieve that target profits and the capital watching about the changing up to the demand and the economy, RAC 2 just the gravity opportunity for this growth and the like to do and steadily and to implement our actions so that we can have the further growth after the year and of the next fiscal year and the next fiscal year onwards. That's all my presentation. Thank you very much.