Earnings Call: Q3 2019

Jan 30, 2019

It's on time, so I would like to now like to kick off. That's our a the performance briefing for the third quarter of fiscal year 2019 of TDK Corporation. First of all, let me introduce attendees of today from the TDK Corporation. Mr. Hirooki Wimala, the Senior Executive Vice President Mr. Nobalu Cyto, Senior Vice President Mr. Tetsuji Amanishi, Senior Vice President. Mr. Jumio Sashida, the CEO Energy Solutions Business Company. These are the 4 are now the attendees from TD K Corporation today. So first of all, And the consolidated result of the third quarter of FY March 2019 and consolidated full year projections for FY March 2019 will be presented by Mr. Tezujya Manishi. This is Yiamanixi, slightly up 2.8% year on year. Operating income was slightly down 2.1%. Yet, we did not start the first half momentum. For the 9 month basis, net sales operating income as well as income before income taxes and net income all achieved new record highs. Year on year basis, capacitors, electrical MLCC grew dramatically, mainly driven by the automotive market, which demands reliability and redundancy in design. Both sales and profit continuously expanded, pushing up the profit baseline for the entire passive components business for the company. And, energy and application, particularly the rechargeable batteries Sales to major companies in China grew big. Sales from tablets and notebook PCs also had a steady growth. Thanks to our continuing efforts for cost reduction. Our COGS declined, giving us higher on profitability, TDK's overall profit level increased. In a big way. However, that said, though, triggered by the U. S. And China on further frictions, we are having macroeconomic changes, in particular, the decelerating Chinese economy is having a great impact on the world economy. In our case, orders in the major segments, including auto and ICT and industrial equipments showed a rapid degeneration, starting from the midpoint onward in the third quarter. In the previous briefing, we had on October 21st, we made an upward revision for the full year forecast. Yet, our assumption for orders have greatly changed. And we believe this situation is here on a Tuesday for some time to come. We decided to modify our full year forecast downwardly. As for details and quite happy to give you a good explanation later, the good market environment and has changed. So dramatically given us an unclear outlook at least for the short term basis, but our markets environments have not changed a bit on the midterm basis. The so called additional transformation, such as IoT and AI and the other additional technology led transformations, trends and how will not change, including further EVs development and the utility and energy fields. And we believe that the electronic components on TDGet offers will have a sure growth going forward. So now we should focus on achieving our midterm plan targets, while keeping an eye on for our midterm management environment. Next, I'd like to go through the performance summary the year on year basis. So net sales was JPY 350,800,000,000, up JPY 9,700,000,000 or up 2.8%. Operating income was JPY 32,800,000,000, down JPY 700,000,000 or down 2.1%. Declined slightly. Income before income taxes was 1,000,000,000. Net income was 1,000,000,000. EPS was Rmb 177.45, respectively. Due to the U. S. GAAP, the retirement benefit of cost change, we transferred about JPY 1,000,000,000 retirement costs in previous years, profit and loss to non operating expense. As for the average change, right, for the autonomous 100 and 12.9 G and vis a vis the U. S. Dollars and year and appreciated by the 0.1% and JPY 128.87 vis a vis euro, year and up 3.1%. All in all, sales side, actually, we had an impact JPY 4,900,000,000 down, operating income actually about JPY 300,000,000 downside. As for the FX sensitivity, no change. Looking at the yen, the dollar, actually, in JPY pro yen, on the a full year basis JPY 1,200,000,000. Between the yen and euro, it was about JPY 200,000,000 according to our estimate. Now I would like to go segment by segment. Starting from the current fiscal year, we began 13.8 a while, with the improved profitability helped to provide good sales of highly reliable and redundant products in the auto industry, and its profit improved greatly due to the continuous, the conditions coming from the improved product mix and improved productivity. Aluminum and the film capacitors suffered from the declines in the sales and the profit affected by the renewable energy situations, particularly in the Chinese market. Inducted devices enjoyed continuing our firm sales mainly in the auto sector on top of it and I see the sales grew. However, in a China market, in particular, observed a decline in home appliances and industrial equipment business, and gaming business also declined, but operating income was maintained to the previous year's level due to the improved product mix. Peace Electric Materials and Ceramic filters are actually enjoyed in growth in sales. And also, in such protection components also, and was able maintain its profit and up to the last year's level. Now thanks to the improved cost structure, though the sales per se for ICT declined, Next, on the Sensor Application Products segment. Due to the Nissan Product Exchange, operating income on a basis grew by JPY 100,000,000. Net sales, JPY 19,700,000,000 or down 8.8% YY basis, operating income, including the In that sense, an acquisition cost JPY 1,600,000,000 became a loss of JPY 5,500,000,000. Temperature and the pressure sensors, despite an impact coming from the decline in the home appliance business in China, The auto business grew firmly in sales. Its profit moved flat in light of the increased R and D and sales promotion spend, particularly in the piece of electric field. Maginete gun sensors and thanks to the increased sales in the automotive and the whole of sensor business growth, both in sales and profit. In regard to the TMA's some, were down due to our continuing efforts and for the cost, actually, now we are enjoying good improve. NIP sensors were affected by the slowdown in the Chinese economy as smartphones and drone sales went down. Salesforce and gaming devices also declined. Though M and A costs went down by JPY 6,000,000 from the previous year, due to the initiatives and the customer base expansion as well as the new models deployment, in a rapid way, development costs actually went up, making our loss bigger. Next, we'd like to move on to the Magnetic Application Products and we'd also, when we visit the last year's performance, due to the recombination of segments and JPY 14,400,000,000 minus of the net sales and JPY 1,500,000,000 for the operating income of last year. The business status and net sales is JPY 66,400,000,000, 8.4 percent, a less than year on year and operating income was 7.800000000013 percent of increase year on year and operating income margin was 11.7%. When it comes to each DD Heads and the sales volumes have declined by 9% year on year, But on the other hand, when it comes to a near line, the head for the data center have improved its mix and then also we could push it up to upgrade the price and for the HDD Heads and the set had almost flat and also for HDD suspensions and also it decreases the sales volumes too, but the micro DSD type a this is a higher other value products, it will be and having more sales and so this improvement in mix will just push up the average price and sales is almost a flux. On the other hand, but assembly of the hard disk drive is there the business and sales volumes decreased and we have lost some of the revenues here and in HDD's Heads Suspensions And overall, we have an minus net sales that when it comes to profits and pushed up a price and we have a and industrial application for that the wind power generations have declined in sales. So that's why and also mix have deteriorated. When it comes, when we talk about energy application products, indeed due to it and again, that the segment recombinations, we have revised year's performance, the JPY 700,000,000 and more JPY 19,100,000,000, more further operating incomes and a Now in JPY 145,400,000,000 of net sales and the JPY 24,600,000,000 of net income, it's a 16.3% increase year on year and 1 of the revenues and 1.2% of increase in the profit. For the secondary, a bad lease And now that the sales of true debt to our major customer in China happened very favorable and increased a lot and also The sales for that the secondary battery for the notebook piece in the tablet have also pushed up and are both net sales and profits. But on the other hand, now I put all the slowdown of the demands of this month forward and I become conspicuous in the middle of this sort of quota and due to that production adjustments and now we are a under materials of the Cobalt, the raw materials of the grind and have some time lag before that, we have to pass on to that portion to the product price bet and actually and the debate in realize this effects of the declining raw materials. So this time lag have caused you that about the specific loss between the selling price and that's raw materials. And they have pushed it down that process. The one that comes to that, a or for due to and also we have some bad impacts for the sales decline in China for this industrial equipment related business. Next, Let me talk about that the quarterly results by segment quarter on quarter and both net sales and and operating income, I'd like to talk about the factors of the change. 1st of all, a passive component segments Then the sales have declined by JPY 5,400,000,000 from the Q2 and JPY 4.8% decline. Bips and the smartphone and industrial equipments and also home and electronic price, all these markets have all, they have not been so good going well. When it comes to the capacity test dramatically and drop it in the smartphone electric and also a circuit prediction components, it have declined in the industrial equipments. Then when it comes to the passing components operating income, it has declined by JPY 1,700,000,000 decline from the Q on Q basis from Q2, 10.4% decrease. For the ceramic capacitors have still maintained a bit of high profitability, but the major reason of this minus and impact is inductor and high frequency products. Next, sensor application products, the net sales was declined by JPY 900,000,000, 4.4% up decline for the temperature and pressure sensors and almost flat from Q2. But on the other hand, and magnetic sensors have dramatically declined for the smartphone markets and MEMSensa have increased for the smartphones But on the high end phone application for the drawn and game consoles have been struggling. So when you can operate income and just like almost so far just like that, temperatures and pressure sensors. And when it comes to magnetic sensors and auto sales client, but we maintain that and profits for MEMS sensors. So that now JPY 1,400,000,000 And for that, the MBS and the MAA cost have just declined and it have pushed up 1,000,000, but now then we have the more end loss due to the decrease of the sales. So the overall the sales application products and JPY 900,000,000 is the minus impact on discounted. Next, and Magnetic Application Products and sales have declined by JPY 9,000,000,000 from Q2 and 11.9% of decline. And how this driver had the sales and due to that in the shipment index have a decline from 97% and Q2 to 81%. That's 17% of drop. This is a major reason of that sales decline. So with this a 16% decline and now the revenues will decline at 15% for also for the hard disk drive suspensions and the sales volumes of suspensions have dropped by 13%. And when it comes to the sales of the magnets, the application for the industrial and equipment have been slowed down so that the related to that minus a gross on the sales. And when it comes to the Magnetic Application Products, the operating income have increased by JPY 6,900,000,000 from Q2. But now the JPY 4,700,000,000, this is impaired last and the magnet to a that have a cardinal to end to end Q2 if it is disconnected on ARPU and ARPU basis, It's a margin of increase as JPY 2,200,000,000. When it comes HDD Heads and Suspensions now and we have about the I have incremental profits due to that the improvement of mix and the average price, but the magnets have a we have to be shrinked the loss due to that decrease in Petrobras. For energy application products, the sales have declined by JPY 9.4000000000,6.1percent quarter on quarter for Q2. The secondary battery business have been adversely affected by that the sales in the a slowdown of the China for the smartphone and mobile equipments and also for the sales and the smartphone and the gaming console is also the budget affected. And industrial equipment, the power supply happens flat. Operating income declined from the JPY 33 point 1000000000 to 1000000000 and from the Q2 and 1000000000 the decline due to that's the sales decline of a secondary battery, but on top of that also and the decrease that's the marginal profits and due to that difference in time lag of that declining raw materials and the cost and that's the Then it passed on to the prices onto the products. And also based on that we have started, that's the production adjustments after the November. Due to the slowdown in smartphone, this and they all have the minus impact. Next let me talk about breakdown of operating income changes. So this is the totally minus 1,000,000 is the changes but for the due to that incremental sales and the capacitor and secondly, VAT and the improvements of that AT and T head and suspensions and improvement of mix 1000000000 positive, but on the other hand that the sales reduction have the minus of a negative impact of 1,000,000,000 and also the rationalization cost reduction efforts and had a positive JPY 3,100,000,000. And after that, we have about JPY 500,000,000 of the restructuring, a restructuring after the pushed up. For the expansion of the secondary battery business and also develop the enhancement and the developments of the sensor business have, but push it up, that's the SG and A by JPY 6,500,000,000. And if we beat a minus impact, And when it comes to the one time reduction of one time, the cost of order M and A had a positive of JPY 600,000,000 and due to the fluctuation of the currency, minus JPY 300,000,000 and all in all and minus JPY 700,000,000 in the changes in operating income. Next, let me talk about the consolidated results through a up to the third quarter of FY March 2019. Net sales net sales was JPY 1,7272,000,000, 11.2% of the increase year on year. Operating income was JPY 94,900,000,000 at the 17.2% and from the year earlier, 22.1 percent increase. And income before income tax was JPY 88,800,000,000, and the net income was JPY 63,500,000,000 that was that's 21.4% and the positive growth and year on year and we have the record high and the recognitions in the sales of an income income before income tax and the net income. Possible, let me talk about the full year revision and full year forecast. As I mentioned earlier, and from the middle of the Q3, now we have have the detailed relations of the orders from that the middle of the Q3 and we needed to and revised downwardly. That's the full year forecast, we announced on October 31st the last time. And now we'd like to just and explain about this downward revision of the forecast full year focus. For the sales, the last time and now that we're not only smartphone, but all the motives, industry, equipments, and we're all these sales have declined and from JPY 1,400,000,000 to JPY 1,000,000,000 and decreased by the JPY 50,000,000,000 to JPY 1,000,000,000 to JPY 1 point 1,000,000,000. Operating income due to this and declined sales and from JPY 120,000,000,000 is and JPY 110,000,000,000 less and JPY 210,000,000,000. There's no change in the income before our income taxes and net income. When it comes to dividends and ATM and the first half are also there's no change. We're going to the paid ATM to the second half and the annual dividend payments will be So the assumption of the foreign exchange rates in the Q4 is JPY 100 and JPY 108 to the dollar, JPY 124,000,000. So there's not any and this is that the change due to the more high yen appreciation. So when you have CapEx, based on that this change in orders and we now probe into and deliver you again in details about this and all the plan and now reduced by JPY 20,000,000,000 from the last forecast and there will be downwarded to the JPY 190,000,000,000, but there was no any and the total CapEx plan and the midterm business plan, there's no change it. And for the depreciation, amortization and the R and D expenses, there's no any change in the difference. That's all my presentation. Thank you very