Earnings Call: Q4 2018

Apr 27, 2018

Okay. It's in time. So we'd like to see the performance briefing of the TDK Corporation on the fiscal year March 2018. First of all, let me introduce that's our speakers and attendees today. President and CEO, Mr. Shigenau Ishiguro Senior Vice President Mr. Hiroyuki Wemura and Senior Vice Presidents Mr. Noburu Saito, Senior Vice President Mr. Tetsuji Aminishi. From Energy Solutions Company CEO, Mr. Humio Sashida, These are the 5 attendees from the TDK Corporation today. Thank you very much. Okay. So we'd like to start with that the consolidated results for FY March 2018 and presenter Tater is the Senior Vice President, Mr. Emanishi. Please. I'm Yamanishi. Thank you very much for joining us today. And for our performance briefing of TDK Corporation, fiscal year, the March 2018. Hey, Dan. And first, I would like to present the consolidated results for the FY March 2018. First off, this is the points of a briefing. The last year, we have and transferred that the business was a high frequency component business. And by taking this opportunity, we have tried to transform that the business portfolio and this, the and business environment still in the 5 straight years, we have the regular high end net sales and it has grown by 7.9% year on year. When it comes to the operating incomes and now JPY 144,400,000,000 is that the gains with the transfer business also included the last year. So that's why now it was declined from 90 59% from year on year, but and but when it comes to the impacts of this transfer of the high frequency component business and have been more than offset by the expansion of the other existing business segments and we could secure that's the incremental profits. When it comes to passive components business and we have a very good favorite business, not more innovative and industry equipments and also we have a good business when the capacity and particularly for the MMCC have been going well with that high liability and the redundancy products and have contributed a lot so that it have led that the substantial increase of the profits of the passive components business. When it comes to that, the sensor application products due to the M and A, and we have the substantially grown of the net sales better still. And when it comes to profits, and the we needed to have that to pay for that one time acquisition and cost, but still, we can have laid out the foundations for the future, a business solutions including the acquisitions of invincense in the CHOP. And we have to improve the product portfolios and for the future of the market, including the expansion of IoT and other applications. When it comes to magnetic application products, HDD and in markets and the total demand has been going on based on our forecast by the still on a volume basis on the HDD Heads it had been declined and in many ways that are a major product, but when it comes to the product mix, we could observe with improvement. So and the net sales are limits and over that our focus so that we could secured it to stable revenues. When it comes to that power supply products, now we could take advantage of that very strong demand in the industrial equipment markets and we could have an incremental and the sales as well as the profits and with expansion of new products and for the magnets. Now we are in resources and focusing on that's from the HTTP and the magnets to the industrial and automotive markets. So that's why and we'd like to reduce and the shrink that the deposit and to try to make it through that profitable. When it comes to secondary battery, now although we have the experienced volatile market for smartphone, but still, we could be flexibly admitted in each of the markets, so we could expand the business for the smartphone market And also, and application and the damaged smartphone have steadily growing so that in 3 straight years, we have the regular high operating income as well as the net sales. Next, let me talk about consolidating full year results for the FY March 2018. And the sales was 1,000,000,000 and JPY 271,700,000,000. It was a 7.9% goes up by JPY 93,400,000,000. Operating income was JPY 85,600,000,000. It was the 59% decline with the JPY 123,100,000,000 bad. As I mentioned earlier, that's the last year and JPY 144 point 4,000,000,000 of the gains by the transfer business included. And also, we have recognized it about JPY 21,200,000,000 it was recognized last year for the impaired asset disposal cost for the structural reform. So excluding all this one time impact actually, we have JPY 85,500,000,000 after operating income. And that was for the last year. So to compare it to this and apple to apple basis, Now, although including the JPY 10,900,000,000 of imbecence M and A cost, still, we could secure that in the positive growth So when it comes to the net income and income before the tax was JPY 89,800,000,000, and net income was 1,000,000,000. The earnings per share was JPY 5.2.8 and assumed foreign exchange rate was JPY 110.93 to the dollar, 2.3% of depreciation with the yen. And 129.64 to the euro and 9.0 percent of of the depreciation of yen. So in result of that, Now, we have JPY 35,500,000,000 and that JPY 6,100,000,000 in the operating income. These are the impacts due to this foreign exchange. And The sensitivity of the foreign exchange is that it's still ended. 1,000,000,000 to the dollar, we have the JPY 1,200,000,000 of operating incomes and for the euro, about JPY 200,000,000 is at the sensitivities. Next, let me talk about segment wise performance. First of all, This is that beforehand, first of all, a 7.2% of the declines for that open income was a JPY 43,500,000,000, so that's a 17.2% decline for that 10.6% was that the a upper income margin. So even after the transfer of the high frequency component business, now on that the value basis and we could not recover a this portion is declined by the steel. When it comes to the profitability, we already have about 10.6 percent of the margins have already been secured in terms of the profitability. When it comes to the ceramic capacitor, now with the background of that's a very strong demand in the automotive industries. Now we still have a favorable business and the automotive markets applications and also now and also we have improvements of a product mix with the high probability and redundancy. Characteristics and now have a substantial increase of that and a productivity and now also our feasibility over exceeded 10%. When it comes to interactive devices and due to that declining of that demand for the smartphone manufacturers, Now we have declined in for the ICT business, but on the other hand, when it comes to automotive markets and industrial robots and the measurements markets measurement equipment markets have been steadily increasing, including that's the major home appliances. Then when it comes to the high frequency component business, and in the continued business and also transfer business, we have a we have lost that WiFi module business this year since last year. So that's why that the net sales have declined better steel. And the other residual businesses segment like a ceramic a filter is having increased in sales and profits. So when it comes to piezo electronic components and And our business with the Automotive And Industrial equipment have been booming, but on the other hand, they came in module actuator for the Chinese smartphone manufacturers have declined substantially so that we have increased sales bet declined in profitability. Next, let me talk about the sensor application business. Sales was JPY 77,600,000,000 due to that and the acquisition of Envance, and we have have the 1.8x in the March as of the sales and the operating income was JPY 19,400,000,000 loss, including the JPY 10 point 9,000,000,000 of the Costa Ford In Business acquisition. And the sales for the Automotive markets have been in the increase for that temperature and the pressure sensors as well as the magnetic sensors. It was a good for internal Europe and Japanese Asian market and have grown by 21% and the indices The MEMS sensor says we'll be put and added on it and the TMR sensor and ICT market sales have also increased so that the total and the sales of the sensor application business for the ICT market have over 20% and we have a and across the 50 percent of that of this business and the automotives and the industrial equipment is 30%. So it was a very good balanced podiforias in these segments. Next, let me talk about Magnetic Application Fridays. Due to the part of the recombinations of the segments. First of all, let me just talk about the business and for the sales and 333,200,000,000 yen net sales and 1.0% increase year on year. Open income was 20.9 1,000,000,000, it was 2.2 times it's measured last year and operating income measure was 6.3%. Plus now, we have recognized it about the 1,000,000,000 forwarded impaired asset disposal for the hazardous restructuring cost. So that's why in total, we have JPY 1,200,000,000 6.1% of increase. For HDD Heads, it's the volumes have declined by 12% year on year But on the other hand, the head for the nearline have increased. So that's now we have improvements of the sales mix so that average selling prices have risen. So the total recording device business have only limits to the 2% decline. So that's due to that effect of the product mix improvements and also consolidations of a wafer basis. So we could secure the double digit operating profit margins and net of profitability is very stable. And excluding JPY 60,000,000,000 of the cost of auto restructuring last year, We have only for the decline of the of the income was only marginal. As for the magnets, although the sales of HDD magnet have declined bad for the wind power generations for the industrial robot market is a new market for the industrial equipped motors. So Excluding the JPY 4,000,000,000 of that restructuring reform costs for the last year and subtracting this, now we have shrink that in the last in just a half from last year, and we have a steady improvement in the progress ended the structural reform. When it comes to power supply, And the semiconductor manufacturing equipments and measurement equipments and the robotics market, these all provide an very strong demand and sales have been very steady. And on top of that, and with the launching of the new products and have contributed a lot for that expansion of the sales. And now that we have a double digit and growth of both debts as a net sales and net profit. We can achieve for that. Next film application products. Net sales was 1,000,000,000. On a year on a basis, actually, the sales grew 1.5x and the profit became 1.7 fold. With this, now for 3 years in Iran, we are able renew the record high end sales and operating profit and our OP margin became 19%, contributing to our unapproximate foundation. In the smartphone market, the demand fluctuated a lot throughout the we are able to adjust our manufacturing capacity at an appropriate level as a new basis, and we're able to the market needs accurately, thus we're able to grow our sales in the smartphone in a big way. At the same time, even in the non smartphone applications, we had a steady growth, we improved our profit in an efficient manner by having a synergy between volume increase and production efficiency. Next, I'd like to go through the full year, actuals by segment. I have already covered in a passive components and, magnetic and application, product and film application products. So Hearna, allow me to explain other products and the corporate and the eliminations. Other sales was JPY 52,300,000,000 or down 76.7 percent Yoy and operating income, the became negative, 2,400,000,000, but this is an improvement of 1,000,000,000 from the previous year. Well, the industrial equipments market showed continued demand growth, we were able to grow greatly our profit of Semiconductor Manufacturing equipments as well as new business and activities. They are the major factors as for corporate as well as eliminations due to the increase in development, so these two items are showing a slight drop in the operating profit. Next, I'd like to go through the analysis of the changes in the operating income. 123,100,000,000 In profit, what are the factors behind that? JPY 144,400,000,000, we gained from the transfer business Excluding that, actually, the structural reform has spent was 21,200,000,000. In other words, it is going to be, the 1,100,000,000 it is going to be an actual performance of 20.1. The sales are actually 3,700,000,000 and, transferring the business actually on an annual basis, actually in a 370,000,000. So, we're able to absorb this, you know, cost and factors. We're able to make contributions to the profit. The APS erosion had a negative impact as much as 32,300,000,000 and SG and A increased 3,700,000,000. Put them together. 36,000,000,000 negative factors. But again, we are able to absorb those numbers due to the rationalization efforts of 34,000,000,000 and the benefit from the structural reform 4,300,000,000 putting together on JPY 38,300,000,000 and also we had in InvenSense acquisition costs of JPY 10,900,000,000 were able to actually make a growth of JPY 21,300,000,000. Moving on, I would like to now go through the factors behind the changes in sales and operating profit by segment from the third quarter to the 4th quarter. Like go through the major factors. First, the passive components sales was, down by JPY 2,800,000,000 or 2.5 percent from the 3rd quarter. Capasters grew nicely and thanks to the good business in Automotive And Industrial Equipment Markets. However, induct devices went down by 2.7% from the 3rd quarter. Though we had a good growth in the automotive, but The smartphone went through the production adjustments and pushing down our numbers, slightly as a whole. Next, other passive and component sales. It was down RMB3 1,000,000,000 or 9.3 percent, CSR products and camera and module or the actuators sales. For smartphone, particularly it went down as for the, you know, passive, the components, the components, actually, you know, 1,000,000,000. And actually, showing the decline of 8.1%. CapEx does actually, you know, grew and, making a good profit, but inductors actually went down due to the decline the cells and also the updaterism for camera modules due to the major customers in China. In light of the new models on production. Again, on the timing wise, there was a ramp up on activities, but again, those ramp up activities actually were taking place in the Chinese New Year. So that had a negative impact upon us. Next essential application products Minus 2,200,000,000 or the down 10.2% in sales. TMR sensors for ICT actually went down greatly, which was the major factor. The M and A spend was down by 1,000,000 from the third quarter, but we still had a big negative impact coming from the reduced production of TA mile sensors. Making the operating income negative figure of 4,800,000,000. Next, Magnetic Application Products Here, the sales went down by 6,200,000,000 yen or down 7.1% from Q3. Recording devices and sales, hard disk can drive in the heads and the shipment volume. 89 was an index Ashalina for the 4th quarter, it became 77, but in actuality, actually it went up to 84 So it went up to 84%. Visovid 3rd quarter, actually, this is declined by about 5% and JPY 5,300,000,000 8.5 percent decline. And other Magnetic Application Product sales, actually was down 900,000,000 or 3.7 percent from Q3. Magnetic Products had a strong, performance, but SDG, magnets declined, unfortunately. This new drive mechanism declined. Pass supplies went down slightly because production days were reduced because of the Chinese New Year. Magnetic Application Products and operating income was down JPY 6,700,000,000 from Q3. In the 4th quarter, And we had the consolidation of the locations outside of Japan, 1,100,000,000 And also now we had a less number of sparkling days due to the, you know, Chinese New Year. And also, HDD Heads, EOL and the products wafer impact. So now we decided to actually to be booked and for a much smaller number. From Q3 to, you know, Q4, actually, in 24,000,000,000, actually 22.7%. So revenue was down with these numbers. We experienced big fluctuations and in smartphone demand pushing our number 26%. And, non smartphone sales also slightly were down. So the other major factors behind the some of the weak numbers. As for operating income, actually, the operating income was down 20,100,000,000, landing at $12,800,000,000 from Q3's $39,900,000,000. Again, the major drivers, the precise declines in the revenue and profit, our Chinese New Year impact on the loss of working days and the materials and price increase. Next. As for the forecast for FY2019, of course, Mr. Chigal and a person, and now he's going to explain, but, Do allow me to explain the changes in the segments that we are going to have for FY March 29, 2019. In order for us to enjoy synergies in our energy related business, we created a new organization as of April 1st this year. Energy and solutions business company. Rechargeable Hana batteries used to be in film application products. And power supplies for industrial equipments used to be included in the magnetic application products, and the automotive from power supplies used to be included in others are now merged into this newly created organization. Within additional changes, we now have a new name in lieu of film application products. We now call it energy application products, whether to change last year and as well as this some actuals are now calculated as a part of this new segmentation. I just wanted to share this information with you. This concludes my explanation. Thank you indeed for your kind attention. Okay, then. I'd like to move on to that the consolidated full year projections for FY March 2019 by the President and CEO, Mr. Shigenau Ishiguro. I'm Michiguro. Okay, thank you very much for joining us today. Thank you very much. So, I'm going to present it about the if we march 2019, full year projections. A the projections and the full exchange rates, a a full We were just since we were just firmly to the plan that now that and the foreign exchange have just volatile, but now, and this is our assumptions. And about the we about 5% appreciation again by 5% to the dollar, but and the net sales, a projection is JPY 1,300,000,000. This is And also for that operating income, it will be this is the JPY 85,600,000,000. Now we would like to exceed billion next year. So this is the milestone target for an operating income. So the one that comes this JPY 100,000,000,000 of OpRegen income is that actually this is that the new record high a operating income for TDK operations. But anyway, 1st of all, I'd like to clear this target and then we'd like to we are determined to achieve this. And JPY 98,000,000,000 is that the income before tax and JPY 70,000,000,000 of net income ended JPY 553 to JPY 4 point for ADN is the earnings per share plan and also dividends and a will have JPY 140N of annual dividends with 7,000,000,000 for each of us in the second year is a 10 year, 10 year of increase is planned. For the CapEx will be JPY 210,000,000,000, which will increase it from the by JPY 30,000,000,000 from the JPY 1000000000 from the March 2018. So actually in order for the investment for the next maritime business plan, now we have a very intensive discussions actually internally in the next 3 years, for this second set years, and we needed to make a substantial growth. So that we need to keep making that we need a substantial CapEx for the basis of the gross. That's why JPY 210,000,000,000 is is now planned for the budget. So the part of inductor and the capacitor and now and still will still some kind of the market is very tight and the supply. So that's in the next year. In the March 2020, a and a plan, it would be front loaded. So that's what I would like to just a front loaded plan of the investments already. And on top of that, a MMCC and including MMCC, we need to enhance further of other products and solutions for automotive solutions So that's why and we introduced that the new model line and which is deployed in the new line factory in Axtra prefectures. So so that all this line will be also enhanced the capacity in this, 3 years of new mid term business plan. And also, when it comes to same application products and we need to make it efficient so that the take advantage of funding and EMS and we have to just work together with them. But on the other hand, that we would like to need to make our own investments, particularly for that a magnetic sensors and all these products, we like to do atmos with in house production so that we need to the investments for enhancing capacity. So when it comes to that magnetic application products, and we need to also make investments So when it comes to the head, we need to consolidate the production so far. But now when it comes to the HDD head, and then now we are looking into the next technologies and So, Thomas and a real estate actuators or that new technology, we needed to just take advantage of so that, particularly, we'd like to aim at the large capacity situation nearline a storage product. I like to make additional investments for this also and you have 2 lead devices, say whether 2 or 3. So if it's the case and now we want to consolidate it in the head, but we need to make further investment additional investment. That will also factor in. And also energy is the other end investment in battery cannot be avoided. And when it comes to this end investments, I'm going to talk about plant net sales. But in March 2018, last year, it happened grown and substantially and exceptionally a booming in the last year. That's why we need to be more aggressive in it. But on the other hand, now, and in order to keep growing, And we must we must make that investments to push that to the current momentum. So that's why and about the one third of these a values will further be invested and on top of this, this is that plan and future. And based on this in capital expenditures. And now we'd like to respond to the demand and the needs of the that we would like to achieve that in our net sales in the Midtown basis. Here. Please allow me to further explain our assumptions on the consolidated revenue change by segment. Ups and downs. 1st, the passive components, as I have explained this already, and FX actually, you know, impact is going to be 5% and dollars an actual 5%. So, and actually, you know, we have to pay additional to factor. But again, on the 1st passive components, again, we've taken it to grow on her 3% to 6% of GESO from FX, the perspective of GESSA you know, we have to aim at, the much higher, less than 10% automotive markets, again, XEVs and, also, and, of course, are here on stay as important trends. Again, on the CapEx is going to be quite important and so that we can actually up to new additional trends in MLCC and inductors. And others, of course, are going to be the very important space for us to be quite an aggressive in making an answer, the investment and the 80,000,000,000 in the sense and actually, you know, 30% and actually, you know, growth is being expected. Other words, we're going to aim at JPY 100,000,000,000. So with that point in mind, and of course, motion sensor and new portfolio, and, ultrasonic on the sensors and also the microphone and the audio sensors need to be further expanded also in the TML and automotive and sensors need to be further, you know, expanded. We have them in the pipeline already. So we're going to be quite aggressive in working on these opportunities, going forward. And also on the 4 ICT market and also on magnetic sensors, actually already been an offer, and we'd like to actually expand the possible applications. And based upon this technology, magnetic application actually products are expected to go down negative, hard disk can drive and head itself. Actually, do not will not keep growing. I think a boom of tears and the growth, I think it is going to have a shorter limitations. So with that point in mind, hard disk can drive and a hedge quantity, think we'll go down around by 6%. So this is our assumption. But having said that, hedging some technologies, you know, we have got it the other day. And actually, and they have action technologies, the, you know, metal or the micro fabrication and action technologies. I think these technologies may help us to find more opportunities in the ICT or in the health care markets, going forward. So very important for us to keep an eye on these opportunities and also the magnets. For automotive and application passport and robotics could be another important, industrial application could be quite possible. So we'd like to make our best effort so that we can gain real good on the fruits. Film application products, while selling energy and application, the products, 10% were around That's the growth factor. We are hoping to get And for March 2018, actually, we grew probably not too much. But again, as you see here, we are here to further grow ourselves. So and the traditional smartphone, the home pouches on top of them actually. And for PCs, actually in 80 growing her, settling. We do believe that this is going to further grow and the drones and also on gaming the, the consoles. I think, you know, they will give us further growth and factors for with the pouch. And also mini sales could be another, on the expectation. I do now don't know, smoke. I'm not smoking up again on this. It's going to be used, you know, as a part of the, you know, it's got and also for the carrying aids, and also, you know, this can be used in the in then, you know, gaming consoles and also on a power cell, somewhat larger, and power is another area. So we like to actually move into this, somewhat larger and power area. As you see here, all in all, 1,340,000,000,000,000 that this is going to be on our target of a profit and a 100,000,000,000 well, they're higher than 100,000,000,000 yen. That is going to be our aspiration. And would I go for these numbers? So now this concludes my explanation as for the forecast. But, again, at 15, 100, today, actually, we announced the changes and the board of directors if I now like to highlight, give you an highlights. As for the latest announcements, well, this is going to indicate the new governance skim. So we we are going to, we like to go for. So out of this governance expectations, we announced this new you know, change. And, being honest with you, since last Jan, and this year, and actually, if you have tried to commission, actually, and the cartel, not only Sean and others. And also the number of, you know, companies, and actually, you know, have gone up in terms of number, not through M and A. So I'm talking about the increased number of the group companies. So having reached this point, I think we have to pay more attention to the governance the policies and rules. The, you know, governance rules originally was introduced 10 years ago, but now it's time for us to further reinforce our governance. The schemes. So in order for us to further strengthen governance and going forward, external director, Makoto now is going to become the full time, the director. So, he is going to be responsible for going forward. So we have big expectations with Mr. Sumitra in the space of governance. So, we would like to actually reinforce in our governance capabilities. And, again, we have got corporate governance and committed as an advisory panel to the K. And Mr. Smithan is going to be the chair of that panel. And Mister Smith, and actually, was looking at from outside, but now he's going to be the, he's going to be become in Toronto, no resource. And, as for the, on the external directors and when I'm missing and, Katinari Yagi and auditor is internally, fill up this, the vacancy. At the same time, chairman, Amishta Kanigama is going to retire from the on the business and activities. But, again, starting from the 20 for as long as 10 years, and he served as the president and the CEO. And for the past 2 years, he served as chairman. Actually, you know, he really helped, me when I, made a transition to the kind of position. I believe that, you know, we have come a long way, and I think Kamjama you know, that's an appreciate what I have done, what we have done. I think it's time he believes that it's time for him to retire from the business world. So, you know, I just I I'm just wanting to share this back with the information. But having said that, Mister Kamigama, as when it comes to being, you know, top and the gurus and experts, and so much in both objectives made. And, actually, we actually, stopped having this holding aircon in Japanese advisory position So, naturally, you know, Mr. Kamigama is going to be given the, special, mission, mission, executive, quote, unquote, But together, energy and application on the space, technology wise, and also making things wise, again, we have a big expectations, and we'd like to ask Mr. Kamigaman to actually have the full engagement, not as a part of the, you know, business models, but again, Again, me, together with them, Sasmidjan, again, I'm going to walk in the fold and further, and, growth and Azure strategy. And, mister Kamigama is an is going to help us again in this new expected area.