Earnings Call: Q1 2018

Jul 28, 2017

Hello, and this is Gemini speaking. First of all, I'd like to turn the thank you name for you and have precious time despite your busy schedule. We're here to explain to you our consolidated results for the first quarter and our FY 2018. So happy to have so many of you. Allow me to explain on our earnings, on the line and then high at the high level. The, the first and I'd like to share some of the key points in the 4th in first quarter. We transferred in the high frequency and components business in the 4th quarter. And, it had a major impact on the corporate profit structure on this first quarter. Net sales was up 3.8%. Operating income was down to 5%, including one time cost 1,000,000,000 for InvenSense acquisition. GDK was able to absorb the impact coming from this business transfer because we were able to expand our growth in the existing lines of business. In Automation segment, though, the North American market slowed down a little bit but besides the China market and the European market, Japan market particularly grew firmly particularly in a passive components of our sales grew And the furthermore and the, we had the increased demands in the same contact facilities and the industrial robots And we observed the recovery in the demands in the renewable energy as well as the wet goods such as air conditioners. LUKA was able to secure an overall growth of sales in the entire businesses centric around empower the products. The total demand for HDD in a hand tunnel to be the way we had forecasted in the beginning of this fiscal year. The so called non captive HDD Heads on her head on firm, her sales performance on top of that. Due to the acquisition of Hutchinson, her suspension and volume increased which helped us to absorb the decline in the captive SDD and assemblies. We had that, the numbers in the previous fiscal year. However, the fiscal year, we are not having that. As for the rechargeable batteries and sales to our customers in North America and grew nicely, And we sold more in the Chinese markets and due to the strong adoption of solutions in a wide variety of customer Sales in new applications such as drones and gaming consoles continue to grow, resulting in an increase both in revenue and profit. In light of the transfer of high frequency components business in order to develop a new business portfolio. Since the last fiscal year, GDK and executed M and A activities based upon the company growth strategy. In order to strengthen the sensor business, which is the major pillar for the growth strategy, We had worked on the acquisition of InvenSense. The acquisition was completed in May in the first quarter. We launched a sensor systems business company And it gives me a great pleasure to report to you that we almost completed, building the business platform mid- to long term growth and for the sensor business. Going forward, we will have further work on the integration of sensor operations and will promote a speedy ramp up sensing core technologies and materials technologies will be integrated with icing and packaged technologies. By doing so, TDK and we'll try to establish solid business foundation. Next, I will go through the highlights of the Q1 results. Net sales was 1,000,000,000, down 1,000,000,000 or 3.8 percent year on year. And operating income was 1,000,000,000, including M and A onetime cost of 1,000,000,000, down 1,000,000,000 or 5.5 percent year on year. OPE margin was down 0.5 points, becoming 5.4%. Income before income tax was 1,000,000,000 up 1000000. Net income for the quarter was 1,000,000,000. Down 1,000,000,000 or 11.3 percent. With these numbers and EPS, it became 1,000,000,000. The average FX rate was JPY 111.16 to the U. S. Dollar. The Japanese yen became cheaper by percent and 100 and 22.02 yen to pushing up the yen by 0.3% all in all, the FX impact was partially 1,000,000,000 in the sales and operating income was up about 1,000,000,000. As for the FX sensitivity for operating income between the dollar and yen, One change had about 1,000,000,000 impact on annual basis. And between the yen and Iran, due to the share change and the foreign currencies and profit caused by the transferred and the high frequency components business. This impact became 1,000,000 from the previous 1,000,000. Next, I'd now like to cover the segments and situations. Starting from this and physically, Ana, we added a new reporting segment since application products. So we have a restructure the last year's capsules based upon this new segmentation. Passive component net sales was 103,500,000,000, down 22.00 percent year on year. Operating income was 1,000,000,000, down 31.1 percent year on year. Again, on the 103,500,000,000, down 22% and operating income was 10,200,000,000, down 31.1%. And our operating OP margin became 9.9% As for ceramic capacitors, we did a share of more than 50% in the automotive industry and turned out to be in a rather strong And the sales volume in what goes such as air conditioners grow given us increase both in revenue and the profit. As for the inductive devices and due to the inventory adjustments and among the major smartphone manufacturers in China, went down in ICT business year on year basis. But just like Ceramic and capacitors, thanks to the strong sales in automotive and which was a high share on internet sales and industrial robots and the instrumentation devices and the health care and the renewable energy sales overall the goal, enabling us to maintain a high profit level. I'm so happy in being able to report this to you. Higher frequency components and had a major decline both in revenue and profit due to the business transfer. And the existing businesses, Wi Fi and how a module business gone in this current year. And in the current year, and, though, we had it in the previous year and pushing down the net sales drastically Chidek was able to maintain its high profitability, centered around the ceramic filters. A piezoelectric material of products grown at its revenue and profit thanks to the strong VCM business now for the camera modules. High frequency and components business and transfer impacts were not observed as much as 1,000,000,000 in the Q1 sales and about 20% decline in LP margin. But we will continue to make our efforts to improve existing business profits, this is somewhat a good nuisance for us to be able to report to you. Next, since application products. This consists of temperature on pressure sensors, magnetic sensors and MEMS sensors for information. Due to the change in the segmentation, actual sales was JPY 10,400,000,000 and the operating income was negative 1,000,000,000. As for details, net sales was 1000000000 up 57.7 percent year on year and operating income was negative 1,000,000,000 Due to the completion of the InvenSense acquisition, the overall revenue was up 1,000,000,000 We are now calculating the goodwill for the deal. In the first quarter, We allocated our depreciation on the inventories and assets and we paid the employees' compensation and also the retention cost, putting them how to get on 1,000,000,000 as the one time expense. So that is included in the P and L for the first quarter. Automotive share is high in the temperature and pressure sensors and magnetic sensors Actually, this grew mainly in the Japanese market and the European market by as much as 13%. And also, we started shipping Gmail has been successful to market. With investments being consolidated, MEMS sensors sales now accounts for 30% within the entire sensor application product segmentation. I see the market and accounts for 70% plus drones and other industrial equipment in our account for 30% a little bit less than 30%. OP margin was flat and if M and A on a cost 1,000,000,000 is excluded. And next magnetic application products. The net sales over last year was the revised app by JPY 5,100,000,000 and and the operating income was a 5,400,000,000 and operating income was down, but 2,400,000,000 due to the change of the segment mix end of portfolio. Net sales in Q1 was JPY 80,000,000,000, up by JPY 3,500,000,000 year on year with operating incomes up by JPY 4,800,000,000 and the 17.7 percent from the year earlier. Operating income margin was 6.0%. The sale as the volumes of HDD have been almost a flat year on year, although there was no assembly sales of HDD for the captive this year. On the other hand, that a on the other hand, that the segment has sounded more profitable due to consolidation of a waiver related facility and the cost reduction efforts, including HDD, food chain key products. Suspension business increased net sales where the sales volume grows due to the acquisition of Hatcherson, magnet business has steadily recovered with the favorable businesses and the areas of wind power generation and industrial robotics, as well as air conditioners. The net sales has been boosted, although still recognizing losses. So that's now in the business has been reconstructed and it'll recover it. Power supply business has been going very well with the pause growth in both sales and profits as well as profit margins because of favorable operating performance in the markets related to semiconductor manufacturing devices and measurement equipments and robotics. Next, FM application products. Net sales was 1,000,000,000 with operating up with 1,000,000,000. The net sales was up by the 53.9% and operating income was up by 15.9%. And it's a substantial growth for both year and a year. Operating income margin has been maintained as high as 15.9%. Who can do the badly business for the North American customer has been better than expected, including in the public products and the business for the customer in China also expanded on the device products. And breaking into new markets such as drones and the gaming industry have also contributed a dramatic increase of both revenues and profits. Next, let me talk about the Q on Q basis and the changes from the the last Q4 in this Q1 in both net sales and the operating income changes. As I explained earlier, and by setting up the new business segments. And so that's why for that all the all of this, the Q4, the sales and net sales and operating incomes have to recombine and based on the new segment compositions. 1st of all, the composite component segments, their sales have declined by JPY 9,800,000,000, 8.6 percent decline. The Islamic capacity markets have been steadily ended the market about the motive applications Also, also the renewable energy markets and industrial robotics sales have been increased mainly for the aluminum film capacitors. The sales of inductively device have been flat from the Q1 on Q basis from the Q4, but excluding that impact of the currency, it has increased by 3%. Just like the Islamic capacitors and the business where the automotive market had been steady and had also the sales of industrial equipment have a dramatic increase better on the other hand that Now food ICT and due to the inventory adjustments of a customer in China had negatively affected. And all in all, it had been floods. Next, the sales of the other passive components was declined by JPY 11,100,000,000 Q on Q, 27.3% is a dramatic decrease, but this in the last Q4 and we have JPY 14,000,000,000 of that's the gains by the transport of the high frequency business. So excluding this one time factor, and the revenues have increased by 11% in Q on Q. The catalog module VCM have been favorable for a particularly for the customer in China. Operating income of deposit components have declined from Q4 by 136.5000000000, 93 percent Q decline, but also we have the gains of a but the business transfers are recognized in Q4. And in total, we have JPY 134,600,000,000. This gains was recognized in Q4 for the one time profits. So excluding all these factors and actually on an apple to apple basis, and it was JPY 1,900,000,000 declined from the JPY 12,100,000,000 in the Q4. So the high frequency a we have the 2,000,000,000 yen of a the high frequency business segments was recognized so that excluding this and also excluding the impact of currency, it was about the 12% increase of the profits. Next, the sensor application products and the net sales have increased by JPY 4,900,000,000 42.2 percent of increase Q1Q. This is mainly due to the consolidation of the indices. The operating income declined by JPY 2,400,000,000, but again, This is due to that's the 1,000,000,000 one time M and A cost due to that acquisition of Invensys. Next, Magnetic Application segments, the sales have declined by JPY 5,900,000,000 from Q4, and this is JPY 9.6 percent decline of net sales. The sales of the recurring devices and a and was adversely affected, but a slight decline of the HD had the shipments and also that the food time case at TDDI shipments have declined so that it was pushed down by 1,000,000,000, 10%. The other magnetic application products have increased by JPY 200,000,000, 1.7% increase. The industrial robots and the measurement devices for the components and have been favorable as well as the products of other magnetic products and power supplies. The operating income of the Magnetic Application Products have increased by JPY 12,100,000,000 from Q4 But now about the 1,000,000,000 out to the cost for the restructuring of the business was included in Q4. So excluding this impact, it was about 1,000,000,000 is the actual margin of increase in the sales and 1.7 times of the operating income. HDD head for the near line, the head have increased a little bit and also on the favorable change of the product mix and and also the prediction of that goodwill due to the hedges and acquisitions and also the improvements of the phthalate Magnus and the power suppliers all pushed up that's profits. From the film application products, the sales have declined have increased by JPY 25,300,000,000,000, 40 6.5 percent security and cure. And in the business of the North Korea, including the sales of the tablets have pushed up more than we had expected and at the same time, and we have the diversified expansion of the business and the China. It comes to operating income, the film application products, and it had increased by JPY 7,700,000,000 and JPY Q4 of JPY 5,000,000,000 and JPY 12,700,000,000. Due to the incremental top line and we could increase it. That's the marginal profits and also we can have the dramatic increase due to the cost reduction efforts. Next, let me talk about the change the breakdown of operating income changes. In total, all in all, now and operating income pushed down by 1,000,000 and all in all, so that I'd like to talk about breakdown of this. First of all, including that's an And for the changes in the sales, after they do do that, they improve with the utilization in the mix and then it pushed up by JPY 1,800,000,000, So it didn't have just to absorb it and this the different and missing of that annual profits due to that high frequency profits had been more than offset by this in the top line growth. And the JPY 14,900,000,000 is the minus and the push down effects of other sales price reduction but at the same time, and that the JPY 12,500,000,000 is pushed up by that rationalizations and then the cost reductions and also that the restructuring efforts produced JPY 1,300,000,000 and also for the SG and A and JPY 800,000,000 orders pushed up and also more than offset that due to that negative impacts of the sales by reductions. And And also, and before this, at 3,500,000,000, one time expenses and also the currency, now that we have and JPY 18,000,000,000 of operating incomes and ARS 1,500,000,000 helps to better than the last year's, the JPY 16,500,000,000. And And on top of that, we they subtracted 1,000,000,000 over a one time expenses for M and A and also adding that exchange fluctuations and a ton know. And minus 900,000,000 yen is that's the the bottom line. So when it comes to this, the, the onetime expenses of the M and A is including the depreciation of the devalued inventory assets and compensation, the retention, fees for and the cost for employees and the advisory costs. Next. And next, let me talk about that, net sales of Q2 this year. And, we expect the city sales of, passive components to the, to the stable markets of Automotive, New York, China, and Japan, as well as India devices. Therefore, steady sales of a capacitor, inductive devices and so forth. As for smartphones, The shipments of the components for the North American customer for their new devices will be on a full swing and yet new picture and also the inventory adjustment by the customer in China will run its course. So take all this into consideration, we expect that 5% to 7% of increase of net sales When it comes sensor application products, this segment will be supported by the steady sales of the churn in the pressure sensors for automotive applications and the TMR sensors for ICT markets as well as additional cells of a memphis sensors uploaded by Envysons. And the ghost forecast of sales about 16% to 18%. As for magnetic application products, The shipping index of HADD improved from 100 in Q1 and when it's based on that last year's Q1 100 and in Q2 of the index is 102, and the sales volume of suspension will go up and, components for fine electronmicroscope will push up segment sales further as well as magnetic products and the power supplies for industrial markets. Now still, given the negative impact over the currency and a high appreciation of VM. We expect the segment will almost be flat. For film application products, we forecast the 7 to 9% up for secondary battery because of the shipments for new devices of the newest American customers will gain momentum and And then last of all, let me talk about stats, our, and the forecast of the full year business performance. And at this time, and as I said, we announced that our forecast in the May at a time, we did not include that M and A of the invoices pendant this time and we have renewed and reviewed as the forecast, including the acquisition of InvenSense. So from the focus we announced in May, we have divided upwardly by 1,000,000,000 of net sales and 1,000,000,000 open income And there's no any change in the JPY 80,000,000,000 open incomes and JPY 55,000,000,000 of net income. Now let me talk about that incremental net sales. The last time when we announced the forecast, the full year announced the forecast according to that's the each of these items were announced in May. 1st of all, for positive components and excluding the impact of the transfer of business of frequency business. And the last time, we had a forecast of 8% to 11% of increase, but now this time, we revised it upwardly to the 12% to increase. When it comes to sensor application products, the last time we had the increased margin would be 27% to 30%. But including invoices, now we think that's the balance that it will be 1.7x to double. And for the magnetic application products. And the last time we have the minus 6% to 9% was the focus of last time, but this time, we have revised to that the minus of the 3% to 6% minus. For the film application products, And the last time, we had 8% to 11% increase by the loss of focus, but this time, we have to revise the upwardly to 25% to 8% of increase. Including all in all, in total, now we have about the 80 percent JPY 80,000,000,000 of incremental and change of the forecast of the the, new sales. When it comes to open income and that the cost of funding money for the embassy, now it will be just only one time that it will be recognized as a cost And so we have factored in the JPY 9,000,000,000 and a JPY 3,500,000,000 and included in Q1. But in annually, we factored in 9,000,000,000, but when it comes to that, the impact, but all this impact that can be absorbent and offset by the favorable business. And the average day foreign exchange rate after Q4, and we still stayed the same as we have announced in the May, JPY 100,000,000, through the dollar and hand it to euro. And those are and for all the expenses when it comes to R and D expenses and This is will increase due to that consolidation of influences. So that's now we have increased by 1,000,000,000 from the last time and now it's 1,000,000,000. That's all my presentation. Thank you very much. Thank you.