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Edited Transcript of 6762.T earnings conference call or presentation 15-May-20 8:30am GMT

Full Year 2020 TDK Corp Earnings Presentation

Tokyo May 18, 2020 (Thomson StreetEvents) -- Edited Transcript of TDK Corp earnings conference call or presentation Friday, May 15, 2020 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Shigenao Ishiguro

TDK Corporation - CEO, President, GM of Humidifier Countermeasures HQ & Representative Director

* Tetsuji Yamanishi

TDK Corporation - Executive VP, Chief Compliance Officer, GM of Finance & Accounting HQ and Representative Director

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Presentation

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Tetsuji Yamanishi, TDK Corporation - Executive VP, Chief Compliance Officer, GM of Finance & Accounting HQ and Representative Director [1]

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Hello, this is Yamanishi. I do appreciate your precious time despite your busy schedule. And also, we are being connected through the web assistants. It's rather inconvenient. Again, I'm so happy to go through the highlights for the performance for the fiscal year 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 and all the performance.

And first, key points. Economic slowdown in China and the rest of the world became so clear due to the worsening relationship between the U.S. and China day-by-day. And as we move toward the end, in the fourth quarter, economic activities in each country stagnated due to the COVID-19 pandemic, impacting the production of electronics and the demands for electronic components. Its impact was beyond our imagination. 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.

Amid severe macro demand globally throughout the year, rechargeable batteries enjoying strong demand, and the ICT market performed well since the beginning of the year.

Energy Application Products segment recorded its sales and profit by making efforts to expand its sales with the expanding applications. The U.S. and China trade friction had a major impact on the automotive and industrial equipment markets, creating a much bigger and sluggish demand than we had expected since the beginning of the year. Many Passive Components and products and the Sensor and Application Products, particularly the conventional sensor and products were affected negatively. In contrast, the ICT market demand turn out to be rather firm. Sales in the ICT market grew year-on-year.

With the 5G demand increasing, the rechargeable batteries and high-frequency components drove overall earnings from the expanded sales for smartphones and base stations. So happy to report this to you. In the fourth quarter, we came to our conclusion that the sluggish demand for automotive and industrial equipment market is here to stay. So it will be rather difficult for us to have a big recovery in profit. So we posted about JPY 6.5 billion for impairment for the production facilities for the magnets and aluminum capacitors. We also booked about JPY 1.8 billion 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. dollar and other currencies. We have the sales and operating income affected by JPY 40.7 billion and JPY 3.1 billion, respectively. With this, net sales was JPY 1.363 trillion, down JPY 18.8 billion year-on-year, significantly declined by 1.4%. So we went through (inaudible) situations. Operating income, including an impairment loss of JPY 18.3 billion became JPY 97.9 billion, down JPY 9.9 billion, or down 9.2% year-on-year. Income before income taxes was JPY 95.9 billion. Net income was JPY 57.8 billion. Earnings per share was JPY 457.47. COVID-19 outbreak stopped some of the planned operations and shipments. With this, we assume that net sales and operating income were affected about JPY 28 billion and JPY 12 billion, respectively.

As for the FX sensitivity, no change. With the U.S. dollar and the Japanese Yen, we assume JPY 1 fluctuation had its impact on operating income about JPY 1.2 billion on the annual basis. Between the euro and yen, it was JPY 200 million.

Here now I'd like to explain the results by segment. Passive Components segment. Net sales was JPY 395.5 billion, down 8.7% year-on-year. Operating income was JPY 39.1 billion, down 33% year-on-year. Operating income margin became 9.9%.

With the continuing U.S.-China trade friction continuing into the new fiscal year, automotive and industrial equipment market demand became so sluggish. Furthermore, with the inventory adjustment made by the major distributors, both in the U.S. and Europe, capacitors, inductors and piezoelectric components, Circuit 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 JPY 2.1 billion due to the declined demand.

In contrast, ICT market demand continued to be firm since the beginning of the year. 5G ramp-up Central Mainland China is gaining its momentum fully. The volume was down because of the COVID-19. But may I remind you that in High-Frequency Components, the business was able to secure the growth both in revenue and profit.

Next, Sensor Application Products segment. Though we positioned this segment as our growth strategy business and try to increase its 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 declined sales. And in another segment, we were able to grow based upon our growth strategy. Globally, the demand for automotive and industrial equipment markets are becoming so low, our temperature sensors and hall 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 strategic products, where now, we do expect a growth. TMR sensors for autos expanded its sales with a steady increase and the volume increase. For smartphone business, a shift to new models and have surely advanced and given us growth in sales. As for MEMS sensors, our motion sensors have grown with our new customers. MEMS 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 Products segment. Net sales was JPY 219.7 billion, down 19.5% year-on-year. Operating income was JPY 400 million, showing a major decline. HDD Heads and HDD Suspension. Well, disk drive, HDD 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 assembly products, HDD suspension as a whole was down about 18% in sales, resulting in a decline in profit. However, thanks to the high-value products introduced, its profitability improved since last year. We are so happy as for this situation.

When it comes -- so we are having -- we have been benefited, thanks to this high-valued products in the Nearline products. Magnets, sales decreased year-on-year due to the withdrawal of hard disk drive magnets and as well as the sluggish demand for industrial robots and machine tools and other industrial equipment markets. With this, we are still faced with a tough situation as for the deteriorating profit. So we had an impairment loss of about JPY 14.4 billion in the fourth quarter.

Next, Energy and Application Products segment. Net sales was JPY 597.7 billion, up 11.2% year-on-year. Operating income was JPY 124.1 billion, up significantly 36.4% year-on-year. Operating income margin was 20.8%. Profitability improved quite greatly. Rechargeable Batteries increased greatly for the smartphone business as a whole. Tablets and laptops business also grew firmly. Furthermore, mini cell products for the wireless earphones and other wearables grew family in sales. It grew about 15% year-on-year, showing the improved profitability.

Power supplies for the industrial equipments were affected greatly by the lackluster capital investment demand, making the total sales for industrial equipment going down.

Next, I will analyze the decline in operating income of JPY 9.9 billion. COVID-19 impact was as much as JPY 12 billion, but we had a profit of JPY 11.5 billion, backed up by the increased volume. Sales and price reduction impact was about JPY 15 billion, but this was absorbed by rationalization cost reduction of JPY 19.1 billion. And the benefiting from the restructuring was JPY 1.6 billion. They have contributed to the improved profitability by improving our internal strength. As for InvenSense, acquisition cost was JPY 5.4 billion, no change from the previous year. Rechargeable Battery expansion activities and costs, including SG&A and the development was up JPY 10.4 billion. FX change, they pushed down profit by JPY 3.1 billion. Impairment loss increased JPY 13.6 billion. All in all, it resulted in the loss of JPY 9.9 billion in profit.

Next, I'm going to talk about that the reason of the changes of that segment-wise net sales and operating income changes on a quarter-on-quarter basis from Q3 to Q4. First of all, Passive Components segment. Net sales have declined by 1.3% from Q3. But if we exclude the impacts of the COVID-19, it had grown by 2% positively. All in all, we can see that now the business in ICT and industrial equipments, business have declined, but on the other hand, that the declining capacity and the High-Frequency Components for the 5G base stations have more than offset.

Now operating income declined by 37% Q-on-Q basis, but we -- excluding the impact of COVID and that's -- and the impairment of aluminum capacitor, it have grown by 9%. Next, the Sensor Application Products. Net sales have declined by 7.9%. Operating income, when it come to operating income, the JPY 1.5 billion of loss has increased. For the automotive market, slightly going up. But when it comes to the decreasing the volumes of the smartphone, and all in all, we suffer from that the negative growth. For the -- due to the impact of the COVID-19, we have to suspend the production line. And due to these impacts, about the -- excluding this impact, is that the margin of decline was 14%.

Next, Magnetic Application Products segments. Now net sales, when it comes to that, due to the volume decline of -- by 6% of that HDD Heads from Q3 and also of the slowdown of the assembly of the HDD and also the sales volume of HDD Suspension by a 10.5%. This is an all in all decline. And Magnetic Applications, the magnet net sales have declined by 5%. The operating income -- and we have JPY 14.4 billion of impairment loss and -- but excluding this and also for the COVID-19 negative impact and the margin of the decline of -- the operating income was 35%.

Next, Energy Application Products. Net sales have declined by 26.6% Q-on-Q basis from Q3. 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 industrial power supply have been flat. When it come to the operating income, 63.7% at negative, but excluding -- that's the impact of COVID, actual margin decline was 49% minus. That's all the performance. Okay next for Mr. Ishiguro is going to talk about the forecast of the March 2021.

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Shigenao Ishiguro, TDK Corporation - CEO, President, GM of Humidifier Countermeasures HQ & Representative Director [2]

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I'm Ishiguro. Hi, everyone. First of all, I'd like to appreciate all of you who joined this unusual 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 face-to-face meeting with all of you as long as possible. And then I sincerely hope that I can meet you again.

Now, I have just take over from Mr. Yamanishi, but Mr. Yamanishi, actually, then speaking quite different separated for having the social distancing. So now we have a working on split team, having the social distancing. All the executives working on that. I sincerely hope that all this problem will be solved. Then I'd like to talk about that consolidated business performance forecast for March 2021.

First of all, I'd like to talk about the assumption 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 which -- on which we have come up 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 growth, while forecast is minus 4%.

Region wise. Now that the China, who already have under the bottom out, although they have just suffered from this infection in earlier stages. And now they're going to recover from that as soon as possible, but on the other hand -- then China will come back to that -- their macro economy. And just like before the COVID-19 infection in China. But other than China, including Japan, now when it comes to the negative impact of the economy, we will bottom out in -- sometime in Q2, and gradually picking up. But it will be impossible to and recover to the level before the COVID-19 crisis. When it comes to the business of our -- the impact on our business and due to that -- about the market inventory impact. Now we expect that about actual impact will be the 2 to 3 months and after and -- this impact come up to the market.

Next, let me talk about the assumption of the demands of our major devices related to our business. When it comes to automotive, now the outputs of the vehicles, including commercial vehicles in the fiscal year 2020. Now our expect is the 75 million units, minus 14% output year-on-year basis. This is our assumption of forecast. Already, part of the market will suffer from the further decline is argued. On the other hand, when you look at the market in China, say that there are the business in China. Demand in the market in China have already have a positive growth year-on-year as early as April.

But anyway, we have to watch the market and demand very carefully. But on the other hand, we think that xEV market will expanded by 11%. This is the assumption of forecast. But on the other hand, the smartphone, which is the main state of ICT market, our expect is that 124 million units minus 9% is that the total demands of the smartphones and units of 5G will be expected to be the 376 million. And then 5G foreign demand in 2020 was expected to be 400 million. So that's why compared to that level, it will be just that we'll be invited.

But then again, the total smartphone demand we expect is 1.240 billion. So when it comes to the Nearline drive, user for the data center, we'll keep expanding, although that the 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 COVID-19 will not only for -- have the impacts on the market demand. And short-term basis with this expansion of the COVID-19 infection, that would directly affect our supply chain. So that will also lead to the suspension of our manufacturing operations. But currently, we have some kind of a problem and part of Indian and part of the Southeast Asia. And we failed to achieve the 100% utilization due to the regulation of the governments that will lead to this, and less than 100% of utilization for the Indian and part of Southeast Asia.

But on the other hand, most of the other regions, we have already almost full capacity, can be upgraded. So that's why an assumption of this forecast based on that our operation will be on a full capacity basis. And then also, at the same time, we expect some kind of -- there's not any further decline of the macro economy due to the second, third wave of infection. This is our assumption.

Okay. Based on the assumptions. Now in March 2020, and about 5% decline from the March 2020. And March 2021, our sales in March 2021 is JPY 1.29 trillion. Now for the Passive Components. Now although there's some automotive and industry equipment markets with some adverse effect, but now about Passive Components, net sales will decline by 7% to 10%. So when it come to Passive Components Segments, and now -- but all these -- and High-Frequency Components or the 5G-related market would be steady. This is our forecast.

When it comes to Sensor Application Products, with the expansion of the customer base and the product lineup and the portfolios, we expect 8% to 11% positive growth. Even into this COVID-19 crisis, and when it comes to the temperature and pressure sensor or that Hall IC used for the automotives, cannot be expected to grow so much substantially due to the negative impact on the market. But when it comes to the TMR and Magnetic Sensor or microphone MEMS Sensor, these are promising for the future market, then we can expect that new and development of new customers and applications, we expect positive growth.

When it comes to the Magnetic Application Products, when it comes to HDD Head, 2.5-inch and 3.5-inch drive market will gradually and decline. At the same time, accordingly, that's about -- of course the manufacturing business of 3.5-inch drive will also will slow down. With this background, we -- our forecast is that is net sales will also slow down. And when it comes to the magnetic products for -- we can expect expansion of the new project for xEV, but due to that slowdown of the automotive market as a whole, we will be -- we expect it will be very difficult to expand 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 smartphone markets, and also infrastructure market shrinking, which is related to power supply, but on the other hand, we have very favorable forecast about this, the PC and tablets and then other. And the telecommuting and the markets, also the mini cell and the power cell, those sales of these and steady and the business will gradually contribute. So that's why -- and the Energy Application Products forecast is almost flat. Based on all these assumptions and forecasts, now just like we have this forecast of consolidated business performance March 2021.

Assumption that the currency is at JPY 105 to $1 and JPY 117 to EUR 1. And the net sales forecast is JPY 1.29 trillion, about a 5% decline in a year. Due to that impact of COVID-19, now based on declining demand of that -- the net sales is considered, but now, we expect about JPY 180 billion as the net impact due to this coronavirus, the COVID-19. When it comes to the negative impact of this operating income -- including this negative impact, our operating income will be JPY 70 billion, and income before tax will be JPY 70 billion. Net income will be JPY 48 billion, and JPY 880 of earnings per share.

And our dividend in the second half of March 2020, where we announced that it will be JPY 90, so that we can pay about JPY 180 to the annual dividend. When it comes to dividends of next fiscal year, March 2021, we have about -- now in this -- based on our target up to -- we talked to the shareholders on this current midterm business plans, including the payout ratios and the amounts, that's why we paid JPY 80 for both of halves in the second half, in totaled JPY 160 in annual dividends.

Capital expenditure, JPY 180 billion; depreciation, JPY 140 billion; and R&D expenditures, JPY 120 billion. So we'd like to be aggressively continue about all these and strategies in the growth area. So now in this segments and Mr. Yamanishi, again, will talk about our strategy on the finance.

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Tetsuji Yamanishi, TDK Corporation - Executive VP, Chief Compliance Officer, GM of Finance & Accounting HQ and Representative Director [3]

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Okay, then, I'm Yamanishi, again, and I'm going to talk about our -- how we can improve financial strengths in this uncertain environment of the business. Now -- so now when it comes to the business forecast for March 2021, next fiscal year, and as our CEO already have explained, due to the impact of COVID-19 and our forecast of the net sales and operating income will also lower than the previous year.

And as we had announced in 2018 that this is the current midterm business plan, and this is very last year of the current midterm business 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 year, but now due to that declining and the incomes of this in the March 2021, and we need to postpone that we have to achieve the target of financial strengths. So also in March 2021 -- but still, we will put a priority on making investments for the future growth areas.

At the same time, we try to recover that the results of these growth investments add aggressively so that we can be sure to and secure the free cash flow expansion so that we can achieve that financial strength target as soon as possible. On the other hand, in order to deal with this rapidly changing the demand in the market situations, we need to secure -- we already have secured the funding capability, including the commitment line, and also we can deal with there's any uncertainty in the market, and with that the financial strengths, and including this specific and liquidity on hand.

When it comes to the return to shareholders, as CEO also have mentioned earlier, when it comes to return to shareholders, we failed to achieve the target of earnings per share. So that's why -- and we needed to decrease the JPY 20 from the JPY 180 as an amount of dividends and the plan in March 2020. But anyway, based on the policy of the dividends and also based on the free cash flow level of the midterm business plan, we think that we could still maintain that 30% of the payout ratio going through all of the periods of the current midterm business plan. That's all my presentations of our financial strategy. And last of all, Mr. Ishiguro again will explain about our basic ideas for the postal -- post COVID-19 crisis.

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Shigenao Ishiguro, TDK Corporation - CEO, President, GM of Humidifier Countermeasures HQ & Representative Director [4]

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Okay. Now -- and when it comes to expansion of the infection of the COVID-19 crisis, and for example, that will have the very brutal impact including supply chains. And also we have adverse effect at the consumer markets and the business market. But still when it comes to electronics market, which is our main battleground for TDK, we still have very good potential for the future growth. As also explained in the last time and energy transformation, EX and the digital transformation, DX, these 2 major trends and the market and the society, we think that these are the areas that TDK has made the bigger contributions to change the society and the world.

And energy transformation EX. First of all, we would like to transform in TDK to solely to the eco TDK. Also by taking advantage of digital technologies, we'd like to try to secure that the maximum output with the minimum input. And also we'd like to more aggressively and transforming into using the renewable energy and I'd like to make a big contribution to the energy conservations and the Low Carbon Society and to become the sustainable TDK.

And when it comes to DX, digital transformations. First of all, I'd like to make our own TDK itself transform into as much digitalized as possible. With this pandemic of COVID, many of the working style and many of the normal life of the world have changed. And also the teleworking will become all the more prevalent practice and digital marketing industry further all, AI and material informatics, RPA. There's all this and the technologies and the practices that will be all the more realized 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 the temporal and spacial limits so that we can have the better communication, we cannot realize before. Without having to have the physical movement and transportation, we can have the communications with each other. So that including all the tasks of the design, development, manufacturing, marketing, all of the aspects we'd like to promote the digitalization of TDK. At the same time, we like to help the society with digitalize a little more so that we can solve that social problem with our digitalization. That's all my presentation. Thank you very much.