TDK Corporation (6762) Earnings Call Transcript & Summary

We will now like to start the financial results briefing for FY March 2022 for the TDK. If I may, I'll take a moment to introduce the participant from our side. We have Noboru Saito. Also we have Tetsuji Yamanishi, Executive Vice President; Corporate Officer, Fumio Sashida and also officer [indiscernible]; and Takakazu Momozuka and they are the members from TDK side. Thank you again for your time and contributions. This is Tetsuji Yamanishi. I'd appreciate your precious time despite your busy schedule to attend our full year financial performance for fiscal year March 2022. I'm so happy to have so many of you. If I may, now I'd like to go through the financial key points for the consolidated numbers. During the period under review, the respread of the new coronavirus infection and concerns about the political conflicts include tensions between the U.S. and China, resulted in the prolonged supply chain restrictions on parts procurement and sluggish growth in automobiles and smartphones and others. But the economic and the social activities started to become normalize. Production activities continued to recover, resulting in a firm demand for electronics, which further resulted in the growth in revenue in all the segments. Passive Components expanded itself and the sensors became profitable. We enjoyed really good balance overall. Net sales was up 28.6% year-on-year, and operating income was up 49.4% year-on-year, reaching record highs, both in sales and operating income. In the automotive market, although the production volume remained at the same level as the previous year due to the supply chain constraints in parts procurement, the demand remained strong due to an increased parts installed and the customers' efforts to secure parts inventories as a result of the further development of the xEVs and accelerated electrification such as ADAS and the sales of passive components and sensors expanded. In the ICT market, demand for the laptops, PCs and the tablets remained strong in the period under review. Well, demand for the data centers recovered and the production of HDDs for servers remained strong. Sales of personal computers, tablets and HDDs increased as a result of the strong production of those products; HDDs for servers and recovery in demand for data centers. In the smartphone market, production volume was lower than the previous fiscal year due to the impact of re-expansion of the new coronavirus infection, but sales of rechargeable batteries, sensors and HDD has expanded. In the industrial equipment market, CapEx remained strong, and the sales of products for semiconductors and other manufacturing facilities, renewable energy and in other applications increased. We are so happy given these initiations because we're able to move to an expanded sales of Passive Components and power supplies for industrial equipments, while rechargeable batteries, including household use ESS sales of medium-sized batteries grew. Net income increased significantly in the fourth quarter due to the approximately JPY 60 billion gain on valuation of investment securities and income on an actual basis, actual business basis, excluding valuation gain, also increased from the previously announced full year forecast. We have revised our year-end dividend forecast by JPY 9 per share in light of the improved earnings per share. Next, I will explain the highlights of the performance. Due to the dollar and other FX changes, net sales was at JPY 125.7 billion and operating income was up about JPY 6.9 billion. So net sales was JPY 1,902.1 billion, up JPY 423.1 billion or 28.6% year-on-year. Operating income was JPY 166.7 billion, up JPY 55.1 billion or 49.4% year-on-year. As has been already announced on April 27, we put about JPY 60 billion unrealized value from the investment securities into nonoperating income. With this done, income before income taxes and the net income grew dramatically. The numbers are JPY 234.2 billion and JPY 177.5 billion, respectively. TDK was able to renew those profit numbers. Earnings per share became JPY 468.36. The FX as dividend has not changed much for operating income in the U.S. dollars and the Japanese Yen, which the JPY 1 fluctuation, it was about JPY 1.2 billion, the same from the previous year. In the Yen and Euro, the impact was estimated to be about JPY 200 million. Next, I'll go through the highlights for the full year by segments. Passive Components, net sales was JPY 505.2 billion, up 24.1% year-on-year. The automotive production units level off from the previous year. But due to the increased number of parts used, automotive sales are continued firm in its growth. In the Industrial Equipment, the demand for the renewable energy as well as the manufacturing facilities turn out to be firm. The demand for IC market system had a slight increase due to the declined number of the smartphone products. Operating income was JPY 77.7 billion, up about 1.9x year-on-year. Operating margin became 15.4%, showing dramatic growth and profitability. By business segment, excluding our High-Frequency Components, in the segments where automotive ratio is high, particularly in the capacitors and inductive devices made great contributions to the improved profitability for the entire segment as a whole. Next, I will cover Sensor Application Products segment. Net sales was a record high of JPY 130.8 billion or up 60.8% year-on-year. Operating income side, though we had onetime spend of JPY 2 billion in the fourth quarter, for the full year basis we achieved a profit of JPY 2.7 billion on a full year basis. Temperature and Pressure Sensors grew for the automotive market and for the home appliances, Hall sensors and also grew for the automotive market. With this, earnings improved quite significantly. TMR sensors enjoyed a great growth in sales and profit, thanks to the increased demand in the ICT market as well as new adoption of the product. As for MEMS sensors, expanded customer basis and the applications -- the benefit of our motion sensors and MEMS microphone business helped us to improve our earnings. So we're able to reduce the loss number quite dramatically. Next, I will touch upon Magnetic Application Products segment. Net sales was JPY 248.4 billion, or 24.7% increase year-on-year. Operating income was JPY 4.6 billion, becoming profitable from the last year's loss. HDD heads, since the beginning of the fiscal year, the demand made a good recovery with the servers for data centers. Nearline HDDs had robust sales. Excluding a onetime spend, this business grew in profit. So [ 38% ] in volume, giving us a good profit opportunities. HDD Suspension Nearline and Suspension heads sales turn out to be quite firm. We enjoyed an increase in revenue, excluding the onetime spend actually on a substantial basis we became profitable. As for the magnets, for the automotive markets, turned out to be quite strong. So we are able to increase revenue. But due to the rising cost of the raw materials, we are still having loss situations. Next I'd like to talk about the Energy Application sector now on JPY 965.3 billion, operating profit on JPY 123 billion. Year-on-year basis, 30.4% increase; 16.4% loss in terms of profit. And as for the rechargeable battery, there are the FX change and also the rising cost of the raw materials which has been transferred into our price. Excluding that, smartphone growth -- and on year basis, declined, but ICT sales stayed at relatively slight increase, but rechargeable batteries and also in home appliances, particularly in the energy storage helped us to expand in sales opportunities and then the substantial business, we were able to enjoy the 90% growth. As for the operating income, for the ICT, even though we did not -- we are not able to increase the real numbers, but starting from the third quarter, we suffered from the high rise in the raw materials, pushing us -- pushing down the profit. And also the JPY 15.4 billion as a royalty. So all in all, we suffered loss from the previous year. In the Power for the industrial equipments, semiconductor equipment and others, there has been a strong demand for these sort of segments. We enjoyed both growth in revenue and profit. Next, I'd like to move on to the operating profit, JPY 51.1 billion (sic) [ JPY 55.1 billion ]. Analysis behind this number. The first, on the Passive Components, sensors became profitable and given us good opportunities and also HDD heads, [indiscernible] recovered. All in all, even though we had some impact in this -- the rechargeable batteries and actually [ JPY 85.9 ] billion, the benefit actually has been still with us. So we actually went ahead in the streamlined stream, learning our cost and structure. And also now, we had the structural reform actually given us the good opportunity for JPY 38.9 billion. SG&A, the JPY 64.5 billion increase. Major factor turned out is rechargeable batteries have licensing fee about JPY [ 15 billion ] increase. And also in Passive Components sales initiatives, the increased on sales cost. And also COVID-19 resulted in the quite tough situation in terms of distribution costs and also the [indiscernible] costs actually went up. The structural reform in the fourth quarter, of course, onetime spend actually JPY 17.6 billion versus we had JPY 9.6 billion for the previous fiscal year. So with a cheaper year and actually JPY 3.9 billion improvement in profit. So actually, the improvement was JPY 51.1 billion. Next, I will go through the quarter 3 and quarter 4 segmentations and the changes. And also now I'd like to talk about operating income improvements and also the decline. First on Passive Components. The net -- starting from the third quarter, JPY 2.3 billion, 1.8% decline. Operating income, JPY 15.7 billion, 30.6% decline. As for the net sales for automotive, , business was quite firm. But ICT market, smartphones, sales actually went down and also the High-Frequency Components have already declined. Operating income in the fourth quarter, we had about JPY 2.1 billion onetime cost and also due to the Chinese New Year, we suffered these declines. Sensor Application Products, the revenue of JPY 1 billion, 2.8% decline. Operating income, fourth quarter, we had about JPY 2 billion onetime costs, that we suffered from the decline of JPY 2 billion. Temperature and Pressure Sensors, thanks to the good businesses in the automobile market, we had a slight increase. And also, we had the TML (sic) [ TMR ] sensor and smartphone business, particularly the major customers and new products launched were down due to the seasonality. And also Motion Sensors, starting from the third quarter actually leveled off. Operating income, TMR Sensors went down, resulted in a decline in profit. MEMS Sensor, due to the increased R&D costs, the slight decline in profit and also the energy cost was up and resulted in the decline in the profit. Next, Magnetic application, the JPY [ 5.8 ] billion in revenue, 8.7% decline. Operating income, fourth quarter, we had onetime spend about JPY 2.8 billion, and that we suffered from the JPY 3.4 billion. Revenue, data center demand went down and HDD heads sales volume actually for Nearline and also for personal computers, again, went down about 19%, HDD Assembly sales volume actually went down about 70%. So we suffered from these major declines. HDD Suspensions, slight decline. As for the Magnetic business, for automotive market, we had a firm business, giving us a slight increase. Operating income HDD heads, with still declined volume and also Chinese New Year. Again, our business had been off and so giving us a decline in numbers. Suspension actually, we had some slight decline in magnetic businesses actually onetime cost that still we suffered from the more loss. Energy Application segment next. The net sales, JPY 17.9 billion, 7% increase. Operating income, JPY 12.5 billion net, 32.1% decline. As for the rechargeable battery in smartphone production, volume went down. Because of that, well, we suffered somewhat, but again, on FX situations and also, we're able to actually transfer the surged prices [ into new prices ], So the result in this Industrial Equipments and actually power supplies, now we had a slight increase. As for the operating income, rechargeable batteries, raw material rates in the fourth quarter, the materials cost went up further and pushing us down our profit. Industrial equipments, due to the expanded production we were able to increase the number to some extent. I went through the highlights of the full year basis. Thank you. As of April 1, this year I became president. This is [indiscernible]. I'd like to thank you for your precious time and participation. Here, if I may now like to explain our full year forecast for the fiscal year, ending March 31, 2023, as well as the progress of our medium-term plan. First of all, I would like to explain our consolidated earnings and dividend forecast for the fiscal year, March 2023 and the market background on which they are based. In the fiscal year ended March 2022, the global economic growth rate was 6.1% due to the recovery from the corona pandemic and the growth rate and forecast for the fiscal year ending March 2023 was revised from 4.4% down to 3.6% in April. Although the production activity is recovering from the pandemic and the economy is accelerating on its normalization, we believe that there are still concerns about further macroeconomic downside risks in the future due to the risk of higher than expected interest rates and the situation in Russia and Ukraine and the lockdown caused by the respread of the corona infections in some regions. As for the production volume of each major set of products, the production volume of automobile is expected to increase from the previous year. And the production volume of smartphones is expected to remain unchanged, but the production volume of PCs and tablets, which had been rather at a high level, but are going to the decrease from the previous year. Furthermore, we expect the impact of the surging energy and the materials prices due to the heightened geopolitical risks to continue. Based on the production volumes and orders received for these major devices, we project full year net sales of JPY 2,200 billion; operating income JPY 185 billion; income before income taxes of JPY 190 billion; and net income of JPY 145 billion. The assumed exchange rates are JPY 120 to the U.S. dollar and JPY 130 to the Euro. Based on the increase in earnings per share, we expect to increase the annual dividend from JPY 78 per share after 3 for 1 split in the fiscal year March 2022 to JPY 106 per share in fiscal year March 2023. Capital expenditure is expected to be JPY 300 billion; depreciation and amortization, JPY 200 billion; and R&D expenses, JPY 190 billion. As we have already announced, we will voluntarily adopt the International Financial Reporting Standards, IFRS, for the fiscal year March 2022 instead of conventional U.S. GAAP. The full year forecast for the fiscal year March 2023, which we have just explained is calculated based upon IFRS. And the figures for the fiscal year ending March 2022, which will be used as a basis for comparison as shown -- as reference for the values, after being replaced by the IFRS standards. The JPY 6.2 billion gain on the valuation of investment securities recorded in the fiscal year ended March 31, 2022, is included in the nonoperating income and U.S. GAAP. But under IFRS, it is included in other comprehensive income on the balance sheet, not in operating income. Next, I will explain the demand and production volume for major devices related to our company. We assume that the automobile markets, including commercial vehicles, will reach 83 million units in the fiscal year March 2023, up 5% from the previous year. Despite this investment in EVs and eco-friendly vehicles, which have a large impact on our business performance, it is accelerating, and we have assumed a 43% increase in xEV in the markets to 14.4 million units. I believe that this situation is going to continue for some time to come. On the other hand, smartphones, which represent the ICT market, are expected to reach 1,319 million units; the same level as the previous year. And the number of 5G smartphones is expected to continue to expand, reaching 663 million units. In addition, while the overall HDD market is shrinking, we expect the Nearline HDDs for data centers to grow to 77 million units. As for PCs and tablets, which had been performing well in the corona pandemic due to the work and the study starts at home. We expect them to remain negative year-on-year. we believe it is necessary to monitor component demand trends while keeping our close eye on the final set sales trends as the macroeconomic [ contents ] remain uncertain.

Next, let me talk about the image of changes in the sales by segment in March 2023. I start with the Passive Components segment and our business with the automotive markets will exceed the growth rates of that automotive vehicle production units [indiscernible] . And also, we expect that the increase in the revenues in the industrial equipment markets and Passive Components segment as a whole. We expect 7% to 10% of the growth of revenues year-on-year. And we also expect that the further expansion of the demand in the mid and long term, so would like to make that aggressive investments so that we can capture this opportunity and make investments and developments and the production capability. As for the Sensor Applications segments and magnetic sensor mainly for the TMR sensor for the ICT use or that MEMS microphone have expanded as an options and also that Temperature and Pressure sensor, for the Hall sensor will be an increase. And based on the further electrification of the vehicles, and all in all, we expect a 13% to 16% revenue growth. For the Magnetic Application products segment, although the production units of HDD have been struggling, now investments and the data center is still active and we expect some steady demand for the Nearline HDD and the total -- the volumes of HDD will increase, and we expect to bolster revenue growth of 15% to 18%. We also expect that the Magnet business will increase its revenues and with that expansion of xEV business. As for the Energy Application Products segment, although the production units of the smartphone will be flat, we expect an increase of the business for the medium size of the batteries for the ESS or the e-bike usage. And the standard power supply business will increase with that -- the increased demand of semiconductor manufacturing equipment or infrastructure, and we expect, all in all, 17% to 20% of revenue growth. Next, let me talk about that -- about the Value Creation 2022, that's our midterm plan, and let me talk about the progress of this midterm plan. As we have explained last year, we would like to achieve the improvements of the [indiscernible] values and by making a contribution to the EX and DX, that is the social trend, so this is our major objective. The KPI, the sales, or the profits or the capital allocation plan is shown here on this slide. But in the next page slide, I would like to talk about the point of the progress of our midterm plan. First of all, for the progress of the growth strategy and for the Passive Components and both for the revenue and profitability, it will exceed in our objectives so far. And the Sensor business have it now, recover its profitability and faster than we expected, and we can achieve that, and profitable business on a full year basis, and for that, the power cell business of the secondary battery have now been on plan. And also an HDD head business have recovered its profitability, and we have launched the MAMR, that is the next-generation technology. When it comes to capital allocations, initially, we investments -- we make investments of 60% of allocation out of JPY 750 billion of CapEx in the next 2 years to the Energy Application segment, but we have changed the strategy due to the change of the business strategy and the market. And now we have to reduce it too, that allocation to the energy application, from 60% to 40%. On the other hand, we have boosted our investments from that to Passive Components from the 20% to 30%. We try to just capture that opportunity for the growth for the next-generation head or the TMR sensor. So that's why we have dramatically changed the allocation plan. When it comes to the financing the cash flow, now we have invested JPY 100 billion for this stable procurement for the battery related materials. And this is implemented as part of the strategy and as a result of that, it was given and was difficult to achieve that about the positive free cash flow after return to the shareholders in this midterm plan, but we needed this investment from the mid- and long-term perspectives. And this is the needed upfront investment for the sustainable competitive power. On the other hand, and cost increase of materials and transportation, it must have affected the finance, but now we are trying to do utmost to minimizing impact by passing the cost onto the price or the improvement of the productivity. So now we're also trying to focus on making the unprofitable business to be and improve its profitability. Next, please go to the right-hand side of the slide, this is about our efforts to improve the social value from the perspective of ESG. I'll start with the E - Environment. And for the first time in November 2021, we had issued the JPY 40 billion worth of sustainability-linked bond. Shown here on the slide, in order to attain to the objective by the FY2025 and in the lower energy and renewable energy, we are with both of the pillars for making that reduction of CO2 emission. Next, let me talk about S - Society. Starting from March 2018, we have been opened several operations and global HR had office in Munich and Germany, including [indiscernible] planning and diverse activity. And also, we try to enhance more female engagement in projects for achieving the 15% ratio of female managers. Last of all, let me talk about the G - Governance. Now we have laid out that the global common rule they [ complied by all the group companies ]. And at the same time, we'd like to promote the environment and the transparency for the employees and in operations. So we would like to have about this autonomous and the distributed type of organization structure. So we would like to achieve that as an agile and proper decision-making and the front line of the business in each region and the company. Next, let me talk about the key points of the future initiatives by segments. When it comes to the Passive Components business, about the 40% of the business is based on the automotive market. But in there, we experienced the dramatic change in that the interest vein and customer structure change, and we have to deal with it flexibly. So although the production of the [ automobile ] is struggling, we were focusing on the EV and ADAS related to the products, and we'll try to keep expanding our sales and profits. And at the same time, already we have announced the release. Now we have decided to build a new factory for the MLCC. Let me explain about overview of this new plant and new factory, building plant. So this is the one we have the new factory within the land of the Kitakami factory, which is one of the manufacturing base of MLCC. The construction will be completed on June 2024 and we will the start the operation in September the same year. This is the new factory that cover [ end-to-end ] productions from the materials to the finished products and also into the considerations to the energy conservations and CO2 reduction, mainly manufacture -- this factory manufactures for the automotive-related products, for example, that's the high-voltage converging units like ADAS and EV, and with it just the product will be the smaller size and also the high performance, high reliable products will be manufactured in these plants. So combining both this new factory and also the existing enhancement capacity, and it has been planned by the end of 2024, we will expand that production capacity 190% compared to the March 2021. Next, let me talk about Sensor Application segments. We could achieve that, to making the business profitable last year, but now in order to further achieve that midterm business plan, objectives, we would like to continue our expansion of our customer base and application base. Now Temperature and Pressure Sensors and automotive, Hall sensor, we are expecting a steady increase of revenues and also for the Magnetic Sensor mainly for the TMR, MEMS, microphone. And the application for the digital transformations will be the new areas to explore to expect a further expansion of business and revenues. When it comes to the Magnetic Application product segments, although production units of HDD have been declining, still the investments in the data center is active, and we expect that steady demand in Nearline HDD and as an HDD head as a whole. The total production units will increase, and we expected the incremental revenue. And this year, we start this, the mass production of MAMR technology, that is next-generation head and then also for -- and we'd like to just expand that suspension application products to the areas other than HDD. Also for the Magnets, we like to make our [ atmosphere ] to improve that profitability with the improvement of the productivity. So when it comes to Energy Application Products, now we expect that -- and since the smartphone production is flat, so that we'd like to explore the new areas of the medium size of the batteries like ESS and e-bike and with the joint venture with CATL, we'd like to make the growth and [indiscernible] balanced approach and the investments and growth. And we'd like to explain about more details about joint venture from Mr. Sashida. That's all my presentation. Thank you very much. Thank you.

Okay, next, the joint ventures with the CATL and Energy Application Products business. I'm Sashida. Thank you very much. I'm going to explain this joint venture. When it comes to the establishment of the joint venture with CATL, we already announced April last year, but let me explain about the current progress of this joint venture operations and also our future perspective. First of all, let me talk about the background of breaking into this market of medium size of the battery as well as the background of this business alliance with the TATL. We have so far focusing on the small-sized battery for the ICT, and we could achieve very high growth. But now we expect that this -- the ICT market, the demand for small battery would decline. On the other hand, about the large size, the battery for the EV or this medium-sized battery for the ESS and the e-bike will increase. So that on our estimates the medium-sized battery market will become about 4x of the small-sized battery in 2025. So in order to become the winner and this will be successful in this rapidly growing market, we needed to just take advantage of the technological and management resources in a timely manner, time to market, time to volume. This is the key for the success. Our battery business have become a current size of the business in the past 20 years starting from the CATL. And the medium-sized battery markets will expand to the larger size, more higher than in the small size battery market. So that's in order to be winner in this rapidly changing, rapidly growing market, we needed to -- we need more of tremendous technological and also management of resources. So now we already have started as a business by the stand-alone operation by the TDK ourselves alone. But now in order to make that more efficiently and the faster growth in a very shorter period of time, and at the same time, the long-term procurement of materials and synergy for this development efforts. Do we have [ determines ] to have this business alliance with CATL? We have the similar corporate culture with CATL and also we have the experience and partially some joint development program in the past. So that I think we think that we expect the synergy speedily and faster. At the same time, cross-license agreement with CATL, not only for that the medium size in the battery, the technological resources of that medium size of battery, but also we can take advantage of this cross-license to the small size of the battery too. So we think that this is essential for a further growth of our business in the battery. Next, let me talk about the holding company and each joint venture and then the capital composition of these companies. 27th of last month, we have announced about the establishment of this new company. The company name is Xiamen Ampeak Technology Ltd and this is a holding company of the two joint ventures and -- so that we can have a more agile in the management of the companies. Now it's located in Xiamen, Fujian Province in China. Now Pack JV, now we have the 70% of stake is now named Xiamen Ampack Technology Ltd. And the Cell JV, then we have a stake of 30% is named Xiamen Ampcore Technology Limited, and these two joint ventures are located in the Xiamen, Fujian Province. Ampcore manufactures cells and Ampack manufactures pack. But now when it comes to the contact of the customers, that will be within the scope of the responsibility of the Ampcore, the cell manufacturer. Next, let me talk about our strategic directions on a mid- and long-term basis with these joint ventures. Left top part of the slide represents that our assumptions of our -- the market size of -- that's the medium-sized battery market. And now we expect we're about 100 gigawatt hour. But now in 2030, the market size will be tripled from the current level. So based on this assumption that this is rapidly growing market for the medium size of the battery, so now first of all, let me just explain about the image of the business going for business ourselves alone in March 2022, that's the medium-sized battery business will account for the 10% in March 2022. On a value basis, it will grow to be the size of JPY 90 billion. As for the long-term basis object, we'd like to have a market share of 10% or higher. And by 2030, we'd like to have, on the capacity basis, we'd like to make the business on par with the current ICT business. So if it's the case, our assumed sales of that medium-sized battery will be JPY 400 billion to JPY 500 billion. Based on this stand-alone business operation scenario, the most important advantage of this joint venture is, as mentioned earlier, we can have the synergy, having complemented with each other. First of all, from the product side, now we have a very good [ at a pouch ] type cell. And at the same time, the CATL can give that about the square and the slim to [indiscernible] cell. And we can combine them together so that we can cover the broader needs of the customers. And now in order to make the aggressive expansion of the market share, we are valuable in this highly expanded markets. when it comes to the technology and not only for the technology but also we can secure that resource, human resources as well as that also for that -- our also that we can have the taking advantage of the other intellectual properties. When it comes to operations, we can expect a scale minute for procurement materials and manufacturing and scale manage and also we can have the synergy of that joint manufacturing technology development. Based on these synergies, we expect one-on-one in not two, but over two, this is what I like to realize. And in the mid- and long-term basis, we'd like to have the top market share in the global market that means that 30% to 40%. So when it comes to that revenue reflected on our consolidated business performance. Now -- that would be just related to the exactly the same level as we -- based on a stand-alone business operation scenario. But on the other hand, the profit, now we can expect the synergies so that we can have the higher profitability compared to the stand-alone business operation model scenario. When it comes to the investments, since we think that's [ about in proper ] and shared the burden under the investments between the joint venture so that we can achieve the actual and the proper growth and the balance was between investment and the growth. Just like this, we're going through the joint venture operations and proceeding with the medium size of the battery business, we can expect to realize that the further growth and high growth. That's all my presentation. Thank you very much for your attention. Thank you.