TDK Corporation (6762) Earnings Call Transcript & Summary

Now it is time to start the full year performance briefing of TDK Corporation for the fiscal year March 2025. Thank you very much for taking time out of your busy schedule to attend the briefing today. First, let me introduce the attendees. President and CEO, Noboru Saito; Senior Executive Vice President, CFO, Tetsuji Yamanishi; Executive Vice President, Shigeki Sato; Corporate Officer, Fumio Sashida; Corporate Officer, Takao Tsutsui. That are all the attendees. Today, we will present the results for the fiscal March 2025 and our projections for the fiscal March 2026. And before that, Mr. Saito will summarize our message for today and the progress on the midterm management plan, followed by a Q&A session. We plan about 90 minutes for the entire session. Please note that today's materials are available on our website in both Japanese and English. So please refer to them as well.

Hello, I am Saito. Thank you very much for joining us today. First, let me start by sharing what we would like to communicate to you today. In the fiscal year ending March 2025, we posted record high net sales and profits. And free cash flow also exceeded our expectations, and we revised the shareholder return upward from the initial plan and increased the dividends. For the fiscal March 2026, with the impact of additional tariffs set by the new U.S. administration, the economic environment is highly uncertain, so we prepared the forecast based on 2 scenarios, base and risk scenarios. For shareholders' return, even in the risk scenario, we plan to maintain JPY 30 per share. This is the second year of the midterm plan. We will touch on the progress, especially our robust portfolio management that is the progress of our growth strategy. I will talk about the progress of the businesses to be intensively monitored as well as our investment and growth strategy in the AI ecosystem, which has great potential in the mid- to long term for the company. We are also enhancing our dialogue with investors and analysts. We plan to provide a detail of our progress on bolstering pre-financial capital, another pillar of our midterm plan on September 1. These are the points I want to cover today. I pass the floor to Mr. Yamanishi.

This is Yamanishi. Now I will illustrate the full year performance briefing and fiscal year ending March 2025, and I'll explain consolidated results highlights and the full year projections. In the electronics market related to our performance, production of ICT-related products increased year-on-year. Demand for smartphones, laptop, PCs, tablets and others was strong. Demand for Nearline HDDs for data centers also recovered significantly. On the other hand, in the industrial equipment market, CapEx demand remained sluggish. And in the auto market, demand for battery EVs was stagnant, resulting in parts demand falling short of initial expectation. In this business environment, with a decrease in demand in the automotive market, sales of passive components and sensors decreased and due to a late demand recovery in the industrial equipment market, sales of power supplies for industrial equipment, passive components and sensors decreased. On the other hand, parts demand recovered in the ICT market and with contribution of new products, sales of sensors, HDD Heads and Suspensions and small capacity rechargeable batteries increased significantly and the sales increased by 4.8%. Due to the significant yen depreciation, increased shipments of products for the ICT market and the rationalization and the restructuring implemented in the previous fiscal year, operating profit increased 29.7% year-on-year. Both sales and profits reached record highs. Next, the summary of the full year results. Exchange rate fluctuations had a positive impact of approximately JPY 95.7 billion to sales and JPY 19.7 billion to operating profit. And sales recorded JPY 2,204.8 billion, up JPY 100.9 billion or 4.8% year-on-year. Operating profit, including onetime expenses of JPY 20.2 billion was JPY 224.2 billion, up JPY 51.3 billion or 29.7% year-on-year. Profit before tax was JPY 237.8 billion, up JPY 58.6 billion or 32.7% year-on-year. Net profit was JPY 167.2 billion, up 34.1% year-on-year. All lines reached new record highs. Earnings per share was JPY 88.1. As for the currency sensitivity, we estimate JPY 1 fluctuation to the dollar to be an annual increase of approximately JPY 2 billion as in the previous calculation and to the euro to be an increase of about JPY 300 million. Next, the situation by segment for the full year. First, Passive Components. Sales to the automotive and industrial equipment markets decreased, resulting in net sales of JPY 559.6 billion, decreased by 1.1% year-on-year and operating profit, JPY 34.1 billion, decreased by 36.8%. Ceramic Capacitors and Aluminum Film Capacitor having a high sales mix to the automotive and industrial equipment markets declined in sales and profits. Inductive Devices sales decreased to industrial equipment, but increased to the ICT and automotive markets and increased in sales and profits. High-frequency components also decreased in sales to the ICT market and with an impairment loss of JPY 10.6 billion, it recorded a large loss. Piezoelectric Material Products and Circuit Protection Components decreased in sales to the ICT and automotive markets and the sales and profit decreased. Next, the Sensor Application Products business. Sales increased 5% year-on-year to JPY 189.5 billion. Operating profit decreased 17.5% to JPY 5 billion. Sales of Temperature and Pressure Sensors increased, with increased sales to the industrial equipment and automotive markets, but the profit decreased because of previous year's P&L included onetime gain from asset sales. For Magnetic Sensors, sales increased due to higher sales of TMR sensors for smartphones and whole sensors to the automotive market, but due to higher expenses of investments for ramping up production, profit decreased. MEMS sensors, sales of microphones increased to the ICT market, but motion sensors for automotive and industrial equipment decreased. Hence, overall MEMS sensor sales decreased. Magnetic Application Products business recorded sales of JPY 223.6 billion, significant increase of 21.4% year-on-year and operating profit turned to positive. HDD Heads and Suspensions, demand for Nearline HDDs for data centers increased by about 1.5x year-on-year. Both HDD Heads and Suspensions turned to profits. Heads sales volume increased by about 30% year-on-year and in particular, volume for Nearline HDDs increased by about 2x. Although the volume is slightly below the post-restructuring breakeven point with an improvement in the mix and the utilization, it turned to profit. Suspensions exceeded the breakeven point and steadily generating high profitability. Magnets recorded lower sales and profit sales decreased in the automotive market. Energy Application Products, sales increased 4.9% to JPY 1,176.5 billion and operating profit recorded JPY 234.4 billion, significant increase by 19.8%. Rechargeable batteries, selling prices deteriorated due to lower material prices, but the mix improved and the volume increased with the launch of new smartphone models and the profit increased significantly and the profitability improved. Power supplies for industrial equipment. Sales and profit decreased as demand did not recover and the sales for EV power supplies also decreased due to a slowdown in battery EV sales. Next, the factors of the changes in segment sales and OP on Q-on-Q basis from the third quarter to the fourth quarter. First, Passive Components segment. Sales decreased by JPY 4.6 billion or 3.3% Q-on-Q and operating profit decreased by JPY 18.8 billion. Demand in industrial equipment market increased slightly, but demand in the automotive market remained sluggish. And in the ICT market, demand for smartphones decreased due to seasonality, resulting in a decrease in sales of Ceramic capacitors, inductors and high-frequency components. Aluminum Film Capacitors sales increased due to increased sales to industrial equipment. Ceramic Capacitors and Inductors sales and profits decreased and high-frequency components posted an impairment loss of JPY 10.6 billion in the fourth quarter, resulting in a large loss in OP. Next, Sensor Application Products. Sales decreased by JPY 1.6 billion or 3.3% and OP decreased by JPY 2.5 billion. Temperature and Pressure Sensors remained flat. Sales of TMR sensors for smartphones declined due to seasonality, and Magnetic Sensors sales and profits decreased. MEMS Sensors recorded restructuring cost of JPY 600 million and the loss increased. Next, the Magnetic Application Products segment. Sales increased by JPY 3.8 billion or 7% and OP decreased by JPY 2.9 billion. Heads for Nearline, volume increased by 30% and HDD Heads sales increased, but it recorded loss due to the fixed asset tax payment. But in real terms, profit increased. Suspension sales and profits decreased in Q4 due to advanced shipments in the third quarter. Magnets saw a decrease in sales and profits. Next, the Energy Application Products segment. Sales decreased by JPY 43.4 billion or 13.4% and operating profit decreased by JPY 35.6 billion, 48.5%. In Rechargeable Batteries, sales of small capacity batteries for ICT were as expected, but sales and profit decreased due to a onetime cost of JPY 2.3 billion for disposable -- disposal of equipment. Demand for Power Supplies for industrial equipment is showing some recovery and sales for profit increased. Sales for Power Supplies for EVs are increasing, but losses continued. Next, analysis of full year operating profit of JPY 51.3 billion. Volume increase of rechargeable batteries, HDD Heads and Suspensions resulted in an increase by JPY 42.7 billion. Rationalization and cost reduction of JPY 24.3 billion and restructuring effects of JPY 9.4 billion absorbed JPY 31.4 billion decrease in profit from selling price fluctuations. SG&A expenses increased by JPY 13 billion due to higher R&D expenses as Rechargeable Batteries new product development is accelerated and increase of JPY 19.7 billion from the weak yen resulted in an overall increase of JPY 51.3 billion. Next, situation of the cash flows. For the full year, operating cash flow stood at JPY 445.8 billion, investment cash flow JPY 244.8 billion and free cash flow JPY 201 billion, roughly the same levels we had assumed at the Q3 results briefing at the end of January. In addition to increase in profit with the reduction of CapEx and working capital, we significantly exceeded the free cash flow levels anticipated at the initial projections. Next, the forecast for the production volume of major devices related to the company as assumptions for our performance forecast. The outlook for the global economy in the fiscal March 2026 is very uncertain due to repeated changes in the tariff measures by the U.S. administration. For the production volume assumption of major devices, in addition to the initial base scenario, we have formulated a risk scenario in which demand for major devices in the United States will decrease due to tariff measures. Based on these 2 scenarios, we set a range for our performance forecast. The risk scenario was formulated by predicting how much expected demand in the United States will deteriorate due to higher selling prices and others caused by tariffs from the base scenario. We assessed the automotive market at the range of 1% increase to minus 3% for the total number of vehicles. The volume of smartphones in the ICT market is forecasted in a range of 1.2 billion units to 1.164 billion, decreased by about 3%. The HDD market is on a recovery trend, and we had expected the nearline HDD volume for data centers to increase by 2%, but we incorporated a decline of approximately 5% as a risk. Based on the production volume of the major devices, we prepared the forecast for the fiscal March 2026 using the base and risk scenarios. The currency assumption to the dollar is JPY 140, a significant appreciation from JPY 153 in fiscal March 2025 and all items, including net sales and operating profit will remain roughly flat compared to the fiscal March 2025 in the base scenario. Even the impact of tariffs on business is unclear, we have set the base scenario as a minimum level to be achieved. We plan to improve ROIC slightly to 7.1%. For free cash flow, CapEx will increase and working capital will remain flat, and it is forecasted to be JPY 70 billion. On the other hand, the risk scenario indicates the possibility of a decrease in net sales of about 4% or JPY 80 billion and operating profit by JPY 45 billion compared to the base scenario. ROIC and free cash flow will also deteriorate due to the decrease in profit. We intend to maintain the annual dividends at JPY 30 as in fiscal March 2025, even in the risk scenario. Next, projected increase or decrease in full year sales by segment. The base scenario incorporated the yen appreciation impact to the dollar from JPY 153 to JPY 140. But for comparison, we will explain excluding currency fluctuations. For Passive Components, with increased demand in auto markets such as xEVs, sales is forecasted to increase for automotive, mainly MLCCs, while sales to the ICT and industrial equipment markets are expected to decrease. We expect sales will increase across all businesses to an overall increase of 4% to 7%. Sensor Application Products. Sensors are projected to increase for Temperature and Pressure Sensors and magnetic sensors for automotive application. MEMS sensors sales are forecasted to increase for ICT and game consoles, overall increase of 11% to 14%. Magnetic Application products, HDD production volume is projected to decrease by 2%, but Nearline HDD production volume will increase by 2%, while head sales volume is expected to increase by 16%. Suspension sales will increase by 25%, resulting in an overall increase of 9% to 12%. Lastly, Energy Application Products. Demand for smartphones will remain strong, and we forecast an overall sales increase of 3% to 6%. Next, changes in operating profit for the fiscal March 2026. On an actual basis, excluding the impact of the stronger yen and the lower onetime expenses, profit will increase by JPY 20.8 billion. We project profit increase of JPY 70 billion due to increased sales across all businesses. Due to an uncertain economic environment, we assume JPY 65 billion of selling prices fluctuation with stronger pressure, a JPY 40 billion increase in profit from cost improvements and restructuring, and we plan to strengthen development of new products and technologies, mainly for rechargeable batteries and SG&A expenses will increase by JPY 24.2 billion. Including the decrease in onetime expenses and the impact of stronger yen, we project OP to be roughly the same as in the previous fiscal year. In the risk scenario, impact is JPY 45 billion from reduced demand due to tariffs. Projections for various expenses. We plan to spend JPY 280 billion on acquisition of fixed asset, JPY 205 billion on depreciation and JPY 260 billion on R&D expenses. Finally, shareholder returns. In the current midterm management plan, considering changes in the business environment, growth investments, ROE and other factors, we plan to return profits to shareholders at a payout ratio of 35%. Based on the levels of free cash flow, we plan to enhance shareholder returns, but considering the current uncertain economic environment, we plan to pay annual dividends of JPY 30, the same as for the fiscal March 2025. In the risk scenario, profit levels are projected to fall significantly, but we intend to maintain the annual dividends of JPY 30. In that case, the payout ratio will be about 42%. And this concludes my presentation. Thank you very much.

So now Mr. Saito will explain the progress of the midterm management plan, please.

First of all, I would like to explain the measures against risk scenario. Although the outlook is very difficult to predict. And there are concerns that stagflation will continue in the U.S., and there will be a slowdown in the global economy. So against this macro environment, we will continue to prepare as best. However, it's not ours to change per se. Therefore, what we need to do is to focus on what we can control. In other words, we are going to improve and strengthen our capabilities. So therefore, shown here, quality, productivity and technology should be strengthened. And therefore, we will strengthen them. In addition, we will continue to strengthen our financial position in order to deal with risk scenarios. Even in this scenario, we are going to have a balance between growth investment, strategic investment and shareholder returns. Next, I'd like to explain about the KPI. In March FY '25, all KPIs were achieved. In the fiscal year ending March 2026, we have incorporated risk scenarios. However, the target for the final year for the midterm management plan remains unchanged. We will continue to endeavor our efforts in order to achieve this target. Next, I'd like to talk about the capital allocation policy. So therefore, in total, we expect a cash flow of JPY 1 trillion. However, we have the upside. And therefore, in total for 3-year in comparison, we are going to have the upside of JPY 250 billion. Of this, approximately JPY 150 billion will be allocated for shareholder return strategic investment and focus on capital investment. We are going to increase by JPY 100 billion. The increase will be mainly for the energy. So therefore, we are going to have a demand for the small rechargeable batteries. And therefore, we are going to have a related investment in the technical facilities. And also about the strategic investment, I will touch upon later. However, we are going to aggressively focus on AI ecosystem. Next, progress of the 3 points of the midterm management plan. So for the first cash flow enhancement have been already explained, we have overachieved. So therefore, for the progress or the evolution of the Ferrite Tree, we have made progress. So to enhance human capital, we established CHRO position. In terms of strengthening technological capabilities, we are going to work on the [ spinoff ] photodetector POC have been achieved first. And using our Spintronics technology, we are going to have a 10x faster. In addition to those efforts, we will continue to enhance our sustainability activities and DX initiatives to make evolution of the Ferrite Tree. So I would like to talk about the selection of the business portfolio management. So therefore, after the announcement of last year's midterm business plan, we are going to enhance the first-mover business portfolio. So therefore, we are going to focus on growth strategy. And I would like to focus on the priority monitoring business on the left-hand side and also high potential area, focusing on opportunities on AI. So I'd like to talk about the priority monitoring project. So since last May, we have discussed 27 CBUs, and therefore, we have implemented a turnaround efforts. Suspension Application products have already achieved a turnaround. And also for the HDD headings, we are having the right direction. For the 19 CBUs, we are having internal measures towards a turnaround, and we are discussing on strategic options. And for today, at this moment, there are 7 CBUs that we can announce, and therefore, we are going to decide to terminate the business and exit magnet applied products. and also MAS-micro-actuator business, we have agreed to transfer the business. In the Passive Components, we terminated PV solar cell and SESUB, Conductor Embedded Substrate. We are going to terminate this business. And for the EDLC lightning air double layer capacitor, we are going to terminate. And this is a progress at this moment. We are going to accelerate proactive business portfolio management in order to focus on growth strategy. I'd like to talk about the growth business on the right-hand side. We are going to implement the TDK transformation and the major driver will be AI-related market. We define the AI market not only the server and data center, we focus on AI ecosystem, edge AI terminals, AI vehicles, infrastructure and also AI manufacturing process, including semiconductors production. We believe there will be a growth in this AI. And therefore, using our core business, we are going to exercise our opportunities. And therefore we are going to contribute to indispensable applications in order to transform the society. So talking about AI ecosystem, there will be a growth prospect. So as I have explained, our major and new business will make an essential contribution to the growth of AI ecosystem. Specifically, at this moment, it will be around 10% of the total sales. However, in the mid- to long term, we expect to achieve a growth rate of 25% to 30%, as shown on the right midsized Rechargeable Batteries, Heads and Suspensions Passive Components. Today, in addition to these current projects, I would like to focus and talk about the 3 new areas and the applications. The first is predictive maintenance in industrial machinery market in July last year. So we have expected SensEI. And therefore, we have created this company, and we released a new product, edgeRX, various sensors and state-of-the-art AI. This edgeRX will make appropriate and also, they are going to detect the abnormality in the production and therefore, provide a predictive maintenance. Through our unique value proposition, we are going to contribute to the transformation of AI ecosystem. Next, this is a strategic investment in AI glasses. As we explained in May last year, so this will be only 1/10 size of our previous products, and we are making a good development. And also, we are going to focus on PiezoHaptics and all solid-state batteries to make glass lower, lighter and more efficient. Finally, we didn't highlight it much. However, TDK also delivers manufacturing equipment in semiconductor field. These are the FA technology cultivated through the development of automatic mounting machines for electronic components and other products as well as the clean technology. And therefore, we have created a strong position in the market. Our main products are [indiscernible], FOUP, Load box, and this will play an important role in back-end process. Therefore, these product lines are still positioned in the upper right corner of the portfolio. But based on the AI semiconductor growth, we are going to achieve a greater height. We will not only strengthen our manufacturing technology, we combine with material technology in order to provide a new solution and contribute to the whole AI ecosystem. And I have talked about the 3 applications. However, talking about the CBC, we are going to make additional investments in order to become a main driver. So that will be the strategic investment in AI ecosystem in order to further grow the Ferrite Tree. So the major driver to continue to realize this growth, our roots are our unique corporate culture, a venture spirit where diverse human resources continue to take on new challenges, and they will work on equal functional basis to pave the way for social and personal transformation. And also talking about the new company SensEI is one of the example. So including human capital, we are going to put the efforts of the pre-financial capital, and I would like to elaborate on September 1 Investor Day. I mentioned about my commitment a year ago. However, I will not waver from my commitments. In the last fiscal year, we increased the number of dialogues with investors by 30%. And also, we have increased 60% in numbers. We will continue to engage in constructive dialogue and collaboration with you to enhance our corporate value, and we look forward for your continued support. This concludes my explanation. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]