Investor Relations | IR Events | Performance Briefing

[ 1st Quarter of fiscal 2018 Performance Briefing ]Q&A

Q1. What has been the impact of InvenSense when acquisition-related costs are excluded from the operating loss for the Sensor Application Products business? Moreover, what change from real loss in the first quarter do you forecast for the second quarter onward?
A1. The business of InvenSense, which is included in the loss for Sensor Application Products, is somewhat in the red, but the impact of this is minimal. The operating income in the Sensor Application Products includes one-time expenses of approximately 3.5 billion yen related to the acquisition in the first quarter, which will decrease somewhat in the second quarter, but the amount incurred will be roughly the same. We presume that the amount of inventory valuation-related amortization and costs such as incentives will be roughly the same as in the first quarter, but no advisory costs will be incurred.
Q2. Goodwill increased from 61.0 billion yen at the end of March to 188.6 billion yen at the end of June. What were the expenses related to the acquisition of InvenSense, and how much goodwill does it represent? Furthermore, if amortization will occur in future, what will the amount be?
A2. The final acquisition amount was over 140.0 billion yen. The goodwill balance increased from the end of March to the end of June mostly due to the goodwill related to InvenSense. We except that the goodwill valuation will be completely finalized around the end of this year, so the increase in the first quarter is strictly provisional. Acquisition costs will be allocated to various liabilities and assets, including intangible assets, and the final goodwill will then be decided.
Q3. Since the portion requiring amortization is unspecified, does that mean amortization has not occurred?
A3. In the first quarter, inventory-related purchase price allocation amortization is included in the 3.5 billion yen, and we expect that it will be around the same in the second quarter as well. Amortization costs when patents and intangible assets are evaluated will be incurred starting from this quarter.
Q4. Regarding the plan for capital investment and future expansion, it seems that no changes were made in the first quarter, but with the supply-demand balance growing tighter, will there be no additional capital investment? What are your thoughts on the matter at this point in time?
A4. There has been no significant change in the basic structure of the plan. However, as we discussed in the previous quarter, the question of through what method to respond to the extremely tight supply-demand situation is an issue, especially with regard to the Passive Components. The layout of the new plant in Akita was completed last quarter. We expect that equipment costs will stay within the budget established at the start of the fiscal year ending March 2018.
Q5. With regard to InvenSense, since the previous performance briefing in May, is there a sense of what your strategy will be?
A5. It has been only a little over two months since the closing of the InvenSense deal, but a joint sales promotion began immediately after closing. We have also begun merging our fab and fabless businesses and our packaging and testing processes already, so we have a better sense compared to the previous quarter in terms of both increasing sales and improving costs.
Q6. The results for the first quarter reflect the acquisition of InvenSense, but discounting the acquisition costs and one-time expenses, how are full-year sales and profits being viewed in terms of organic business growth?
A6. For the full year, we forecast that the performance of the Sensor Application Products business as a whole, including InvenSense, will be 1.7 to 2 times greater than the 42.9 billion in net sales of the previous fiscal year. Around 80% of the 1.7- to 2-fold growth will be accounted for by InvenSense. Furthermore, as mentioned earlier, the losses of InvenSense have had virtually no impact on losses for the Sensor Application Products segment as a whole in the first quarter.
Q7. The sales projections for the Passive Components segment have been revised, but what products and fields does this revision involve? Also, it is believed that there is working being done to improve productivity at the new plant completed in October last year. What are the results so far, and what are the expectations for the future?
A7. First of all, there has been growth in infrastructure-related applications, including the railway sector, and industrial equipment-related applications, especially those relating to wind power generation. There is also growth among some air-conditioning-related applications, particularly for film and electrolytic capacitors and certain ceramic products. Orders relating to automotive applications are surging, especially for coils and MLCCs, and there is the launch of new models by a North American customer in the ICT market. We therefore expect growth to exceed projections for industrial equipment, automotive, and ICT applications.
At the new Akita plant, we are proceeding with transferring equipment for improving productivity. We are also adapting to customer 4M changes. With regard to MLCCs and high-frequency filters, as reported previously, model line development for the purpose of achieving the desired quality is proceeding more or less according to plan. We are now considering the issue of how quickly we can introduce and launch new products.
Q8. In the Passive Components segment, Demand is fairly strong for high-pressure application-related components, and the point at which there may not be sufficient material capacity is approaching. Increasing material capacity will be quite costly, which means proactive investment may not be possible unless revenue is increased. Given the strong demand from customers, have considerations been made regarding adjusting the pricing of components in this field in order to proceed with investment? Moreover, since TDK has already invested in a ferrite material plant, increasing new material capacity more rapidly than other companies should be possible. How is this advantage planned to be leveraged? Furthermore, how will the material capacity shortage for the industry as a whole and the experience to date affect business?
A8. As stated, there has been quite remarkable growth in demand relating to medium-pressure and high-pressure applications, especially in the automotive applications. In terms of ferrite-related facilities, we built a new wing on Inakura Factory in Nikaho City last year, and also have plants in Korea and Xiamen. For ferrite, I believe we are equipped to handle EV-related transformers and coils. We are currently considering how to handle ceramic-related materials. Given the current situation, it will be necessary to increase our capabilities. When it comes to creating distinctive products, you cannot maintain a competitive advantage if you do not have your own materials, therefore we intend to make investments in fields where we excel and are able to expand.
Q9. Is there a sense that the ceramics capacitors are changing due to high-pressure application-related components such as mega caps?
A9. That’s exactly right. Thanks to our pursuit of two-terminal component technology, we believe our products will be able to remain competitive. In particular, since substrates will become even smaller in the future, increasing the reliability of terminals will be extremely important. In that sense, I believe mega caps and soft terminations will be crucial, so our focus will be given to the growth of these products.
Q10. The sales forecast for the Magnetic Application Products segment has also changed since the announcement of the previous quarter’s results. Has there been a change in the market assumptions for hard disc-related products, and if so, what has changed?
A10. For hard disc TAMs, we project sales of around 400 million units, as initially forecasted, so there is no change there. The quantity of heads has gone basically unchanged from the level anticipated at the start of the fiscal year ending March 2018.
Demand has increased in the areas of magnets and power supplies, especially in relation to industrial equipment, so the decline projected in the full-year forecast for the Magnetic Application Products segment has decreased somewhat.
Q11. Energy units are a new business area in power supplies. How can the development of this market be seen going forward?
A11. We will be making energy units, one of the key pillars of our growth, after sensors, and we expect the market to expand from the next quarter onward, including industrial power supplies, EV power supplies, DC-DC converters, and batteries. This should be clearly indicated in the next medium-term strategic plan. We recognize that increasing the speed of new product development will be key to increasing sales of power supply products.
Q12. There is quite strong demand for power supplies-related batteries used in mobile applications, industrial equipment, ESSs, and robotics, where there is a shift toward use of power supplies. What is the current situation with regard to that?
A12. We are currently at the stage of launching a model line and developing prototypes in Japan. Our basic aim is to meet demand with pouch cells, but it’s not simply a matter of expanding production of the batteries for consumers and ICT that have been manufactured to date. We have to integrate the required technology, and we’re in the middle of that process now.
Q13. The upturn in performance for batteries has been explained by factors such as strong sales to a North American customer, their use in a wide range of equipment by Chinese customers, and increased sales for new applications such as drones and game consoles. To what extent is demand exceeding initial expectations?
A13. With regard to performance being considerably higher than expected in the first quarter, North America does not account for a very high proportion of battery sales, so while there has been an upturn there, it has not had that much overall impact in terms of smartphone batteries. However, there does seem to be a fairly significant upturn for applications other than smartphones, including tablets. In China, batteries for smartphones are exceeding the initial estimate. Based on the overall smartphone production situation, the trend is slightly different from that for passive component-related applications. One reason for this is that the range of equipment using them has expanded, from high-end to low-end. Mid-end to low-end applications are increasing for emerging economies. In addition, with regard to demand in the battery market as a whole, we assume that we received a lot of orders in the first quarter. In the second quarter, it is expected that there will be sales growth for North America, which is commensurate with the growth in the number of new machines. For China, rather strong demand was seen in the first quarter, but conversely, we do not project that this will grow significantly in the second quarter. Therefore, we estimate that overall growth from the first quarter to the second quarter will be around 7% to 9%. The growth rate for game consoles and drones is relatively large, but the products do not yet represent a very large proportion of the total sales amount.
Q14. With the supply-demand balance becoming tighter, including for MLCCs, what is the trend with regard to pricing for passive components and film application products? Since the price of cobalt and nickel is rising, does that mean the price of rechargeable batteries is increasing?
A14. With regard to MLCCs in particular, there has been a significant decrease in price, depending on the use and product, and we expect that there will continue to be a certain degree of price adjustment by companies. In terms of the impact on rechargeable batteries, the price of cobalt, which is a key ingredient, has been rising steeply since last autumn, and that increase has been reflected in prices to some degree throughout the whole industry. In the breakdown of operating income change, sales price reduction accounted for a 14.9 billion loss in profits, but this is basically within the normal range when it comes to the impact of price reduction. The steep rise in material prices has been offset in the rationalization and cost reduction line item, so that increase has been absorbed through pricing adjustments and cost improvements.

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