Investor Relations | IR Events | Performance Briefing

[ 3rd Quarter of fiscal 2019 Performance Briefing ]Q&A

Q1. You forecast net sales for the fourth quarter will decrease by 53.5 billion yen from the third quarter and operating income will decrease by 17.7 billion yen, but what sort of risks are being considered? Also, how will sales for each product change?
A1. The fourth quarter is normally affected by seasonality in a significant manner, so such has been factored into the decline. We expect sales to the automotive market to be similar to the that for the third quarter, but overall sales are expected to decrease by 15% from the third quarter. By segment, the Passive Components segment will decrease by 1 to 4%. No major fluctuation is seen in MLCCs, the main factor being decline in Chinese smartphone demand. We do not anticipate a major recovery in the industrial equipment market, either. We expect sales of aluminum electrolytic capacitors, film capacitors, inductors, etc. to fall from the third quarter. For the Sensor Application Products segment, we anticipate a decrease of 8 to 11%. Demand for TMR sensors for smartphones will further fall, which we expect to be a major downward factor for magnetic sensors. We see temperature and pressure sensors remaining almost unchanged from the third quarter and MEMS sensors continuing downward after third-quarter decline in major markets. The Magnetic Application Products segment will decrease by 12 to 15%. The sales index of HDD heads will fall from 81 in the third quarter to 78 in the fourth quarter and we expect a corresponding decline in sales to occur. Magnets will remain nearly the same. For the Energy Application Products segment, we expect a decrease of 27 to 30%. Sales for Chinese smartphones, drones and game consoles will continue to fall from the third quarter. Rechargeable batteries are greatly affected by seasonality in the fourth quarter, so considering that impact, we do not see a major recovery.
Q2. Is there a gap between MLCC sales and orders? Also, has anything changed in your perspective regarding customer inventory, capacity utilization, capital expenditure, etc.?
A2. MLCC orders have been impacted by the rising consumer product inventory levels of Chinese customers. However, the level of automotive use has not changed very much, so capacity utilization rate has not dropped. Moreover, since we have multi-year contracts, capital expenditure is proceeding as planned.
Q3. Will sensor loss be greatest in the fourth quarter? Also, have you made any progress since the second quarter in securing sales for next fiscal year?
A3. We forecast sensor sales will continue to decline in the fourth quarter and remain in the red, but we also expect this fourth quarter to be the bottom and earnings to improve from the first quarter of next fiscal year into the second half of the year. At the beginning of the fiscal year, we talked about our goal of breaking even with business in the second half of the year, but it looks like it will be another year before this occurs.
This fiscal year, we are working to improve the structure of our sensor business by expanding three pillars: customer base, applications and products. We have not started anything new recently but the number of smartphone manufacturer customers for our motion sensors is one the rise, as is the number of models in use. We have already responded to over 100 orders for automotive TMR sensors, and orders for mass production are scheduled to increase significantly over the next fiscal year. We are also expanding sales with new applications such as mobile usage, which we believe will contribute to sales next fiscal year. In addition, motion sensors were adopted for automobiles this year, and this can be expected to grow going into next fiscal year. Mass production of the ToF sensors for VR applications that we exhibited at CES in January began in the fourth quarter. With Chirp's ToF sensors and InvenSense's motion sensors, we will now be able to offer comprehensive solutions including software and algorithms, which we expect will expand our customer base. We also predict various applications for our industrial equipment, especially in robotics. Finally, because we will be significantly increasing sales of motion sensors, barometric pressure sensors, microphones, TMR sensors, fingerprint sensors and other sensors, I firmly believe that the entire Sensor Application Products segment will grow next fiscal year.
Q4. Nine-axis motion sensors are expected to require greater precision. What is your view of this motion sensor market?
A4. TDK has acceleration, gyroscopes and geomagnetic sensors that make up nine-axis motion sensors. However, these all require extremely high precision, so we are stepping up our development of major sensors. We expect to spend money on development not only next fiscal year but over the current medium term as well as the next. I think we will start with technologically-advanced manufacturers and move forward in order of priority.
Q5. Why did income for the Magnetic Application Products segment increase when sales in the third quarter declined from the second quarter? Also, do you expect the product mix to continue to be strong beyond the fourth quarter?
A5. Excluding foreign exchange, sales in the Magnetic Application Products segment decreased approximately 10 billion yen from the second quarter, while income increased approximately 2.2 billion yen, excluding impairment loss. The most significant factors were HDD heads and suspension. First, due to the slowdown in data center demand, the sales index fell from 97 to 81, a decline of roughly 16%, and income decreased accordingly. On the other hand, the proportion of high value-added HDD head and suspension products increased, raising the average unit price and compensating for the decrease in volume. In addition, the earnings of suspension application products improved. This was primarily for smartphones, but the third quarter contained the peak season, during which profitability improvement due to increase in capacity utilization and production efficiency contributed to securing a surplus. Combined with the effect of impairment loss from magnets, total real income increased by 2.2 billion.
As mentioned earlier, data center demand declined sharply in the third quarter, and we expect it to fall a little further in the fourth quarter.
Q6. How did rechargeable battery sales change from the second quarter to the third quarter? You said that capacity utilization rate fell in both quarters, but what were the figures and what are your predictions? Also, how much did operating income decrease with the impact of a time lag between reflecting the lower market price for materials in our sales prices?
A6. Sales in third quarter for the Energy Application Products segment declined approximately 6% from the second quarter, but rechargeable batteries decreased almost the same amount. Segment operating income declined by approximately 8.7 billion yen from the second quarter, affected by the time lag and the worsening of capacity utilization. We expect the capacity utilization ratio to continue to fall in the fourth quarter due to the Chinese New Year, which was taken into account at the beginning of the fiscal year. Regarding the time lag, since the market is flat at this time, we do not think it will have a very large impact on the fourth quarter.
Q7. Regarding rechargeable batteries, when the price of cobalt or some other material rises, you raise the product price, and when it falls you lower the product price, but doesn't this price shift time lag affect overall business?
A7. We purchase materials every month but make arrangements with customers on a quarterly or other basis, so the timing can create a price difference. Although our premise is that market price fluctuations do not affect earnings, since there is a time lag in the price shifts, dividing by quarters can result in the impact you see in the third quarter. In principle, no one benefits from cobalt price fluctuation.
Q8. The company's inventory has increased significantly since the fiscal year ended March 2018. How do you plan to reduce it in the fourth quarter?
A8. Looking at trends in rechargeable battery demand, we made some adjustments in the third quarter, but inventory levels did not fall sufficiently by the end of the quarter. For the fourth quarter, our production plan anticipates the Chinese New Year lowering capacity utilization and affecting demand. We currently have inventory for about 1.8 months. I think you will see inventory shrink in line with sales.
Q9. Do you forecast increases in rechargeable battery sales and income in the fiscal year ending March 2020? How much growth can we expect from this fiscal year on a volume basis?
A9. We see rechargeable smartphone batteries, a major business platform for TDK, remaining flat next fiscal year, so it could fall from this year. While maintaining the current platform, we want to raise our production capacity of mini cell batteries, which are beginning to be adopted for various applications such as watches and wearable devices. In addition, we believe we are likely to begin mass production of a slightly larger power cell in the second half of this year, so we would like to aim for higher sales and income across our battery business. On a volume basis, we continue to aim for double-digit growth.
Q10. You mentioned that you want to raise your production capacity of mini cell batteries, but how do you expect the market to grow in the future? Also, what kind of applications for power cells are you working on?
A10. Mini cell battery sales have increased significantly, especially this past year. Currently, the main applications are watches and wearables, but small product demand is increasing, as are inquiries regarding a range of applications. For power cells, we are receiving inquiries regarding e-motorcycles and home storage batteries, and are working to start business in the second half of next fiscal year. Apart from that, we are also working in robotics and hope to further expand those applications.
Q11. What is your view on the risk of rechargeable smartphone battery profitability being pushed down next fiscal year? Although volume loss is intensifying competition, there also appears to be increases in demand for other applications and in functional changes. Do you think you can maintain the current level of income?
A11. While demand for rechargeable smartphone batteries is leveling off, we are working on developing higher value-added batteries for next fiscal year. These are still smartphone batteries but we are trying to achieve greater differentiation in ways such as enhancing safety and fast charging. We hope to maintain our current positions and ensure profitability by avoiding a race to the bottom in pricing.