Investor Relations | IR Events | Performance Briefing

[ 2nd Quarter of fiscal 2020 Performance Briefing ]Q&A

Q1. There is a gap between the sales guidance for the second quarter, which was announced in the performance briefing for the first quarter, and the actual results for the second quarter. You explained that the demand for products for the automotive market would recover. What caused this gap to be generated?
A1. Last time, we announced the guidance based on the assumption that the demand for products for the automotive market would begin to recover in September. I feel that we were too optimistic. While products for the automotive market declined significantly, those for smartphones were strong, and we were able to acquire market share mainly for batteries. Positive and negative growth were clearly shown as a result. We expect that in the second half, demand for products for smartphones will be lower than in the first half. At the moment, we are forced to see the demand environment conservatively, so we assume that demand for products for the automotive market will not recover.
Q2. The results of TDK overall show that the operating income margin varies among businesses. Could you tell us what you are focusing on at present in steering TDK?
A2. We have recognized once again that Passive Components is extremely important in order for TDK to produce profits sustainably. During the first half under review, the earning power of Passive Components declined slightly, and our issue is that inductors and piezo application products, which are normally our strengths and which are expected to see expanded applications in the future, are growing sluggishly. We believe that a major factor for the variation in operating income margin is the delay in making the sensor business profitable. While the decline in sales of conventional sensors, which previously sold well, was a miscalculation, our efforts to increase customers of TMR sensors and MEMS sensors and expand their applications are steadily bearing fruit. We believe that we will see the outcome of these efforts in the second half, and we expect further growth of the products in the next fiscal year.
Q3. I feel that the profitability improvement of Passive Components is slightly delayed. How will you increase the profitability level in the next fiscal year?
A3. While the profitability improvement is delayed, we are proceeding to improve production throughput, productivity improvement, cost reduction, and streamlining in the current fiscal year. In addition, the batteries business, in which we have number-one products, has entered a virtuous circle, with time to market, time to volume, and time to quality all being short. We must manage Passive Components as well to achieve such a positive cycle. We feel that it is important to increase earning power by having number-one products and increasing the number of such products.
Q4. It appears that the market environment of multilayer ceramic chip capacitors (MLCCs) improved slightly in the second quarter. What is your outlook for the third quarter? Could you also tell us how you will operate the business in the next fiscal year?
A4. We have a somewhat cautious outlook, and we expect sales for the third quarter to remain flat or decline slightly. MLCCs from TDK are mostly for automotive use. However, while we are receiving an increasing number of orders, including 5G-related products for base stations and products related to power supplies, demand for MLCCs for the automotive and industrial equipment markets has been sluggish. Accordingly, we expect that there will be no major changes in the overall demand environment. Next fiscal year, we anticipate demand for products for 5G-related infrastructure and others. We would therefore like to release products meeting the demand and take initiatives to stabilize the supply.
Q5. I believe that canvas filters have been in short supply because you estimated the demand conservatively. Demand for those filters is expected to increase due to ADAS and electrification. Will you make an investment to increase production?
A5. We are planning to do so.
Q6. What are your views on the inventory cycle of products for the automotive market? Because the inventories of automotive components are believed to be decreasing compared to vehicle production, I expect the demand to recover around the second half. I consider that sensors will benefit from ADAS and electrification like MLCCs. What do you think?
A6. Overall, we feel that inventories have been decreasing. Looking at the inventories of distributors, they are slightly large in Europe and the United States, while those in China are becoming normal again. In addition, as you pointed out, sensors from TDK are also used for autonomous driving, safety functions, etc. Given the current environment, however, we cannot be optimistic. We therefore view it slightly conservatively.
Q7. At the beginning of the fiscal year, you projected that full-year sales in the Sensor Application Products segment would increase by 28% to 31% from the previous fiscal year. However, sales in this segment declined 1.5% year on year in the first half. What are your views on the full-year sales at present? What about your plan to move into the black in real business terms in the second half? Could you also tell us what your views on the goodwill impairment risk are?
A7. Regarding the full-year sales in the Sensor Application Products segment, we told you that sales of products for the automotive market would recover to a certain degree in the second half. At present, however, we are forced to revise the projection downward and say that sales will not grow at all in the period until the end of the fiscal year. In particular, the growth of conventional products is unlikely. At the beginning of the fiscal year, we projected that sales in the overall segment would grow 28% to 31%. At present, however, we expect sales to grow 12% to 15% in light of the fact that the first-year results of hall sensors and temperature sensors declined year on year. This is attributed to the fact that there will be virtually no growth in sales to the automotive market. On the other hand, we expect sales to the ICT market to grow more than 30% and sales of products for game consoles and other consumer products to increase by 20% to 30%. New projects on pressure sensors and TMR sensors have been launched, and the customer base of motion sensors has been expanding, although there is a macro influence. Last time, we told you that we would move into the black in real business terms, anticipating the recovery of the automotive market in the second half. At present, however, we expect to move into the black early next fiscal year.
While profits from conventional sensors have been declining due to the economic conditions, sales of sensors, which are expected to achieve strong growth, have been growing steadily. In the medium term, we can expect sales of such products to increase. We also expect to secure profits from conventional products if we can secure the top line. Impairment risk is judged based on the medium- and long-term cash flow plan. In light of the projected demand and profits, we believe that there is no such risk at present.
Q8. You explained before that you would achieve an operating income margin of 10% or higher in the sensor business. Do you still think that this will be possible if sales increase?
A8. We are sure that it will be possible. We have achieved double-digit profits from TMR sensors, and MEMS sensors also bring sufficient profits. Because the number of competitors is relatively limited, we believe that the top line will increase and that we will be able to secure profits if we can release products by identifying the right applications.
Q9. What are your current views on the sales and unit prices of batteries as compared to your projections for the products at the beginning of the fiscal year? I think that the added value of batteries for 5G smartphones will be increased by a countermeasure against heat generation, etc. Do you expect their unit prices to increase?
A9. We expect sales from batteries to grow due to an increase in quantity. Concerning those for 5G smartphones, the required specifications, such as countermeasures against heat generation, quick charge, and high energy density, differ among customers and among models as well. We would like to provide TDK’s technologies in response to the needs of each. We believe that a unit price increase is possible where added value is recognized.
Q10. Is the second-quarter level of the operating income margin of Energy Application Products, which is 24.5%, sustainable? What is your projection of the enhancement of battery production capacity for the next fiscal year? I also think that mini cells have been growing significantly in the current fiscal year. Could you tell us how much you expect them to grow in the next fiscal year?
A10. Factors for the second-quarter operating income margin of 24.5% include a front-loaded increase in sales of batteries and the higher-than-planned production volume and utilization rate. While the second quarter is the peak season every year, we think that the result in the quarter was particularly good in the current fiscal year. Regarding the increase in production capacity for the next fiscal year, we believe that a double-digit increase in production capacity is needed for mini cells because these products are growing significantly. Our target for the next fiscal year is to expand the sales of power cells, which are larger. We are now making a plan with the aim of achieving the double-digit growth of batteries overall.