Investor Relations | IR Events | Performance Briefing

[ 3rd Quarter of fiscal 2020 Performance Briefing ]Q&A

Q1. In comparison with the projected changes in net sales from the second quarter to the third quarter, which were announced at the last meeting in October, actual third-quarter net sales in the Passive Components and Sensor Application Products segments seem to have fallen below the projections, while those of the Magnetic Application Products and Energy Application Products segments were almost in line with the projections. Why did net sales in the former two segments fall below the projections?
A1. In the guidance announced in October, we stated that third-quarter sales in the Passive Components segment were expected to remain flat from the second quarter. Actually, however, sales decreased by 3.5%. In comparison with the previous projection, sales of 5G-related High-Frequency Components were greater than projected. However, this segment was affected by lower-than-expected demand for capacitors for the industrial equipment market and piezo application products, among others, and the delay in the inventory reduction of capacitors and Inductive Devices at distributors in Europe and the United States. The decrease in sales of products for the automotive and industrial equipment markets directly reflects the weak demand.
We stated that sales in the Sensor Application Products segment were expected to increase by 6% to 9% from the second quarter. However, sales decreased slightly. Among the major factors for lower-than-projected sales, the slowdown in the demand for products in the automotive market should be mentioned first. Regarding conventional products, sales of Temperature Sensors were lower than the projection in particular. Decline in sales attributed to seasonality remains unavoidable in the fourth quarter. Full-year sales of MEMS Sensors, which are strategic growth products, are expected to increase by approx. 20% year on year and those of TMR Sensors are projected to increase by approx. 40% from the previous fiscal year. On the other hand, sales of conventional sensors, such as Hall Sensors and Temperature Sensors, are again expected to decline year on year in the fourth quarter following the year-on-year decline in the third quarter.
Q2. How do you expect sales in the fourth quarter to change from the third quarter? Concerning your operation in China, are there any risk factors, such as ones related to COVID-19?
A2. Overall sales in the Passive Components segment in the fourth quarter are expected to remain almost flat from the third-quarter level although some increase or decrease is expected in each business. Sales in the Sensor Application Products segment are expected to decline approx. 5% to 8% from the third-quarter level. Concerning Magnetic Sensors, products for the ICT market are expected to be affected by seasonality. MEMS Sensors are predicted to fall somewhat below the initial projection. Sales in the Magnetic Application Products segment are projected to remain almost unchanged from the third quarter. Sales in the Energy Application Products segment are expected to decrease by approx. 14% to 17%, assuming that it will be greatly affected by seasonality as in past years. The impact of COVID-19 is not reflected in these latest projections, because it cannot yet be measured. We have factories for Passive Components, Magnetic Application Products, and Energy Application Products in China. The delay in the resumption of operations after the Lunar New Year is expected to affect the overall results.
Q3. Subtracting the cumulative total for the first nine months from the full-year projection, profit for the fourth quarter is expected to decline significantly from the third-quarter level. Does it include the cost of restructuring, impairment of goodwill and others?
A3. One of the factors for the significant decline in profit in the fourth quarter is a substantial decrease in sales. The full-year projections remain unchanged because capacity use is lowered due to the Lunar New Year every year. Restructuring costs and other temporary costs are not included. It cannot be said whether impairment will be generated because the appropriateness of future plans will be examined in the year-end audit.
Q4. What is the ratio of production in China to total production?
A4. The overseas production ratio is approx. 85% and production in China accounts for the majority.
Q5. What is the price trend of ceramic capacitors from the viewpoint of TDK? Also, describe the progress of capital expenditure in the current fiscal year and your views toward the next fiscal year.
A5. Currently, a price increase is inappropriate, so discounts are being given as usual. At TDK, we operate businesses with a focus on especially difficult fields among automotive products. Therefore, prices have not gone down much. Regarding the capacitor production capacity, there is not a significant increase in terms of quantity as in the previous fiscal year. However, the ratio of large-capacity products, which are used for EVs and ADAS, has been increasing. Accordingly, we must make preparations by assuming an approx. 10% increase of load as planned.
Q6. In the Passive Components segment, 5G-related products have begun to be marketed. Describe their impact on sales.
A6. The impact of 5G is limited at present. Demand for 5G smartphones is predicted to be approx. 400 million units in the next fiscal year, constituting about 25% of the demand for all smartphones. Demand for TDK products depends on their share, or their proportion in handsets, so we would like to increase the proportion.
Q7. Among HDD heads, ratios of TDMR, MAMR, and HAMR are expected to rise. What is the current situation? In addition, we believe that HDD heads for notebook PCs are decreasing, while ones for nearline storage are increasing. Describe the initiatives that you are taking for HDD suspensions.
A7. HDD heads are in a period of change in the demand environment. From the next fiscal year onwards, HDD heads for nearline storage will increase and technological innovations have made further progress. As a specialized manufacturer of HDD heads, TDK is making steady progress in preparations for technological evolution, such as TDMR, MAMR, and HAMR. Demand for high recording density has been growing at an increasing clip. Density increased from 12TB to 14TB last year. Currently, it is 16TB and is expected to go up to 18TB next year. In addition, while that of HAMR heads has exceeded 20TB, we are prepared to fulfill such a requirement. Therefore, we can supply heads appropriately to captive and non-captive customers. Regarding HDD suspensions, µDSA-type products for nearline storage have been increasing. We are building a supply system that will allow us to meet market demand.
Q8. What is the factor for the improvement of batteries’ operating income margin from the second quarter to the third quarter, which happened despite the decrease in their sales in the same period? Also, describe your projections for the fourth quarter.
A8. Sales of batteries in the third quarter were almost as high as we assumed. Normally, sales peak in the second quarter and decline in the third quarter. However, in the third quarter under review, improvements of product mix, such as the higher sales ratio of mini cell batteries, are believed to have contributed to the improvement of operating income margin.Sales are expected to decline in the fourth quarter as in past years, partly reflecting the seasonality including the Lunar New Year holidays. Currently, however, orders received for smartphone batteries are slightly above the projected level. Mini cell batteries are strong, having remained almost flat from the third-quarter level, while other products are expected to decline. As mentioned earlier, the impact of COVID-19 has yet to be included.
Q9. Can sales of batteries increase by double digits in the next fiscal year? Can you maintain the current level of operating income margin in the next fiscal year and onwards?
A9. Among batteries other than existing ones for consumers, we would like to have large power cells start growing in full scale next fiscal year, including ones for residential ESS and ones for e-Mobility. The market for mini cell batteries is also expanding and we would like to increase the quantity by 20% to 30%. We also aim to grow existing consumer batteries with greater sales by increasing our market share, carrying out vertical integration of processes, from one for cells to one for packs, and taking other measures to achieve double-digit growth. The percentage growth rate of 5G-related products for smartphones is expected to be in the single digits. Regarding operating income, we do not expect to achieve a high operating income margin from the beginning, because TDK is a latecomer in the power cell domain. Expenses including development investment will be generated in advance, so we would like to increase profits while ensuring an increase in sales of overall batteries.
Q10. How do you view the mini cell battery market?
A10. The mini cell battery market has the potential to grow at a rate of 20% to 30% in terms of CAGR in the next several years. Customers to whom TDK supplies smartphone batteries include manufacturers working on the application of mini cell batteries. Therefore, we would like to make a foray into the mini cell battery market while transforming the business model for smartphone batteries.
Q11. What is your business model for power cells? In the markets of e-Mobility and others, it is difficult to do business only with the sales of batteries. What system are you planning to create? Describe the extent to which power cells will contribute to your growth in the next fiscal year.
A11. Power cells differ completely from consumer batteries in that there is no demand for cells only, while there is demand for modules and packs. We are standardizing modules and customizing packs for each customer. Power cells are still in the starting phase, so their sales as a percentage of sales of overall batteries is expected to be in the single digits.
Q12. Batteries for 5G smartphones are believed to be technologically difficult. Will the vertical integration of packs and cells lead to a competitive edge?
A12. We believe that we will have a competitive edge in the enhancement of safety against the increasing battery capacity and response to quick charging.