Investor Relations | IR Events | Performance Briefing

[ 1st Quarter of fiscal 2021 Performance Briefing ]Q&A

Q1. You stated that sales in the Passive Components segment remained flat in the second quarter, although global automobiles production bottomed out in the first quarter. What is your outlook for sales by product?
A1. At this point, we anticipate that sales will recover as initially expected, although the degree of recovery differs by product. Sales of Passive Components for automobiles are on a recovery trend. However, we expect the segment to be affected because the production volume of smartphones will decline slightly in the second quarter. Components for 5G base stations are characterized by the seasonality where production peaks in the first half and declines in the second half. With respect to 5G-related components, in the first quarter we received orders that seemed to be placed to secure inventories, reflecting concerns about supply chains. We assume that the increase attributable to these orders will level off and decline in the second quarter.
Q2. Demand for MLCCs for automobiles is currently weak. However, the number of MLCCs installed per vehicle is expected to rise sharply if automobile manufacturers adopt the drive computer system in earnest. Describe your stance on the planning of production capacity expansion.
A2. As you mentioned, it is expected that demand related to the drive computer system and EV will continue to grow. In line with the growth, the number of MLCCs installed per vehicle is expected to increase with respect to MLCC. However, considering the decline in the total number of automobiles produced, we do not expect a sharp rise in demand for the time being. We will be increasing production in the long term. In the current fiscal year, we will monitor macro demand trends while simultaneously focusing on investments for rationalization rather than investments for increasing production.
Q3. Why did sales in the Sensor Application Products segment fall below the initial plan in the first quarter? In addition, even if sales rise by 16 to 19% in line with the guidance in the second quarter, you must increase sales significantly in the second half to achieve the full-year increase of 8 to 11% shown in the guidance. What is the current status? How will you reduce the deficit?
A3. At the briefing on full-year financial results held in May, we stated that sales in the Sensor Application Products segment were expected to decrease by 16 to 19% in the first quarter from the level in the fourth quarter of the previous year. However, sales decreased 21%. With respect to sales to the automotive market, the decrease that we had expected to be in the higher 20% range was eventually in the mid-30%. The sharper-than-expected decrease was a factor that contributed to the results that fell below the projection in the first quarter. Sales of some sensors are expected to stay at the lowest level until the second quarter because the length of the supply chain differs depending on the product. However, considering that the automotive market as a whole has bottomed out, we forecast that sensors for the automotive market will achieve double-digit growth in the second quarter. Products that drive overall growth in sales include TMR Sensors, MEMS Microphones and Motion Sensors. We will take advantage of market recoveries and focus our efforts on obtaining results from our sales promotion measures to meet the guidance on sales for the second quarter. With respect to sales for the current fiscal year, we expected that sales in the first and second halves would account for about 40% and 60%, respectively. Based on our current forecast, the ratio for the second half will be slightly greater than 60%. We will continue to steadily obtain results from our sales promotions in the second half and will aim to achieve sales maximization and year-on-year growth.
Concerning the reduction of deficit, although sales fell short of the guidance in the first quarter, the total amount of deficits did not increase significantly. This was attributable to the background where we thoroughly reviewed all costs, including the cost of production. We will increase sales and continue to make development investments effectively, going forward, while simultaneously working on cost reductions, with a view to continuously reducing losses.
Q4. You stated that sales in the Energy Application Products segment was 32% higher in the first quarter than the level in the fourth quarter of the previous fiscal year, and are expected to be 19 to 22% higher in the second quarter than the level in the first quarter. Please provide the breakdown of the respective increases.
A4. First of all, the increase in sales in the first quarter from the level in the fourth quarter was mainly attributable to an increase in sales of Rechargeable Batteries for PCs and tablets. The growth of sales for PCs exceeded the overall growth of this segment. In addition, orders for batteries for smartphones increased because demand bottomed out in the fourth quarter in the previous fiscal year due to seasonality factors.
Next, an expected rise in sales in the second quarter from the level in the first quarter reflects an increase in sales of Batteries for smartphones due to its demand usually hitting a peak in the second quarter. Even so, we expect that the increase will be in 19 to 22% range. In addition, we forecast that sales of Batteries for PCs, mini cells and power cells will continue to rise.
Q5. Were there any orders for Rechargeable Batteries due to temporary demand?
A5. There were orders attributable to temporary demand early in the first quarter. Looking at the first quarter overall, we do not think there was a large amount of these orders.
Q6. Are you expecting that operating income in the Energy Application Products segment will also increase in the second quarter in line with a rise in sales? You stated that sales of power cells would rise. Please describe what kind of application will they be used for and to what extent sales of the products will account for total Battery sales at the end of the current fiscal year.
A6. We expect to post operating income that reasonably reflects an increase in sales in the second quarter. We are assuming that power cells will be sold mainly for residential storage systems and e-drives. We will expand sales of the product to account for several percentages of the overall Battery business in the current fiscal year.
Q7. I assume that your power cells for e-drives feature rechargeability instead of replaceability. Is there any difference in performance?
A7. It depends on customers whether to adopt replaceable cells or rechargeable cells. With respect to rechargeable cells, we consider it necessary to ensure that loads are minimized by taking advantage of our technologies such as quick recharging that we have been cultivating to this day. In Taiwan, e-drives equipped with replaceable cells are also popular. We think that the market's direction remains unclear.
Q8. TDK established a success pattern in Batteries for smartphones because they feature stable performance and long cycle times as well as quick recharging. Does this apply to power cells?
A8. The batteries' reliability and cycle characteristics, among other factors, are important in terms of determining a device's life. We want to increase our market share of power cells as well as other products by making sure that customers understand the convenience and features of technologies that TDK has been cultivating so far.
Q9. If demand for PCs and tablets is normalized, demand for Rechargeable Batteries will be slightly more stabilized. Still, taking into account the current conditions in which sales have been increasing, I assume that a rise in the market share also contributed. In addition, you have mini cells and power cells that fall under new categories. What are your expectations with respect to the growth of the Battery business?
A9. There was an increase in orders for PCs and tablets attributable to temporary or special demand. We are assuming that demand will continue to be relatively strong until around the end of the year. We forecast that demand will decrease in the next year due to the absence of this demand. On the other hand, we are expecting that demand for Batteries for smartphones will rise slightly. In addition, the power cells and mini cells markets will continue to grow. Taking these factors into consideration, we expect that overall sales of Batteries will continue to rise.
Q10. There is a need to review the business portfolios and production systems due to the COVID-19 Describe the changes from the initial plan, if any, taking into consideration the situation of the first quarter of this fiscal year.
A10. There was movement in the business of power cells as early as in the first quarter. Taking this into consideration, we should review capital expenditures and other initiatives that we planned initially. On the other hand, the production volume of smartphones is expected to be slightly lower than initial projections and its product mix is changing. Therefore, it is necessary to examine how best to respond to a change in the requirements for products from high-end products to mid-range or low-end products.
Q11. You stated that cost reductions due to rationalization increased approximately 5.3 billion yen on a year-on-year basis. What was the amount of budget that you were unable to spend due to the impact of the COVID-19?
A11. Consider that roughly one third of approximately 5.3 billion yen accounted for cost reductions, reflecting constraints due to the impact of the COVID-19.
Q12. I see inventories rising. Describe the breakdown of the increase. In addition, describe the significance of the impact of the increase on profitability in the first quarter.
A12. Inventories increased by slightly more than 20 billion yen from the end of the previous year, of which approximately 50% was accounted for by Passive Components and approximately 40% and another 40% of the remaining half were accounted for by HDD Heads and Batteries, respectively. 40% and another 40% of an increase of approximately 10 billion yen in Passive Component were accounted for by MLCCs and Inductors, respectively. With respect to MLCCs, demand for the components for automobiles was lower than the initial projections, while sales to base stations increased. We expected automobile-related demand to recover to some extent in and after the second quarter. Based on this assumption, we accumulated inventories in the first quarter while continuing to produce components for base stations efficiently. Regarding Inductors, we were unable to clear the inventory because automotive-related orders fell sharply. We plan to reduce the inventory of MLCCs and Inductors through the implementation of sales plans in the second quarter and beyond. We increased the inventory of HDD Heads based on the assumption that there will be a shortage in the wafer capacity as the result of an increase in quantity in the second quarter and beyond as well as growth in demand related to the nearline HDD. With respect to Batteries, we are gearing up for an increase in demand for smartphones in the second quarter and beyond. Please consider that the degree of the impact of the inventory increases on profits is on the same level of gross profit to 20 billion yen.

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