Investor Relations | IR Events | Performance Briefing

[ 3rd Quarter of fiscal 2021 Performance Briefing ]Q&A

Q1. In the third quarter, sales in both the Passive Components and Sensor Application Products segments increased by more than 10% from the second quarter. However, growth in operating income appears to be slightly low relative to the sales growth. Does this reflect factors such as higher logistics costs, materials expenses and other expenses?
A1. In the Passive Components segment, income was slightly affected by the sale of inventories we had built up on the assumption of automotive market recovery in the first half. In the Sensor Application Products segment, we invested in the development of magnetic sensors and microphones looking ahead to the period covered by the next Medium-Term Management Plan, and these expenses offset the boost to income from higher sales. There has been no deterioration in profitability.
Q2. Is there a gap between customers' component purchases and actual demand?
A2. Starting with the automotive market, orders were even stronger in the third quarter than in the second quarter, but I imagine that demand was in line with automobile production volume. In the United States, moves to replenish dealer inventories are still underway and we expect there to be some degree of adjustment in the future. Meanwhile, we believe that semiconductor supply shortages have accelerated demand for electronic components and think the market may enter an adjustment phase from the latter part of the fourth quarter through to the beginning of next fiscal year. Looking at the ICT market, orders for smartphone applications remained firm in the third quarter. We recognize that annual smartphone production volume has also recovered to year-ago levels, but there is still the risk of production adjustment after Chinese New Year, and are monitoring the situation.
Q3. What changes in sales and operating income do you expect to see in the fourth quarter compared to the third quarter? According to my calculations, fourth-quarter operating income will fall sharply, even taking structural reform expenses into consideration. What is your view?
A3. Looking at changes in sales in the fourth quarter compared to the third quarter, we expect decline of 3-6% in the Passive Components segment, a decrease of 2-5% in the Sensor Application Products segment, a drop of 11-14% in the Magnetic Application Products segment, a fall of 8-11% in the Energy Application Products segment, and sales decline of 8% overall.
We expect operating income to decrease by just over 10 billion yen as a result of the decline in sales. As every year, we also estimate downtime losses of around 7 billion yen mainly as a result of suspension of plant operations during Chinese New Year. As explained earlier, we recorded a gain on the sale of business of around 2 billion yen in the third quarter and fourth-quarter income will reflect the absence of this. We also expect deterioration in the product mix to have a slight impact. On top of this, given that sales will fall by just over 30 billion yen, we forecast a drop in income which is slightly less than this, which is fairly conservative.
In addition to the foregoing, we plan to record structural reform expenses of around 12 billion yen in the fourth quarter. Around 5 billion yen of this is structural reform expenses for the reorganization of sites and we have also factored in around 7 billion yen for the risk of impairment in anticipation of sudden changes in demand trends.
Q4. The structural reform expenses of 12 billion yen do not include impairment of goodwill associated with InvenSense. What is your view on the risk of impairment of such goodwill? What effect will the structural reforms have on performance over the coming fiscal periods?
A4. We have to some extent factored the disposal of ultrasonic fingerprint sensor equipment into the structural reform expenses. We will assess the need for impairment of goodwill based on the future cash flows of the Sensor Systems Business Company as a whole, and we assume that demand for MEMS sensors, motion sensors and microphones will grow in the future and anticipate that demand from the automotive market for temperature and pressure sensors and hall sensors will also at last start to return to normal. We also expect sales volume of TMR sensors to increase. On this basis, we judge that at present there is no need to factor the risk of impairment of goodwill. We estimate that the structural reforms will boost performance by around 5 billion yen next fiscal year.
Q5. How do you expect sales of MLCCs and inductors to the automotive market to change in the fourth quarter compared to this third quarter?
A5. In the third quarter, we assumed there would be a disparity between market conditions and orders, but orders held firm. In the fourth quarter, we will keep an eye on the operations of semiconductor manufacturers and orders as required and carefully monitor supply risks. We expect that fourth-quarter sales will fall short of the third-quarter level because of Chinese New Year but forecast that orders will remain at a high level.
Q6. Surely, the rollout of 5G and the advance in electrification of automobiles means that you need to expand production capacity for passive components and batteries?
A6. Looking at passive components first, as advanced driving assistance systems (ADAS) and autonomous driving feature become more widespread, orders are likely to grow. We estimate that demand for automotive components will grow by around 7-8% and anticipate expansion in our automotive component production capacity of around 10%.
Moving on to batteries, demand for batteries for 5G applications will increase but given that we have the basic production capacity, we think investment to accommodate additional features will be required.
Q7. You explained that some battery sales which you assumed would be recorded in the third quarter shifted to the fourth quarter. Does this reflect some kind of irregularity at odds with actual demand? What is the future outlook for batteries and do you plan to expand production capacity for next fiscal year?
A7. Customers shifted some production to the fourth quarter and as a result our deliveries were also delayed until the fourth quarter. Nothing fundamental has changed. It is not a case of overordering by customers and a subsequent drop. As for plans to expand production capacity next fiscal year, as mentioned previously, we still foresee a double-digit increase and intend to focus on power cells as a growth driver. We also assume that demand for smartphones will recover slightly and expect sales of smartphone batteries to increase.
Q8. Does the deterioration in the operating margin in the Energy Application Products segment during the third quarter partly reflect expansion in the share of power cells?
A8. In the third quarter, power cells did not account for such a large share of total sales. The operating margin fell slightly due to costs incurred for the expansion of facilities given the need to allocate resources and start up production lines earlier than expected because of the growth of the power cell business. Profitability was also affected by unfavorable exchange rates due to the appreciation of the yuan.
Q9. What share of total battery sales do you expect power cells to account for? And what are your predictions for the size of the power cell market?
A9. This fiscal year, power cells account for around 5% of total battery sales and we intend to increase this share to around 10% next fiscal year. We expect that the markets for electric motorcycles and residential energy storage systems, where power cells are catching on, have far greater potential than the existing ICT market and we therefore believe that there is still a great deal of room for business growth. We also intend to expand sales of power cells for electric motorcycles, focusing first of all on the Chinese market. Our target markets for power cells for residential energy storage systems are the Japanese and European markets.
Q10. TDK batteries are laminated. What are the strengths of this type of battery?
A10. The strengths of laminated batteries are that they are lightweight, they can be comparatively flexibly adapted to requested shapes, they are very safe, and they have a longer life cycle than cylindrical batteries.
Q11. When it comes to power cells for residential energy storage systems, do you feel that customers are starting to realize the advantages of laminated batteries and that you are carving out a market?
A11. Customers are realizing that our power cells are not only laminated but are also extremely safe and can be charged and discharged many times over.
Q12. In the third quarter of the current fiscal year, SG&A expenses increased sharply compared to the third quarter of the previous fiscal year. Is this because of the inclusion of expenses to start up the power cell business?
A12. The increase in SG&A expenses is mostly due to batteries including the startup of the power cell business. We are also continuously developing batteries for smartphones and expanding our production capacity in this area.
Q13. TDK used to be involved in various smartphone-related components but now products for the automotive market, products for the industrial equipment market and other products for power-related applications appear to be gradually increasing. Have there been any changes in the way you generate synergies with peripheral businesses and your way of doing business?
A13. The Energy Solutions Business Company covers the battery business and the power supply business and we have started to receive requests from customers of industrial power supplies saying they want us to bring not just power supplies with us but also batteries, creating opportunities for power supplies and batteries sales people to speak with customers together. We feel that these businesses can grow still further.