Investor Relations | IR Events | Performance Briefing

[ 1st Quarter of fiscal 2022 Performance Briefing ]Q&A

Q1. Please provide your view on the situation of channel inventory of passive components and sensors.
A1. We don't think that channel inventory of passive components has increased significantly. However, we believe that there is a possibility that some of the products shipped by TDK still remain in the market as channel inventory, given that production is stagnant due to a shortage of semiconductors in the automotive market. Orders have not fallen significantly at this time, and strong demand is expected to continue in the first half. The situation is almost the same for sensors, and we don't think that their channel inventory has increased much. Orders also remain strong.
Q2. Is there any move towards an improvement in the earnings of sensor application products beyond expectations?
A2. In the first quarter, sales of TMR sensors grew more rapidly than expected. MEMS motion sensors for VR as well as those for tablets and PCs remain strong. In particular, sales of motion sensors for high-end products with short response times are growing significantly. We will continue to bolster the earnings of the overall segment by improving yield and with the meaningful allocation of development expenses, in addition to improvements in the product mix.
Q3. Demand for sensor application products and magnetic application products seems to be quite strong in the first quarter. What is your outlook for the full year?
A3. As for sensor application products, there is uncertainty about the environment in the second half, but we believe that the probability of achieving the full-year sales target we announced at the beginning of the period has increased significantly. Based on the results of the first quarter, among other factors, we have our sights set on halving the operating loss for the full year.
Regarding magnetic application products, we expect that TAM of HDDs will increase about 8% compared to the initial forecast. In addition, we expect that nearline HDDs will increase and that TAM of HDD heads will also increase about 10% compared to the initial forecast. Given that the volume of HDD heads was much higher than expected in the first quarter and is also expected to remain slightly higher than anticipated in the second quarter, we think that the volume of HDD heads will be higher than the initial forecast in the full year.
Q4. You showed your forecast that sales of energy application products in the second quarter will increase 28 to 31% from the first quarter, excluding the impact of exchange rates. Unless there is a slowdown in the second half, sales of energy application products will exceed the initial forecast of an 8 to 11% increase in sales, will they not?
A4. Our sales forecast for the second quarter includes surcharges that pass on the rise in material costs. If this impact is included, sales will be higher than the initial forecast, but if we look at sales on an actual quantity basis excluding this effect, we expect that sales will be at the level indicated at the beginning of the period. Although we have revised our sales plans for all segments based on our forecast that the production volume of smartphones, which was lower than projections in the first quarter, will recover to some extent in the second half, we have left our initial forecasts for company-wide sales and operating income unchanged.
Q5. At the beginning of the period, you stated that sales of energy application products would increase 8 to 11% in the full year, while the profit margin would decline slightly. What are your views at this point?
A5. We expect that the full-year sales will be at the level we expected at the beginning of the period, excluding the impact of exchange rates in the first quarter and the effect of higher sales due to our passing on rising material costs. However, because the impact of the rising material costs is expected to remain to some extent, we expect profits to be slightly lower than our initial forecast.
Q6. How do you expect the earnings of the battery business to change from the second quarter of the fiscal 2022? Please provide your outlook on whether the operation, which declined in the first quarter, will bounce back and whether you will be able to eliminate the negative impact through surcharges that pass on the rising material costs?
A6. We expect that sales will increase from the first quarter to the second quarter of the fiscal 2022 given a rise in the production volume of smartphones. In addition, the utilization rate, which declined in the first quarter, has recovered considerably. The impact of rising material costs is expected to be eliminated gradually from the second quarter. We expect that material prices from the second quarter will remain at the same level as in the first quarter. In the second quarter, we expect that sales will increase by a little more than 50 billion yen from the first quarter and that growth in sales of power cells and packaged products of batteries for smartphones will account for about 40% of this increase of a little more than 50 billion yen. As for the profit level in relation to the sales increase, please consider that the profitability of power cells and packaged products is lower than that of cells alone.
Q7. The number of smartphones produced in China seems to have fallen below the initial forecast. How do you see future trends?
A7. We recognize that the number of smartphones produced in China in the first quarter fell by more than 10% compared to the initial forecast. We expect that the production volume will be slightly higher than the level in the first quarter starting the second quarter and that it will recover more strongly than the initial forecast in the fourth quarter. In the full year, however, we expect that the production volume will be slightly lower than the initial forecast.
Q8. With regard to batteries, is there any change in the method of determining the price of surcharges that pass on rising material costs?
A8. There is a certain formula for determining the amount of the surcharge, although it varies slightly from customer to customer, and we have customers bear the surcharge according to market fluctuations. It has not changed much from the past method.
Q9. Is there any change in expenses for starting up power cells from the fourth quarter of the fiscal 2021 to the first quarter of the fiscal 2022? Also, how do you expect they will change from the second quarter of the fiscal 2022, excluding license fees to CATL?
A9. Expenses for starting up power cells were almost flat from the fourth quarter of the fiscal 2021 to the first quarter of the fiscal 2022. Although the expenses increased year on year in the first quarter, they are expected to remain at the level of initial forecast in the full year.
Q10.  How is demand for power cells currently moving compared to your forecast?
In addition, please let us know if there are any specific initiatives underway in the business alliance with CATL.
A10. As we showed in April, we aim for sales of power cells to make up about 10% of sales of the overall battery business in the current fiscal year, and their sales are progressing almost as planned. While the sales plan of power cells for electric motorcycles is slightly behind the initial forecast, mainly in China, orders for power cells for residential energy storage systems are slightly stronger than initially expected. Therefore, we believe that overall sales are in line with the initial forecast we made at the beginning of the period.
In terms of collaboration with CATL, we are currently in discussions regarding the establishment of joint ventures.
Q11. How do you record the license fees you pay to CATL?
A11. We have already paid out license fees, but there is no license fee to record in the first quarter. We are currently considering how to record them with an audit corporation and incorporate them from the second quarter. If license fees are positioned as development expenses, development expenses will increase compared to the initial forecast.
Q12. Even if the production volume of smartphones was below the projection, sales will remain high in the first half. Is there any deviation from the plan to increase the production capacity of batteries?
Also, do you have any intention to utilize the joint ventures with CATL to increase the production capacity?
A12. Because sales in the first half include surcharges that pass on rising material costs, sales will not increase that much on a volume basis. We expect that sales will increase about 10% on a volume basis in the full year. However, because this is a forecast based on the standard operation of factories, we will adjust their operation to meet demand if there is very strong demand attributable to market conditions.
The joint ventures with CATL are positioned as the domain of power cells. We will increase the production capacity of batteries for the ICT market as an investment by TDK, as we did in the past. The joint ventures with CATL plan to increase their capacities by specializing in power cells.
Q13. You said that profits increased 32.5 billion yen due to changes in sales. Please describe the extent of the negative impact of rising material costs that is included in it.
A13. The rise in material costs has an impact on all segments, but the largest is the impact on batteries. Although the operating income of energy application products decreased 7.9 billion yen year on year, it would have been almost flat year on year if the impact of exchange rates and the rising material costs was excluded.
Q14. Research and development expenses were 37.7 billion yen in the first quarter, which seems to be slightly higher considering the initial plan of 140 billion yen. Please describe an increase in development projects, etc., if any.
A14. The impact of exchange rates is a factor for the increase in research and development expenses in the first quarter. We actively conduct research and development activities even under the COVID-19 pandemic, but we have no plans for development under any additional themes at this point. In the full year, we think that there is a possibility that research and development expenses will be on par with the initial plan or will be slightly higher due to the impact of exchange rates.
Q15. What is the factor for the increase in inventories of 45.4 billion yen from the end of the previous fiscal year?
A15. Inventories increased about 40 billion yen from the end of the previous fiscal year, excluding the impact of exchange rates, and batteries made up about 80% of this increase. Inventories of passive components, sensors and HDD heads also increased slightly. The major factor for the increase in inventories of batteries is the building up of inventories to prepare for the launch of new products from the second quarter. Another factor is our strategic increase in inventories because it is important to ensure a sufficient quantity even in a situation where the unit price of raw materials is rising.