[ 2nd Quarter of fiscal 2022 Performance Briefing ]Consolidated Results for First Half of FY March 2022

Mr. Tetsuji Yamanishi
Executive Vice President

Hello, I’m Tetsuji Yamanishi, Executive Vice President of TDK. Thank you for taking the time to attend TDK’s performance briefing for the first half of the fiscal year ending March 2022. I will be presenting an overview of our consolidated results.

Key points concerning earnings for first half of FY March 2022

First, let’s take a look at the key points concerning the earnings for the first half. Since the beginning of the second quarter of the previous fiscal year, social and economic activities around the world have gradually resumed, and following the progress of COVID-19 vaccine rollout, social and economic activities started to be normalized mainly in developed countries. As production activities continued to rebound, demand for electronic components remained on a recovery trend. Demand related to digital transformation (DX) and energy transformation (EX), in particular, remained strong. As a result, net sales and operating income increased by 29.4% and 28.2%, respectively, on a year-on-year basis, posting record highs for the second quarter and the first half.
In the automotive market, production did not recover to the level prior to the outbreak of COVID-19, due to the effects of a shortage in the supply of semiconductors and other components. However, sales to the automotive market remained brisk on the back of an increase in the number of components installed per vehicle reflecting the acceleration of the electrification of automobiles, such as xEV. As a result, sales of Passive Components and Sensors increased.
As for sales to the ICT market, the production of smartphones remained flat from the previous fiscal year, falling behind the initial forecast due to the shortage in supply of semiconductors and other components and the negative effects of the resurgence of COVID-19 in some Asian countries. As a result, while sales for smartphone applications were below the initial forecast, demand for PCs and tablets remained robust. In addition, demand for servers increased as investment in data centers remained brisk. Consequently, sales of Rechargeable Batteries, Sensors, and HDD Heads increased.
In the industrial equipment market, corporate capital expenditures remained at a high level as production activities recovered. As a result, sales of Power Supplies for industrial equipment and Passive Components increased.

Consolidated results for first half of FY March 2022

Next, I would like to present an overview of our results. There was an increase of about 45.4 billion yen in net sales and a decrease of about 1.8 billion yen in operating income due to exchange rate fluctuations against the U.S. dollar and other currencies. Including this impact, net sales were 894.2 billion yen, an increase of 203.1 billion yen, or 29.4%, year on year. Operating income was 80.0 billion yen, up 17.6 billion yen, or 28.2%, year on year. Income before income taxes was 84.5 billion yen, and net income was 68.2 billion yen, setting record highs for all items. Earnings per share were 180.03 yen.
With regard to exchange rate sensitivity, we maintain our estimate that a change of 1 yen against the U.S. dollar will affect annual operating income by about 1.2 billion yen, while a 1-yen change against the euro will have an impact of about 0.2 billion yen.

First half results - Passive Components segment

Now, I would like to explain our business segment performance for the first half.
Net sales in the Passive Components segment were 248.5 billion yen, an increase of 35.2% year on year. Demand from the automotive market has remained strong and demand from the industrial equipment market has also been brisk, particularly for renewable energy and production equipment. In addition, as for demand from the ICT market, demand related to base stations, which had surged during the previous fiscal year, declined, but smartphone-related demand remained robust. As a result, sales increased in all markets and businesses. Operating income increased 2.3 times year on year to 39.4 billion yen, and the operating margin was 15.8%, indicating a significant improvement in profitability.
By business, both sales and operating income increased year on year in all businesses except for the High-Frequency Components business. In particular, improvement in the profitability of Capacitors and Inductive Devices contributed to the expansion of earnings for Passive Components as a whole. In the High-Frequency Components business, however, operating income decreased slightly year on year due to upfront investments in new product development, among other factors.

First half results - Sensor Application Products segment

In the Sensor Application Products segment, net sales for the second quarter of the current fiscal year further surged from the first quarter when TDK posted record quarterly sales. As a result, net sales for the first half increased 72.5% year on year to 59.5 billion yen.
During the second quarter, the segment achieved profitability on a quarterly basis, on the back of increased sales and positive changes in the product mix. As the profit level improved significantly, the segment was a step closer to achieving profitability even on a cumulative basis for the first half.
As demand for Temperature and Pressure Sensors from the automotive market and for home appliances remained firm, both sales and profit increased year on year. Sales of Hall Sensors to the automotive market surged, with earnings also improving greatly.
Sales and profit from TMR Sensors rose substantially, driven by their increased adoption by the ICT market. In MEMS Sensors, sales of Motion Sensors and MEMS Microphones surged, reflecting steady growth on the back of the expansion of the customer base and applications. As a result, earnings also improved and operating loss diminished significantly, resulting in enhanced profitability.

First half results - Magnetic Application Products segment

In the Magnetic Application Products segment, net sales increased 42% year on year to 126.0 billion yen, with operating income returning to profitability after posting a loss in the previous fiscal year.
As for HDD Heads, demand for servers has increased in line with the recovery of investment in data centers. Sales of Nearline HDD Heads increased 2.5 times year on year and increased about 18% compared to the sales volume projection for the first half of the current fiscal year. In the absence of the effect of a significant decline in sales volume due to the plant closures (as a result of lockdowns) of a major customer in the first quarter of the previous fiscal year, both sales and profit increased substantially. HDD Suspension Assemblies also saw a significant increase in sales and expansion of profit due to a rise driven by robust sales of Nearline HDDs for the data centers of a major customer. However, an operating loss was recorded for the first half, due to a one-time expense of about 4.0 billion yen concerning an antitrust matter during the second quarter. In Magnets, sales increased as sales to the automotive market remained robust, and operating loss shrank from the previous fiscal year.

First half results - Energy Application Products segment

In the Energy Application Products segment, net sales increased 21.7% year on year to 435.1 billion yen, while operating income decreased 27.5% year on year to 57.7 billion yen. In Rechargeable Batteries, sales for smartphone applications remained virtually flat as smartphone production was about the same level as in the previous fiscal year, when excluding the effects of exchange rate fluctuations and an increase in sales as a result of cost pass-through measures to cope with the soaring raw material prices. Sales for tablet and notebook PC applications remained strong. Sales of power cell products for electric motorcycles and residential energy storage systems also expanded steadily. As a result, sales of Rechargeable Batteries on the whole increased year on year. On the other hand, operating income decreased year on year, due to the effect of a decline in profit for the first quarter owning to raw material price hikes as well as expenses related to upfront investments for power cell products and the recording of about 5.0 billion yen in royalty fees during the second quarter. However, in the second quarter, the impact of higher raw material costs was absorbed through the cost pass-through measures and cost improvement efforts were accelerated, which resulted in a significant improvement in profitability, albeit with royalty fees, from the first quarter.
In Power Supplies, both sales and profit increased year on year thanks to the robust demand from the industrial equipment market, including that for semiconductor manufacturing equipment.

Breakdown of operating income changes

Next is the breakdown of the change in operating income. Let’s take a look at the main factors behind the 17.6 billion yen increase in operating income. First, there was an increase in profit of 49.6 billion yen due to a significant increase in earnings reflecting increased sales of Passive Components, a considerable decline in the loss of Sensors, and a recovery in profit of HDD Heads, despite the negative effect of soaring material prices. While reductions in sales prices had a negative impact of about 7.6 billion yen, there was an increase in profit of 11.9 billion yen as a result of rationalization and cost reduction as well as the benefits from restructuring during the fourth quarter of the previous fiscal year. In addition, SG&A expenses increased by 34.5 billion yen, owning to an increase in SG&A expenses related to Rechargeable Batteries, an increase in development expenses in line with accelerated power cell development, an increase in global logistics costs due to COVID-19, as well as the recording of about 5.0 billion yen in royalty fees concerning Rechargeable Batteries and a one-time expense of about 4.0 billion yen concerning an antitrust matter. Exchange rate fluctuations had a negative impact of 1.8 billion yen due to the appreciation of the yuan, despite the weaker yen against the U.S. dollar. As a result, the overall increase in operating income came to 17.6 billion yen.
As it was determined that royalty fees related to Rechargeable Batteries recorded during the second quarter will be recognized as development expenses, development expenses under SG&A expenses for the current fiscal year will increase by about 15.0 billion yen year on year. However, the amount has been included in the initial projection as additional expenses, and there will be no impact on TDK’s consolidated results.

Consolidated results for 2Q of FY March 2022

Next, let’s look at the consolidated results for the second quarter of the fiscal year ending March 2022.
In the second quarter of the fiscal year ending March 2022, net sales rose 24.2% year on year to 474.1 billion yen, operating income increased 11.9% year on year to 49.2 billion yen, income before income taxes was 52.2 billion yen, and net income was 41.6 billion yen, setting new record highs for all items on a quarterly basis.

Quarterly results by segment

Now, I will explain some of the factors behind the changes in segment net sales and operating income from the first quarter to the second quarter of the fiscal year ending March 2022.
First, in the Passive Components segment, net sales increased by 6.2 billion yen, or 5.1%, from the first quarter, and operating income rose by 3.3 billion yen, or 18.5%, from the first quarter. Sale to the automotive market remained virtually unchanged, while those to the ICT market, industrial equipment market, and distributors increased. Both sales and operating income increased in all businesses excluding High-Frequency Components. As for High-Frequency Components, sales remained flat, while operating income decreased slightly due to upfront investments for new product development.
In the Sensor Application Products segment, net sales increased by 5.9 billion yen, or 21.8%, from the first quarter, and operating income rose by 3.4 billion yen from the first quarter, achieving profitability for the first time on a quarterly basis. Sales of Temperature and Pressure Sensors and Hall Sensors rose on the back of strong demand from the automotive market. Sales volume of TMR Sensors significantly increased for smartphone applications thanks to their increased adoption by major customers for their new products. In MEMS Sensors, sales of Motion Sensors and Microphones grew steadily. As for operating income, earnings from TMR Sensors grew substantially and the profitability of Motion Sensors increased due to an improved customer and product mix, which contributed considerably to overall profitability.
In the Magnetic Application Products segment, net sales increased by 4.7 billion yen, or 7.8%, from the first quarter, while operating income increased by 3.2 billion yen from the first quarter, excluding a one-time expense recorded in the second quarter of 4.0 billion yen. Sales of HDD Heads increased from the first quarter, due mainly to an about 11% increase in the sales volume of Nearline HDD Heads, and HDD assembly sales remaining virtually flat. Sales of HDD Suspension Assemblies increased slightly overall from the first quarter, due to an increase in sales for application in Nearline HDDs, despite a decline in sales of Suspension Application Products for smartphones. Sales of Magnets increased slightly from the first quarter, reflecting brisk demand from the automotive market. As for operating income, while earnings from HDD Heads and HDD Suspension Assemblies significantly improved in line with the increase in sales volume, operating loss for Magnets shrank.
In the Energy Application Products segment, net sales increased by 35.9 billion yen, or 18.0%, from the first quarter, while operating income decreased by 10.9 billion yen, or 46.8% from the first quarter. Sales of Rechargeable Batteries increased from the first quarter, due to an increase in sales for smartphone applications in line with a rise in smartphone production, as well as an increase in sales of power cell products, even when excluding the effects of exchange rate fluctuations and an increase in sales as a result of cost pass-through measures to cope with the rise in material costs. Meanwhile, sales of Power Supplies decreased from the first quarter, as shipments stagnated due to the effect of shortage of semiconductors for industrial equipment. As for operating income, earnings from Rechargeable Batteries rebounded significantly, despite the recording of 5.0 billion in license fees, as the lingering effect of the hike in raw material prices in the first quarter was mostly absorbed and cost improvement efforts were accelerated during the second quarter. That concludes my presentation. Thank you very much for your attention.