Investor Relations | IR Events | Performance Briefing

[ 2nd Quarter of fiscal 2022 Performance Briefing ]Q&A

Q1. In the Passive Components segment, you explained that there will be a slight drop in net sales in the third quarter of the fiscal 2022 due to distributors having filled their inventory of MLCC. What are your thoughts on the risks of inventory adjustments?
A1. There may be slight inventory adjustments in the automotive market, but we believe the market will continue to be solid in the medium to long term and do not see any factors that would lead to a major slowdown. We also don't believe there will be a significant price drop.
Q2. The Sensor Application Products segment shifted into profitability in the second quarter of the fiscal 2022 on a quarterly basis. Was this the result of sales to specific customers being greater than expected, which in turn impacted revenue?
A2. The second quarter sales in the Sensor Application Products segment were up 21.8% QoQ, higher than the 11-14% increase (excluding forex effects) we forecast in July 2021. We believe the efforts we have been making to expand sales was connected to greater-than-expected results. Firstly, a major smartphone manufacturer increased the number of models using our TMR sensor, and there was also an increase in the number of components installed per device. Additionally, the TMR sensor was also used for new functions. In MEMS sensors, sales of motion sensors and MEMS microphones grew more than expected due to an expansion in our customer base and usage applications. There is still a sense of uncertainty regarding the fourth quarter, and although it will depend on orders received, in light of the fact that we moved into profitability on a quarterly basis this time, for the full year we will aim to break even in real terms excluding M&A-related costs. Although both net sales and operating income should have peaked in the second quarter and decline from peak levels in the third and the fourth quarters, we believe we are now in a position to generate profits.
Q3. Regarding sensors, are there any fields apart from automobiles and smartphones where you expect to increase sales?
A3. In terms of enhancing our product lineup, we expect to launch new TMR sensor products as well as new hall sensors for consumers use and MEMS microphones. In terms of the expanded applications, we anticipate the use of our MEMS microphones for TWS, and the use of our MEMS motion sensors in the area of robotics such as robotic vacuum cleaners.
Q4. Looking at net sales for the third quarter seen in comparison to the second quarter, apart from the Energy Application Products segment you forecast a slight decline. Do you expect that sales peaked in the second quarter?
A4. For the Passive Components segment, we expect to see a decline from the second quarter in sales to distributors, particularly to distributors focused on general-purpose products. In the Sensor Application Products segment, due to seasonality factors we expect volume to decrease slightly in the third quarter after a peak in the second quarter. For the Magnetic Application Products segment, we do not foresee any major shift in demand.
Q5. What are the reasons for the 9-percentage-point decline in operating income margin in the Energy Application Products segment compared with the first half of the previous fiscal year?
A5. Profitability dipped slightly compared with the first half of the previous fiscal year due to rising material prices in the first quarter of this year, and the impact of license fees, etc. recorded in the second quarter. We do not believe that the profitability of products such as batteries for smartphones has changed that much.
Q6. You mentioned that in the Energy Application Products segment, you expect operating income in the third quarter to be flat despite increased sales. What do you think will impact operating income in the third quarter, such as sharply rising material costs, change to the product mix, or otherwise?
A6. Market prices for cobalt have started to rise again since the second quarter, and we expect that rise will have an impact on operating income in the third quarter. We expect that a profit increase that matches the sales increase will offset the rise in material prices, resulting in mostly flat operating income from the second quarter. We expect almost no impact from foreign exchange rates.
Q7.  I believe your share price declined over the last few months due to concerns over your medium-term business model for power cells. Can you describe your vision for the future profitability of the Energy Application Products segment?
A7. We recognize that there are concerns over the degree of profitability that will be achieved from power cells. Even if the power cell business expands, we think we will be able to achieve an operating income margin of just over 15% for the Energy Application Products segment by the final year of the current Medium-Term Plan. As we are going to achieve further growth in sales, we expect that we will be able to adequately ensure profits in absolute amounts.
Q8. It seems that even on its own, ATL has an extensive lineup of power sells for electric motorcycles and residential energy storage systems. What can you not achieve with ATL alone that you will accomplish through the joint ventures with CATL?
A8. We had been wondering whether increasing production capacity at ATL alone and continuing to invest in development would be the right way to go once the markets for electric motorcycles and residential energy storage systems have become very large, such as four or five times that of the ICT market. We think we can do a lot through mobility channels so far, particularly in China, but we believe it is best to collaborate with companies that have sufficient capital, production capacity and technological know-how.
Q9. You explained that while market inventory has risen, it has not done so to an excessive level. What is the situation for each of the major applications?
A9. We recognize that there is more automotive inventory in the pipeline than before. Since inventory at automobile manufacturer and Tier 1 manufacturers (primary suppliers) was considerably low in particularly in the second quarter, we feel that there is a lot of inventory by comparison. However, since Tier 1 manufacturers still have a tendency to procure inventory from VMI warehouses, we believe inventory is not at an excessive level. For TDK, because the percentage of products we supply to the automotive market is high especially for passive components, we keep a close eye on Tier 1 and OEM inventories, but there is no concern that they will suddenly hit the brakes hard. For smartphones, the battery business is large but batteries themselves are not suited to stocking, we do not get the impression that excessive inventories have accumulated. As smartphone manufacturers make inventory adjustments on a case-by-case basis, at a localized level inventory might accumulate by the same amount that production declines due to shortages of other components or semiconductors, but overall we don't perceive this to be excessive. For industrial equipment, there may be a slight impact from the semiconductor supply shortage, but our view is that the situation remains strong.
Q10. What is the background to fixed assets classified as other increasing by 32.2 billion yen?
A10. The main factor behind the rise is the purchase of rights to obtain materials in the future. We have determined the securing of material resources to be a medium-to-long term risks, and since we have made allowances for battery materials including through long-term agreements, assets commensurate with those payments have been recorded. The assets include deposits entrusted with suppliers to ensure raw material resources in the future, and prepaid expenses for suppliers to increase production capacity on their side. Under this system, as TDK purchases those raw materials in the future, those assets will decline by equivalent amounts.
Q11. What were the factors behind revising your full-year net sales forecast upward by 200 billion yen from the previous forecast?
A11. One of the factors for the upward revision to our forecast was that exchange rates in the first half of the year resulted in a weaker yen than we initially forecast. We expected an exchange rate of 105 yen against the US dollar in the second half of the year, and this has now been revised to 109 yen. Additionally, in the Energy Application Products segment, by passing on the sharp rise in raw material prices in both the first and second halves of the year, sales in the full year will increase, and excluding foreign exchange rates and the shifting of sales prices, we expect a slight decline compared with the previous period. In the Passive Components, Sensor Application Products and Magnetic Application Products segments, we expect significant increases even excluding foreign exchange effects. On a company-wide basis, we expect a slight increase excluding the effects of foreign exchange and price shifting.
Q12. What caused research and development expenses to increase by 20 billion yen from your previous forecast? Was it because license fees paid to CATL were declared as research and development expenses?
A12. License fees paid to CATL were incorporated into operating income at the start of this fiscal year, but were not treated as development costs. As they were declared as development costs this time, research and development expenses increased by that amount. License fees will also be recorded in the third and the fourth quarters in addition to this second quarter.
Q13. Production by smartphone manufacturers has stagnated due to the semiconductor shortage, and it is thought that sales of batteries might not grow as a result. In light of this situation, are there any changes to the 750-billion-yen capital expenditure plan in your Medium-Term Plan?
A13. The smartphone market has not grown as much as we expected at the beginning of the fiscal year, and since there is not a great need to increase production capacity for smartphone batteries, we are reviewing our capital expenditure plans. We will start by revising the overall amount, and allocate funds to improving the product mix and developing products on a priority basis, from the perspectives of which technologies we need to further expand in order to manufacture products with better performance and charging capabilities. In particular, we think we should allocate funds to increasing the capacity of batteries that only a limited number of manufacturers can produce, and to improving the degree of freedom in the shapes available.
On the other hand, as demand for electronic components for motor vehicles, particularly MLCCs and inductive devices are staying at a higher level than expected, we will also allocate funds for capital expenditure in those areas. Demand for HDDs at data centers has already continued to grow, and the need to shift to MAMR and TAMR as capacities further expand has become clear. As the adoption of MAMR has become a reality, we also need to redirect investment in terms of a number of wafer processes. While there are no major changes to the cumulative 750 billion yen in spending over three years or spending of just under 300 billion yen in the current fiscal year, the breakdown of those investments will change.
Q14. Your effective tax rate for the first half of the year has fallen to around 20%, but looking at the full-year forecast, you are assuming the tax rate will rise a little in the second half. What is behind your expectations of this tax rate?
A14. The biggest factor is reduced losses in our unprofitable companies. In recent years, tax rates had risen to a little over 30%, but they fell to around 20% in the first half of this year. The tax rate was raised because on a non-consolidated basis TDK continued to operate in the red and had negative taxable income, and was not able to implement tax effect accounting, but rapid improvements to earnings became a factor in driving the consolidated tax rate down. However, we expect that the tax rate will be a little under 30% for the full year. The possibility of recovering deferred tax assets has been brought up as a concern at some subsidiaries, and we expect this risk.