Investor Relations | IR Events | Performance Briefing

[ 2nd Quarter of fiscal 2024 Performance Briefing ]Q & A

Q1. Your projections for fiscal 2024 and the exchange rate assumption for the third quarter (one dollar = 130 yen) have not been revised from your previously announced projections in August. Has your view on the segment outlook changed?
A1. While we have maintained our previously announced projections for fiscal 2024, there are changes in projections by segment. Based on the exchange rate assumption of 130 yen for dollar, sales in the Passive Components segment are expected to decrease from the previous projection. This is attributable to the prolonged inventory adjustments affecting sales to the industrial equipment market and distributors, despite expectations for a moderate recovery in sales to the automotive market. We predict that sales in the Sensor Application Products segment will remain virtually unchanged from the previous projection. Sales in the Magnetic Application Products segment are expected to decrease from the previous projection, reflecting a decline in shipment volumes of HDD heads and HDD suspension assemblies in tandem with a drop in total demand related to HDDs. On the other hand, sales in the Energy Application Products segment are forecast to increase from the previous projection as sales of small capacity rechargeable batteries, especially those to the Chinese market, remain brisk. Under these circumstances, we have maintained our previously announced projections. We predict that operating profit will be in line with changes in net sales on the whole. Operating profit is expected to decrease in the Passive Components segment, remain unchanged in the Sensor Application Products segment, and decline in the Magnetic Application Products segment, which will likely be offset by an increase in operating profit in the Energy Application Products segment. Therefore, we have decided to maintain our previously announced projection for operating profit, as is the case with net sales.
Q2. You mentioned that you will maintain your free cash flow projection of 80.0 billion yen for fiscal 2024 and aim for further improvements in the second half. However, free cash flow amounted to 106.0 billion yen in the first half alone. What is your free cash flow projection for fiscal 2024? Also, can you tell us how you are planning to utilize your improved cash flow?
A2. We expect operating cash flow to increase by continuing to optimize inventories in the second half. While the amount of investment in the second half is expected to increase slightly compared to the first half, the amount of increase will not be significant.
In the current fiscal year, we plan to focus on the repayment of interest-bearing debt first. By continuing efforts to maximize our free cash flow in the next fiscal year and thereafter, we will also consider growth investments and further shareholder returns.
Q3. I believe that you are seeking to increase your market share of small capacity rechargeable batteries by launching batteries using silicon anode electrodes. Is the increase in profit during the second quarter a result of an increase in market share?
A3. The proportion of products using silicon anode electrodes is still small. The increase in profit during the second quarter was attributable mainly to a rise in demand due to seasonal factors. Our market share increased just slightly from the first quarter. The impact of silicon anode electrodes on profitability is still limited. The recent improvement in profitability is attributable mainly to cost reductions. We would like to further increase our market share by leveraging new technologies such as silicon anode electrodes in the next fiscal year.
Q4. As for your JVs with CATL in medium capacity rechargeable batteries, you mentioned that the target net sales consolidated to TDK will be in the mid-100 billion yen range in fiscal 2027 and 400–500 billion yen in 2030. Can you explain more about the outlook for net sales and profits?
A4. We aim to achieve at least double-digit operating profit margin for medium capacity rechargeable batteries over the medium term. In medium capacity rechargeable batteries, the trends of renewable energy, Energy Storage Systems (ESS) and electric motorcycles have not changed significantly as a direction. We would like to establish a performance record with the aim of achieving net sales in the mid-100 billion yen range in fiscal 2027.
While we have been reviewing our projections for the next fiscal year, we plan to commence sales of Residential Energy Storage Systems (RESS) to new major customers in Japan and Europe next year. We believe this will help us increase our market share and sales in Japan and Europe. In addition, at the recent exhibitions held in China and the United States, we announced new products with 15,000 cycles and a long lifespan of 20 to 25 years. We have received a number of inquiries from customers that are manufacturing not only RESS but also industrial- and commercial-use ESS. We believe these products will become our mainstays in the future.
Q5. How is the progress with transferring the medium capacity rechargeable batteries business to your JVs with CATL?
A5. The JVs commenced production at a new plant in Xiamen in the current fiscal year, and the production transfer has been progressing ahead of schedule. The transfer is scheduled to be fully completed by the end of 2023.
Q6. You mentioned that you have announced new long-life medium capacity rechargeable batteries for ESS applications. What are their technical features?
A6. The key requirements for batteries used in ESS are safety and long life. There are two points essential to meeting these requirements. The first is to carefully select materials and build processes in manufacturing cells. The second is to control the cells using the Battery Management System (BMS).
Q7. How will you enhance the profitability of HDD heads? Please also tell us about the timing and conditions for returning to profitability.
A7. In the short term, demand for HDD heads and HDD suspension assemblies will be sluggish due to a temporary shift in investment to generative AI such as Chat-GPT. However, we predict that the trend of data increase will not change over the medium to long term, and that demand related to data centers will grow in the future. Under such circumstances, we are implementing restructuring initiatives and building a structure that reflects the latest demand trend. We predict that the overall market will recover around the second half of the next fiscal year.
As for HDD heads, we had aimed to achieve profitability in the second half of the current fiscal year in assumption of an increase in sales volume by about 1.8 times from the first half to the second half. However, given the frontloaded orders from the third quarter and some delays in mass production, among other factors, it has become difficult to achieve profitability in the second half. We will aim to break even during the fourth quarter.
Q8. You mentioned that sales of passive components to the automotive market remains brisk. Is there any pressure to reduce prices?
A8. Our MLCCs are mainly sold to automobile manufacturers, but there are different grades of products for automotive applications. The level of pressure to reduce prices varies among customers. The high-reliability products that we focus on are relatively expensive, but we are not in a situation where prices have fallen significantly recently. We believe that this trend will continue where price pressure varies depending on the grades of products. In addition, we have received more requests for high-reliability products used in xEVs from our customers. As this is a field where we can demonstrate competitiveness through our material and process technologies, we would like to maintain competitiveness by increasing production in the next fiscal year.
Q9. Can you talk about the trend in the Passive Components segment by product?
A9. As for the trend by product, MLCCs basically remain on a growth path as most of them are sold to the automotive market. We will continue to increase production. While the ratio of inductive devices sold to the automotive market is high, they are affected by the slowdown in some markets, including the industrial equipment and ICT markets. In particular, orders from the industrial equipment market have been sluggish. As many of our aluminum electrolytic capacitors and film capacitors are sold to the industrial equipment market, we expect sales to slow in the second half. The trend for circuit protection components such as varistors will be similar to that for inductive devices, as they are sold in a balanced manner to the ICT, industrial equipment, and automotive markets.