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The 123rd Ordinary General Meeting of Shareholders Q & A
- Q1. It seems that the sensor business did not grow during FY March 2019 as much as you had expected. I would like to ask why, and I would also like to ask about your initiatives for future expansion of the business.
- A1. The performance for FY March 2019 fell short of expectations mainly because of the delay in the development of new products for smartphones and the deterioration of macroeconomic environment in the second half of the period. Meanwhile, we have been driving forward well-balanced initiatives for business expansion in each strategic market for FY March 2020. For automobiles, measures have been taken to expand the sales of TMR (Tunnel Magneto Resistance) angle sensors, pressure sensors, and motion sensors employing MEMS (Micro Electro Mechanical Systems) technology. For mobile devices, we have been expanding the customer base of motion sensors and application of TMR sensors, in addition to expanding the sales of ultrasonic fingerprint sensors and microphones. By producing tangible results of these initiatives and expanding sales, we would like to develop the sensor business as one of the main businesses of our company.
The scale of the sensor market is expected to grow to exceed one trillion yen. As we have strengths in both the automotive market and the consumer use market, we would like to steadily expand the business. - Q2. Could you update us on the improvement of profitability concerning the three businesses that had been regarded in the past as facing challenges?
- A2. In the past, three businesses, namely, SAW (Surface Acoustic Wave) filter, power supply, and magnet businesses, had been regarded as facing challenges. Firstly, the SAW filter business is no longer in our business portfolio as it was transferred to the joint venture established in 2017 with Qualcomm Incorporated in the United States. Next, TDK-Lambda is in charge of the power supply business, focusing mainly on power supply for industrial equipment. Profitability has improved as a result of streamlining and launching innovative products, and the business contributes to the profit of the entire group. Finally, the magnet business is still in a difficult situation in terms of profit, incurring impairment loss of 4.7 billion yen in FY March 2019. While a high proportion of our magnet products have conventionally been used for HDDs (hard disk drives), the number of HDDs is on the decline. As the pillar of the business cannot remain there, we have been trying to improve profitability by focusing on application to automobiles and industrial equipment as well as to environmentally friendly energy, such as wind power generation, for a few years. Although we are still in a difficult situation, we are expecting improved performance in the future.
- Q3. What are your plans for improving the profitability of magnet and sensor businesses?
- A3. My answer to the previous question includes the plan for the magnet business. The sensor business is facing a difficult situation in terms of profit, partly because of the temporal costs for acquisition. On the other hand, the sensor market is expected to expand, as I mentioned earlier. A large number of sensors are expected to be installed on automobiles and consumer use products, which can be said as a mass of sensors. We would like to expand the business by taking full advantage of such business opportunities.
- Q4. Could you elaborate on the influence of US-China trade friction and the company’s response to the situation?
- A4. Although we produce a high proportion of our products in China, a considerable part of them are for supply within China. Direct influence is therefore relatively small. In the meantime, we have been discussing how we should respond to possible slowdown of the global economy triggered by the US-China trade friction. In addition, the US-China trade friction is not the only risk we face. There are unique risks in each region of the world, including the regions where we have our production bases. For example, we had an earthquake in Japan the other day. How to avert such risks is our great concern. From customers’ point of view, they have a great interest in how we can keep supplying the products. By assessing such risks, we have been discussing various issues to be able to take appropriate measures. In this process, it is extremely important to gain information from and listen to the sentiments of not only Japanese employees but also members who are in charge of management at overseas locations. This links to one of our strengths, such as “flexible response,” mentioned earlier with regard to issues to be addressed.
- Q5. What is the expected exchange rate for FY March 2020?
- A5. Business performance of our company is influenced to a certain extent by the fluctuation of exchange rates between the yen and U.S. dollar as well as euro. The average exchange rates expected for FY March 2020, announced in April 2019, are 108 yen against the U.S. dollar and 122 yen against the euro. At the moment, the rates are close to the actual exchange rates.
- Q6. Initiatives related to SDGs lead to better reputation and value of the company. What measures have the company taken from such a perspective?
- A6. SDGs (international development goals stated in the “2030 Agenda for Sustainable Development” adopted at the United Nations Summit in September 2015) are common goals of the international community, cover common social challenges that need to be addressed by the world, and are a significant guideline in achieving the company’s growth while increasing its social value. The focus of corporate social responsibility has shifted from reducing negative aspects of corporate activities, such as addressing environmental pollution, to producing positive aspects of corporate activities. Our company established the Sustainability Promotion HQ in April 2019, thereby creating a structure where the HQ takes initiative in understanding how our technologies and products can contribute to society, appealing it to the society, and emphasizing it as the company’s stance. We would first like to take full advantage of technologies related to EX (energy transformation) and DX (digital transformation), make clear in what area the technologies can contribute, and drive business activities forward with specific targets for each division. From FY March 2020, we would like to drive forward activities based not only on conventional sales and profit targets but also on targets concerning the degree of contribution to society. We would like to regard this as one of our business challenges and make an appeal to the society.
- Q7. Could you elaborate on what “accumulated other comprehensive income” in the consolidated balance sheet represents?
- A7. A loss of approximately 124.4 billion yen is incurred as accumulated other comprehensive income in the consolidated balance sheet for FY March 2019. There are two main reasons for this. One is an accounting process called foreign currency translation adjustment. Our company has a number of overseas subsidiaries, and overseas companies usually settle their accounts in foreign currency, not yen. When settling the account, exchange rate may be different from the time the subsidiary was established by investment from Japan. For example, when a subsidiary is established by investment based on 120 yen against the dollar and settles its account based on 110 yen against the dollar, the value of the asset in which the company invested decreases due to the 10-yen difference caused by the appreciation of yen. Such a difference is incurred as a loss. The other is related to pension liabilities. Fixed benefit pension systems are adopted mainly in Japan and Germany, which requires calculation of liabilities the company should prepare for the future. Due to recent low levels of interest rate in Japan, liabilities the company should prepare for the future increase when discounted to present value. The increased pension liabilities due to decreased interest rate are incurred as a loss in accumulated other comprehensive income.
- Q8. Has the company been able to manage the acquired U.S. sensor business companies?
- A8. Our company acquired InvenSense, Inc., a listed U.S. company, in 2017 and Chirp Microsystems, Inc., a U.S. startup, in 2018. We have also acquired multiple European sensor business companies. The Sensor Systems Business Company, launched in 2017, organizes a management committee comprised of each company’s managers to bring these companies together, thereby eliminating barriers between companies with regard to major functions, such as R&D, marketing, and quality assurance, and aiming to develop and implement integrated strategies across the companies. We would like to link major functions globally and further drive the business forward.
- Q9. In the earnings forecast for FY March 2020, both net sales and operating income will be at a record high. Meanwhile, sales of automobiles and smartphones have been sluggish in China, and it is said that full-fledged spread of 5G will happen from 2020 onward. Could you explain to us the background of the earnings forecast, amid increasing uncertainty about the global economy?
- A9. Uncertainty about the global economy started to further intensify in November and December 2018. The earnings forecast for FY March 2020 was made reflecting such an economic situation and published in April 2019. From a medium- or long-term perspective, spread of 5G (fifth-generation mobile communications system) as well as improved safety and electrification of automobiles would progress steadily and be a tailwind for our products. The trends of EX and DX would also be unstoppable, although there might be temporary stagnation. It is important for us to seize such business opportunities. Meeting customers’ expectations steadily by offering first-to-market products would enable us to gain trust of customers and produce results, regardless of short-term macroeconomic trends. Although the earnings forecast for FY March 2020 does not include a large growth in sales on the whole, we would like to make steady efforts to achieve the targets.
- Q10. Amid concerns over the influence of US-China trade friction on the global economy, could you elaborate on the chances of achieving the targets in the earnings forecast for FY March 2020?
- A10. As I explained earlier, the trends of EX and DX are unstoppable in the long run, and we will be in the world that cannot be realized without electronics. The market for our products is expected to grow further, and our products would be able to further contribute to society. By investing in not only major businesses but also development of new products and new businesses, we would like to increase profitability and growth potential of the entire group. Although there are negative macroeconomic aspects in the short term, we would like to make steady efforts to achieve the targets.
- Q11. What are your views on share buyback?
- A11. Paying dividends to shareholders through medium- and long-term increase of corporate value and growth in earnings per share is our basic way of shareholder return, which includes share buyback. We would like to continue to consider providing appropriate returns based on such a stance.
- Q12. How does electrification of automobiles, such as shift from engines to motors, affect the number of installed electronic components?
- A12. We consider electrification of automobiles to be a significant business opportunity for our company. For example, a large amount of neodymium magnet, one of our products, is used for motors. In addition, our company lays emphasis on the development of magnet which uses reduced amount of rare metal. Our products also include large size capacitors for inverters to rotate the motors as well as inductors and common mode filters to eliminate noise. Demand for these products is expected to grow considerably in the future. Our company has a wide range of product portfolio for sensors as well, such as sensors to detect rotation, electricity, or temperature. The number of those products installed on automobiles is expected to increase.
- Q13. What are your systems for product inspection like, especially the system concerning products for automobiles?
- A13. Under the basic philosophy of zero defects (zero defective products), we comply with laws and regulations and carry out inspections by complying with standards agreed on with customers. Based on the policy that quality cannot be assured only by final inspections, we strive to manufacture without producing defective products at each process.
Our basic stance is that not only the final process but the upstream, such as raw materials, production methods, and production equipment, needs to be appropriately managed. We engage in quality control at each location in accordance with such a stance. - Q14. The other day, an earthquake occurred centered off the coast of Yamagata Prefecture in Japan. TDK has a number of factories in Akita area. How would the company respond to earthquakes? Have you conducted simulations as to how much time it would take until recovery?
- A14. We have production sites in Yamagata and Akita areas, but they did not sustain significant damage from the earthquake occurred the other day. As Japan is prone to earthquakes, we have taken various measures against them. To begin with, we have a system to first check on the safety of employees and their families, as we give priority to human life. Next, we need to think about how to fulfill our responsibility to supply products to our customers. In this regard, we reviewed our BCP (Business Continuity Plan) after the Great East Japan Earthquake and made plans to establish supply systems that would be able to meet customers’ expectations. Considering that various kinds of natural disasters occur more frequently today than they did in the past, we have conducted further reviews of the BCP and created a system to more firmly ensure that we would be able to meet the deadlines for our customers. I cannot give a complete answer on how we are to respond as each business has its own plans. In any case, we would like to respond to natural disasters by giving top priority to human life and then developing and implementing BCP to meet the deadlines for our customers. I would like to add that the proportion of domestic production for FY March 2019 is approximately 15%
- Q15. How have business conditions for the first quarter of FY March 2020 been?
- A15. I cannot comment on the business conditions for the first quarter of FY March 2020 here. We would like to keep paying attention to global economic trends, such as US-China trade friction.
- Q16. I would like to ask about current state of affairs concerning appointment of women to executive management positions and managerial positions, as well as future policies on this matter.
- A16. We do not have numerical targets for promotion of female employees at the moment, such as those for appointment of women to managerial positions. Our basic policy is to appraise and promote employees regardless of personal attributes, including gender and nationality. Through various recruiting activities, we would first like to increase the proportion of women among all employees. Then, we would like to increase the number of female managers in the future. In addition, our company has introduced systems of childcare leave, part-time work, and telecommuting, as we consider it important that women can continue to work in a pleasant environment without worries even after getting married and having children. Please note that as of March 31, 2019, the proportion of female managers in Japan is 3.9%.