Tdk Corp S/Adr

Now we would like to begin GDK earnings call for the second quarter fiscally on March 2024, more than first half results. Let me introduce the participants. We have President and CEO Noboru Saito. Executive Vice President Tetsuji Yamanishi. Thank you. Corporate Officer Fumio Sashida. Thank you indeed. Corporate Officer Taro Ikshima, thank you. Corporate Officer Takao Tsutsui, thank you indeed. That's all. Thank you again for your precious time. This is Yamanashi speaking. I would like to thank you for your precious time despite your busy schedule to attend the earnings call for the first half for TDK. fiscal year on March 2024. I'm so happy to have so many of you. Now allow me to go through the highlights of the first half earnings. The first background surrounding the earnings, although the global economic recoveries are observed in certain regions, But in Europe, the economy stagnated due to the monetary tightening, and in China, the economy slowed down due to the real estate recession. The economic situations vary depending on the region in question. Thus, unstable situations continued. We also observed foreign exchange in impact, and the Japanese yen became cheaper vis-à-vis the US dollar and euro. Under such a business environment, In the electronics industry, which affects our business performance, on top of the sluggish demand of ICT and hard disk drive markets due to the long-lasting weak final demand, we had a delay in demand recovery in industrial equipment and automotive markets. On a yearly basis, our sales declined 5.6%, operating profit went down 28.9%. Looking at the inner sales and buy-in market, passive components declined significantly in foreign ICT and industrial equipment markets. In the automotive market, though passive components and sensors grew, but the recovery of the demand turned out to be slow due to the inventory adjustment on the customer side in particular. HDD demand also dropped significantly from the previous year. HDD heads and suspension cells went down significantly. Small capacity rechargeable batteries for the ICT market remained almost the same in sales volume as last year, but due to the decline in the prices of raw materials driven by the declining material prices, its sales dropped. Sales of power supplies for industrial equipment continued to be strong. Next, allow me to explain the highlights of the first half results. With FX fluctuations particularly to the US dollar, net sales was up about 35.5 billion yen. Operating profit was up about 13.4 billion yen. Sales was 1 trillion 59.7 billion yen down 62.3 billion yen or 5.6 yen year on year basis. Operating profit 85.5 billion yen down 34.8 billion yen or down 28.9% year-on-year. Profit before tax was 80.2 billion yen. Net profit attributable to owners or parents was 54.2 billion yen. Earnings per share was 142.86 yen. As for the forex sensitivity, the same as the last time, between the Japanese yen and US dollar. With the 1 yen fluctuation, we are assuming that its impact is about 2 billion yen for the full year, and between the Japanese yen and Euro, its impact is about 6 million yen. Next, I will explain the situation by segment for the first half. Passive components. Net sales was 286.2 billion yen. down 3.3% year-on-year. Though XEVs and other automotive sales grew, but ICT and industrial equipment sales went down, pushing down profit by 41.2%. Sales to the automotive market increased in all business segments, but the orders varied depending on the other markets and applications specifically, giving us non-uniform results among the lines of business. We were able to secure the growth in sales in ceramic capacitors thanks to the increased sales to the automotive market, but due to the deterioration in the product mix, its profit dropped. Aluminum film capacitors on top of the automotive market, we had strong long-term orders for industrial equipment market. We enjoyed growth both in sales and profit. As for inducted vices, high-frequency components, piezoelectric materials products, and circuit protection components, sales for ICT market and industrial equipment as well as distributors declined, resulting in drops in sales and profit. Next, since an application product segment. Net sales was 36.1 billion yen. 1.3% year-on-year. Operating profit was 5 billion yen, down 29.6%. Temperature and pressure sensors, thanks to the increased sales for automotive, enjoyed growth both in sales and profit. Magnetic sensors grew thanks to the whole sensors for the automotive. TMR sensors for smartphones also grew firmly. In contrast, MEMS sensors, though emotional sensors for automotive, expanded in sales, but due to the drop in sales for an ICT market resulted in the decline both in net sales and profit. Next, magnetic application products. Net sales 83.1 billion yen, a big drop of 24.4% year-on-year. Operating profit was a big negative of 19 billion yen. HDD heads and suspensions. With the sluggish demand for HDDs, the total demand for HDD was down 25% year on year. In particular, total demand for linear line HDD dropped 43%. Both HDD heads and suspensions dropped significantly in sales volume year on year, resulting in a big drop in sales, generating the loss. We expected a structural reform aiming at a proper production system as we had planned. For that cost, we booked about 900 million yen in the second quarter. Though the magnet for XEVs grew in sales, but industrial equipment and others declined in sales, pushing down on sales, which delayed in the productivity improvement, the loss increased slightly. Next, energy and application products. Net sales was 578.9 billion yen, Operating profit was 89.7 million yen down 3.9% in sales and operating profit was up by 10.9%. In the rechargeable batteries, sales volume of the small batteries for the smartphones was almost the same as the previous year. but the revenue decreased due to the lower selling prices and the price discounting driven by the falling materials prices and sales of medium-sized batteries also declined due to the joint venture transfer. Despite the drop in sales, the company secured a profit increase, including the effect of streamlining and FX gains. In the power supplies for industrial equipment, Revenue and profit increased due to the firm demand for semiconductor manufacturing equipment and medical equipment, while the loss of power supplies for EVs narrowed significantly due to the effect of structural reform at the end of the previous fiscal year on top of the increased revenue. Next, the analysis for the ups and downs of operating profit being down over 34.8 billion yen. HDD heads and suspensions declined in sales volume, and passive components declined in volume, as well as the deteriorated product mix, pushing down profit by 73.6 billion yen, and with the selling price change, profit was down by 16 billion yen. Although we had positive effects driven by the cheaper yen, pushing up profit by 13.4 billion yen, restriction caused reduction in rechargeable batteries and passive components of 11.8 billion yen, and the effect of 8.4 billion yen coming from the structural reform executed in the previous year, as well as the HGN and AN improvement by 21.2 billion yen, we were not able to observe the impact coming from the drop in sales volume. Next, I'd like to explain the second quarter results. The Forex fluctuations into the US dollar etc. resulted in the growth in sales by about 17.4 billion yen and in operating profit by about 6.9 billion yen. Net sales was 556.3 billion yen. down 55.2 billion yen or 9% year-on-year basis. Operating profit was 59.2 billion yen, down 16.5 billion yen or 21.7%. Profit before tax was 59.2 billion yen. Net profit attributable to owners or parent was 39.5 billion yen. Earnings per share was 104.04 yen. Next, I would like to explain the factors behind the ups and downs in sales and operating profit by segment from the first quarter to the second quarter of the current fiscal year. First, in the passive component segment, sales increased by 4.7 billion yen or 3.3% from the first quarter and the operating profit was 3.4 billion yen up 24.2%. Sales to the automotive increased in all businesses, while sales to the ICT market, mainly in the inductive devices and high-frequency components, increased as the peak season for smartphones would come up. On the other hand, sales to industrial equipment and distributors declined overall, partly due to inventory adjustments, and the overall sales of passive components increased slightly from the first quarter. Operating profit increased due to the cost improvement we carried out. Next, sensor and application products. Sales was up by 8.5 billion yen, and operating profit was up by 3.7 billion yen. Temperature and pressure sensors for automotive applications remained strong, and the sales of magnetic sensors for ICT applications increased significantly as the peak season for smartphones arrived. Of particular notice is the big growth both in sales and profit due to the advance orders from the third quarter. In MEMS sensors, while sales of motion sensors for game consoles declined, microphones grew in sales. For the total MEMS, revenue increased slightly, and profit became almost flat since the first quarter. Next, magnetic and application products. Sales was up 6.6 billion yen, or 17.3%. Operating profit was up 300 million yen, including the cost of 900 million yen for the structural reform which occurred in the second quarter. While the total demand for near-line HDDs remained almost flat, HDD and head cells volume increased approximately 40% from the first quarter, partly due to the orders received ahead of the schedule from the third quarter, while suspension sales volume declined about 5%, resulting in an overall increase in head sales. If we are to Exclude the restriction cost of about 99 million yen incurred in the second quarter, partly thanks to the increased sales volume, the deficit has become smaller. As for the magnets, sales remained almost flat, but the deficit has improved. Next, energy application product segment. Sales was up 29.1 billion yen, or 10.6%. Operating profit shows a big increase of 25.3 billion yen. In the rechargeable battery business, sales of medium-sized batteries decreased due to the transfer to the joint venture, while sales of small batteries to smartphones in China increased, resulting in a significant increase in overall sales and profit. Industrial power supplies remained firm. Sales on power supplies for EVs remained flat, but profitability improved. In the last section, I would like to explain the cash flow situations. For the first half, operating cash flow was 204.6 billion yen, capex and investing cash flow was 98.5 billion yen, and free cash flow was 106 billion yen. Taking into account the demand situations in the markets, We carried out a thorough inventory optimization and by further improving other working capitals, we improved our operating cash flow dramatically. We also made a careful judgment on capital investment taking into account of the supply and demand situations, generating a big increase in our free cash flow. Although we revised our earnings forecast downward when we announced the first quarter results, we did not change our cash flow forecast from the initial plan and maintained the free cash flow of 80 billion yen for the full year. Though the first half results already exceeded this level by a wide margin, we will continue to aim for further improvements in the second half. This concludes my explanation.

Thank you for your kind attention. The global economy showed increasing signs of slowdown due to a further rise in geopolitical risks, high interest rate policies to control inflation in the U.S. and Europe, and the real estate slump in China. Under these circumstances, as explained earlier, although The production and the electronics market as a whole slowed down due to sluggish end-user demand. The result for the first half of the fiscal year, March 2024, exceeded the forecast announced on August 2, 2023, partly due to the effects of the depreciation of yen. As for the future outlook, we expect the production volume of near-line ATDTs for smartphones and the data center to remain below the assumption made in the August announcement, and in particular, we expect a slow recovery in demand in the industrial equipment market. In automotive markets, the recovery of demand is expected to be slower than we previously assumed due to The components of inventory adjustments by some customers and the market environment surrounding our business is expected to remain uncertain. In light of these circumstances, our full-year forecast for the fiscal year March 2024 remains unchanged from those revised in August. with the net sales of 1 trillion and 970 billion yen, operating income of 150 billion yen, and the net income of 105 billion yen. And we assume an exchange rate of 130 yen for the second half of the year, and change it from the beginning of the fiscal year. With regard to... The cash flow, as explained earlier, operating cash flow is also on an increasing trend and we will maintain the 80 billion yen that we explained in August. There is no change in the dividend from the beginning of the fiscal year that we would like to do further. And there is no change in dividend from the beginning of the fiscal year. As explained now, we have revised the production volume forecast for major devices related to our company, which is just the earning forecast, as you can see. As for the automotive markets, the shortage of semiconductors and other factors are on the way to being resolved, and the growth and the number of EXVs in particular has been strong. Therefore, production units stay the same, although there is some uncertainty. On the other hand, as well explained in August, we expect a gradual recovery in the demand for components, although the degree of adjustment of the company of components inventories vary from the customer to customer. Smartphone production volume, which represents the ICT market, was reposited from the August assumption of 1.108 billion units to 1.102 billion units. although the worst assumption was still revised from the beginning of the period. Next, regarding the HDD market, due to the rapid changes in the data center investment environment, consumers continue to adjust HDD inventories, and we have revised the production volume of near-line HDDs for data centers downward from the August volume to 40 million units. I'd like to continue with an overview of the sales increase and decrease from the second to the third quarter of the current fiscal year. This assumption includes a negative impact of about 10% of each segment due to the yen depreciation by about 14 yen from the actual exchange rate and the Q2. As for passive components, Although sales of ceramic capacitors for automotive applications will increase, overall sales of passive components are expected to decline by 5% to 8% due to lower sales of aluminum film capacitors for industrial equipment and other passive components for ICT applications. In sensor application products, sales of temperature and pressure sensors for automotives are expected to be strong, but sales of magnetic sensors and MEMS microphones for ICT applications are expected to decrease in the Q3 due to the impact of accelerated front loading of the component sales from the Q3 to Q2, resulting in an overall decrease of 6% to 9%. In the area of magnetic application products, HDD heads and suspensions are also expected to see a 15% to 18% decline in overall sales from Q2 to Q3 due to the front rolling from Q3 to Q2. And while the sales volume for heads is expected to remain almost flat, sales volume for suspensions is expected to decline by approximately 23%. We had previously explained that an head-to-sales volume would be 1.8 times higher in the second half of the year than in the first half, but due to the advance and the front-rolling of the Q3 to Q2 and the delay in the timing of the project launch, we now expect an increase of about 1.3 times, not 1.8 times, but 1.3 times. In energy application products, sales volume of small rechargeable batteries is expected to decline slightly, while overall sales are expected to decrease by 12% to 15% due to the ongoing transfer of medium-sized rechargeable batteries to the joint ventures. As a result, we expect an overall decrease of 10% to 13%. In addition to the image of a sales increase and decrease that I have just explained, I will provide a supplementary explanation of the future outlook for passive components by market based on the Q2 results. Sales to the automotive market increased 9.5% year-on-year, and are also on an upward trend on the Q quarter-on-Q quarter basis. Although the degree of adjustments and component inventories varies by customer, we expect the upward trend to continue due to the increase in the number of EXVs and the increase in the number of components per vehicle. On the other hand, The industrial equipment market is down 5% from the first half of the previous year. The ICT market is down 19%. And other markets, mainly for distributors, are down 24%. And we expect this adjustment phase to last a little longer. Having reported on the current business outlook, I would like to Conclude with an explanation of our efforts to improve the return to capital Beginning end in the fiscal year March 2022, the company has classified its approximately 80 business units within four segments into six layers based on the two axes. Number one, return on invested capital, and the two, business potential, to qualify the rates of investment allocations and to transform and optimize the business portfolio. These charts, now you see here, symbolizes that the positioning of our major business units and the direction of their growth and improvements. Let me explain the following with these charts. Therefore, return on invested capital, we have set AWACC, Weighted Average Cost of Capital, over 10% as hurdle rates, and we are prioritizing investments in businesses that meet these hurdle rates and have high future potential, such as MOCCs, small rechargeable batteries, TMR sensors, and motion sensors, that are all as sustainable, high-profit businesses. I will explain the measure to be taken for each of these businesses, including those that I explained as strategic growth businesses at the beginning of this fiscal year. With regard to TMR sensors, we expect a continued business expansion for ICT applications, such as smartphones and for high-performance motor angle sensors for automobiles and industrial robots. And as we explained in April, we are continuing our efforts to expand our capacity. In addition, we started mass production of current sensor products for EVs last year, and as announced in our recent press release, we have decided to form a strategic alliance with LEM, the largest company in the current sensor industry. By partnering with the industry, the largest company, we will accelerate our expansion not only into automotive EV applications, but also into various other applications such as renewable energy, industrial equipment and home appliances. Regarding MEMS motion sensors, we believe that demand for MEMS motion sensors will continue to grow significantly in future as a gateway to capture motion information for various applications in the DX society. In particular, sales have been strong for automotive applications. we will continue to refine our cutting-edge design and development capabilities to prepare for the sustained market growth over the medium to long-term basis. As for MLCC, Demand continues to increase steadily, especially for high-performance, high-reliability products used in EXV and ADAS applications. And we are on the track to double our capacity end in the fiscal year March 2025 compared to the fiscal March 2021. And we also, and the further enhancement of capacity is under consideration. and the area of small rechargeable batteries, where we continue to maintain our position as the top runner in small rechargeable batteries for the ICT by continuously developing and introducing cutting-edge technologies. Even though we do not expect significant growth in the production of ICT devices such as smartphones, this theory will enhance our cost competitiveness and ensure profitability by selling the manpower savings, automation, and rationalization. Regarding medium-sized rechargeable batteries, The joint venture with CATN started full-scale mass production in April this year, and the transfer to the new plant is progressing smoothly. As the only manufacturer specializing in medium-sized rechargeable batteries, the joint venture plans to expand its market share and sales by taking advantage of its broader product lineup, safety, long-term reliability, mass production know-how, and scalability. In addition to the residential ESS, the joint venture plans to expand its applications to industrial and commercial ESS, aiming to achieve consolidated sales of over ¥100 billion in the fiscal year March 2027 and ¥400 to ¥500 billion in the fiscal year March 2030. Next, I would like to explain the turnaround enhancement project. which is shown in the lower left. In the magnets, the delay in productivity improvements of products for automotive is an issue, and we are aiming for an early turnaround by mobilizing all our resources, including the production technology and materials development centers of the head office functions, in addition to the business divisions. In parallel, For businesses for the automotive industry, where the time cycle for design and mass production is long, we are working to further tighten the criteria for decision-making to go when business is committed. With regard to power supplies for EVs, their profitability is on an improving trend as procurement issues such as semiconductor shortages have been resolved, and we are aiming for an early turnaround. As for MEMS microphones, we expect the demand for digital microphones for smartphones and wearable devices to increase, and we will aim to secure the top line by acquiring new businesses. As explained above, now we will further strengthen our business portfolio by continuing to further strengthen our highly profitable businesses while continuing to implement appropriate measures to turn around our problem businesses. Although the current economic environment is very uncertain, we will continue to promote our growth strategy by continuing to implement measures that we can and should take internally, that is, measures to increase our own strengths to ensure that we can ride the big wave of the EX and DX. The measures and deductions I have just explained will lead to the basic concept of the next medium-time business plan. More specific details of the plan will be announced in May of next year, but in order to achieve a new stage of growth for a company where it will improve capital efficiency and significantly grow strategic growth businesses such as passive components and sensors as a major earnings pillar following the rechargeable battery business. That concludes my presentation. Thank you very much for your kind attention.