TDK Corp. ADR (OTCPK:TTDKY) Q3 2017 Earnings Conference Call January 31, 2017 3:30 AM ET
Tetsuji Yamanishi - Corporate Officer
Unidentified Company Representative
Okay. Thank you very much for waiting. It’s time. So we’d like to start the performance briefing of the Q3 of fiscal year March 2017 of TDK Corporation. And, first of all, thank you very much for joining us today for this briefing. And I'm going to [indiscernible] from the Corporate Communications. Thank you very much.
First of all, let me introduce the speakers today. Looking from the left hand side, from this side, Mr. Hiroyuki Uemura, Vice President. And next, Mr. Noboru Saito, the Managing Director and Corporate Officer and Mr. Tetsuji Yamanishi, Corporate Officer. The three speakers will make the presentation. Thank you very much.
And let me just introduce the proceedings of today's briefing. And first of all, Mr. Yamanishi is going to present results and outline the performance briefings of Q3 of fiscal year March 2017 and also the full year basis and the forecast. And after the presentation, we’d like to open the floor to the questions.
And the other thing is that from the previous times, in order to strictly comply with the requirements on the information disclosures, we ask you to refrain from that, so called the doorstop interview, so I highly appreciate the cooperation. Okay. Thank you very much. Thank you.
Hello. And this is Yamanishi speaking. Let me now take this moment to thank you for your precious time, attending this, our performance briefing for the third quarter of fiscal year March 2017. And certainly, I’d like to go through the outline of our performance numbers.
The first, and the highlights of the third quarter, the performance. The year-on-year basis actually, Japanese yen actually, appreciated JPY12 or 10% or vis-à-vis the euro, JPY15 or 12%. Despite -- and actually, the net sales actually increased 7.7% and operating income increased 7.3%. So we’re able to record the past record, both in revenue and profit year-on-year basis. Of course, we’re enjoying a good growth in the automotive market, particularly with the inductive and capacitors products, but also DC-DC Converters for the [indiscernible] and also the magnetic sensors actually have become important drivers and actually we’re able to grow from the previous year.
And above that, and actually, smartphone markets which are showing dip -- dipping in growth, but again passive components and film application products actually, actually gave us good and stable growth, thanks to the extended portfolio among the customers and on a quarterly basis, the passive, actually, we’re able to have the record high in revenue and also in operating income wise actually, we’re almost hitting the record high.
The film application products actually on a quarterly basis, both on sales and operating income, we’re able to actually have a record high. Thus in passive components, high frequency on products on top of the discrete products, thanks to the expansion in sales of diversity module actually and also, we improved, we’re able to improve the productivity and resulting in a much greater profitability and despite, we’re faced with the stronger yen impact, we’re able to actually secure quite a dramatic increase in the sales and the profit.
As for the rechargeable batteries, actually, we’re able to expand our sales into the Chinese customers also for game consoles, new applications and the sales expanded. Under those circumstances actually, depending on the customers in North America has become less and also thanks to the improved productivity, we’re able to actually kick out the impact coming from the stronger yen and FX impacts, enjoying good growth both in revenue and in profit.
As for the HDD heads, and SD, supply demand environment and also demand for the personal computers actually helped the HDD market business. And looking at the HDD market, 410 million was the number we gave to you earlier and actually that rose to upward to 420 million. Non-captive HDD head shipments actually, we’re still enjoying a good growth and HDD head shipments actually year-on-year basis actually, they grew almost 10%. Actually, it is going to be almost 30% increase over the original forecast, even though, we had stronger yen impact, actually, we’re able to improve the revenue by 2% since last year and we’ve been working on the sensor and actuators, energy needs and on next-generation electronic and components.
They are the strategic products and we have been working on the strategic actions and in these areas and in general last year, we announced the business relationship with Qualcomm and also we have been working on joint ventures and we believe that we should be able to do some soon, we can expect to get the profit out of that relationship and in the fourth quarter and we’re going to revise up our full year forecast.
Next, I’d like to give you an outline of the third quarter numbers and revenue, 324.8 billion and up JPY23.1 billion or 7.7% YoY basis. Operating income, JPY32.5 billion or JPY2.2 billion or 7.3% improvement from the previous year. Operating income, and we’re maintaining the two digit, the number 10% since last year. Before income tax -- revenue, 32.1 billion, up JPY2.2 billion and as for the net income for the third quarter, since last year, slight decrease by 24, JPY24.4 billion [ph]. That results in an EPS being JPY193.52. As for the average FX vis-à-vis the US dollars, JPY109.19 or appreciated by 10.1% and vis-à-vis the euro, 117.74 or appreciated on the Japanese yen side, 11.5%.
All-in-all, the FX impact in terms of revenue down JPY37.3 billion, in terms of operating income, actually impact wise, it was down JPY7.6 billion. As for the FX and safety, just like last time, in terms of the operating income, again between the yen and US dollars, almost at JPY1.2 billion and between yen and euro, almost JPY700 million.
Moving on to the segment situations. First, I’d like to go through the passive components. The revenue JPY147.9 billion, up 3% from the previous year. Operating income, 20.4 billion or increasing by 16.6% and the operating profit ratio was 13.8%. We’re able to actually protect ourselves against the stronger yen and the impact improving both revenue and profitability.
Moving on to the ceramic condensers and the inductive devices, in this segmentation, actually, 50% accounts from the automotive market sales and North American and in Europe and China actually, they have been a great driver and actually we’re able to absorb the impact coming from the stronger yen. But in ICT sales, particularly for the smartphones actually have declined. High-frequency components, particularly discrete products for the smartphones, including the customers in North America and also in China and also the South Korea, we enjoyed good growth.
And on top of that and actually, even though, there was a dip in the [indiscernible] we’re able to actually increase this sales of the diversity in the modules and particularly for the North American customers, actually giving us 1.5x improvement over -- in terms of the revenue. Operating income, actually, we have gained a production pick in the third quarter, giving us a better utilization and also we’re able to improve the profitability for the modular products, given us big improvement in profit. So we’re able to enjoy the good result, not only in the passive products, also we enjoy the end-to-end, the profitability.
Piezoelectric materials and actually, particularly for the Chinese smartphone manufacturers, we’re able to sell good number of the camera module actuators.
Moving on to the magnetic application products, actually, revenue JPY92.4 billion or up 13%. Operating income of JPY4.8 billion. This was an improvement of 2.1% from the previous year. Operating income ratio was 5.2%.
In regard to the HDD heads, there has been no change in that since the beginning of the fiscal year and non-captive 2.5-inch HDD head, the shipments are turning to be growing and on top of that, for 3.5-inch HDD, we have a shift toward full turnkey sales, giving us more numbers for sales. We’re able to absorb FX impact and actually we increased profit, increased sales by 2%.
As for the shipments for the third quarter and the previous quarter, first quarter, have been 100 actually. It became 126 from 119 and given us 10% improvement from the previous year. As for the profitability, in new products, of course decline in the APS and also for captive HDD assembly, actually gave us dip in the profitability, but we’re able to actually improve the utilization, centered around the way for deal locations, even though we’re affected by the stronger yen, HDD head has given us better profitability and also given us good sales opportunities.
As for the magnet and power supplies, due to the stronger yen impact and actually, sales dipped and declined. Actually, excluding on FX impact, actually, it’s been flat. As for the magnet side, due to the decline in the HDD and actually HDD and magnet, the sales is faced with tough situation. This is still continuing. But that said though, for the industrial equipment, this is a part of our efforts, particularly working on the motors with power generation and actually the sales here is increasing. As for the power supplies, in Europe, the instrumentation actually market seems to be showing slight decrease, but in other regions actually, in industrial equipment, given us good growth.
Moving on to the film application products, the net sales being JPY76.4 billion. Operating income being JPY16.2 billion, up 13% in revenue and up 11% in profit. Thanks to [indiscernible], we’re maintaining a high profit level and our operating income percent was more than 20%, the same as the last year’s. As for the rechargeable batteries, sales for the customers in North America actually, year-on-year basis, actually it declined. But forecast on the third quarter, we’re able to surpass that and also for the Chinese smartphone manufacturers, actually sells there and actually increased 2x and also the non-smartphone new applications, particularly for the drawn and game console and applications section, we’re able to actually enjoy the good results and out of our investment into the CapEx and making good response into the demands coming from the markets, we’re enjoying good results both in terms of revenue and in terms of the profit. And next let me talk about net sales and operating income on a quarter-on-quarter basis from Q2 to Q3 and also the breakdown with changes of operating income. First of all as we’ve just done in the last quarter, we have made some reclassifications of the products and the part of the products in film application segment was reclassified to the other segment, so that impact is that and also the net sales of other have increased by JPY800 million and also part of the products in the other segment was reclassified to the passive component so that's in the Q2 - net sales of Q2 of passive component pushed up by JPY2.1 billion. There was no impact on the operating income due to this reclassification.
Let me look at the segment wise performance, first of all for the passive component segments. The sales of this segment have increased by JPY3.9 billion, 2.7% growth QonQ basis and when we come to capacitors, although the sales and business in automotive market have been steady but we have declined business in ICT market and aluminum film capacitors also again that automotive market had been going well, but still it experienced the economic slowdown in China and also the bad impacts on from the de novo price declines and also slow business in the industrial equipments and pushed our business to almost flat from Q2. And excluding that and the positive impact of the appreciation to yen it will be slightly declined and the net sales by 6%. For inductive devices, now that Q2 net sales have declined by 1.1 billion, 3.1% declines in revenues. And again although business in the automotive markets have been favorable but we have declined business in the industrial equipment and excluding currency impact and it declined slightly. And the sales of the other passive components have increased by JPY2.9 billion and 3.9% growth QonQ basis, although the high-frequency components have been very favorable but now some adjustments for supplied other materials by our customer in China. And then also on the other hand, actuator for the carbon module for the customer and the Chinese, but excluding the currency impacts, it's only declined slightly.
When it comes to operating income of the passive components, it declined by JPY300 million, 1.4% negative growth from Q2. And the margin also - and still - and maintained 14%, although it has declined slightly. Next let me talk about the magnetic application segment. The sales of this segment have increased by JPY8.5 billion and that is 10.1% growth from the Q2. Recording device sales increased by JPY8.4 billion, 13.5% of increase and the shipment index of Q2 HDD head - the shipment index in Q2 increased 2% from 124% to 126%. The full turnkey sales of 3.5-inch HDD have increased and also from the Q3, we have started consolidation of the Hutchinson so that it was pushed up about a JPY6 billion of net to sales that's a major impact. And operating income of the magnetic application product has doubled by JPY2.4 billion from Q2. When it comes to HDD head and the volume increase of the 2.5-inch head have contributed a lot and also now we have contributions from the profits, operation profits of the wafer process consolidation.
Next the film application product segments. The sales increased by JPY11.2 billion and 17.2% of dramatic increase. Now, on to forecast of business of the smartphone for the North America have been right on the forecast, but at the same time and dramatically - have a dramatic increase in business to the customer in China. So that now we have a very good product mix between China and North American customers and we have a very good portfolio balance. Now operating income have increased by JPY3.2 billion, 25% growth to JPY16.2 billion and with an improvement of the marginal profits due to increase to the top line and also with the promotion of the cost improvements and cost improvements and also absorbing, and also we have to offer discounts we have a dramatic and a profit increase.
Next, this is the breakdown of operating income changes, in total JPY2.2 billion. First of all for including that - due to the change in the sales and we have a JPY21.4 billion, we have pushed up with it. And the sales of the high-frequency components in the second [indiscernible] contributed a lot. Next, when it comes to decline of the selling prices and about an average we have to offer about 5% discount, that were pushed down by JPY15.9 billion and JPY7.6 billion of the negative impact from that appreciation of the yen and then also with that efficiency improvements due to the rationalizations and also improvements of the yields have pushed up JPY11.1 billion and about JPY50 million made by that structural reforms and SG&A that was the negative impact of JPY7.4 billion. About half of this SG&A was due to that relevant cost for M&A, several M&A costs and [indiscernible] Hutchinson consolidations have pushed up and SG&A and also. And after the acquisition of Hutchinson, we added to and invested for the structural reform and for acquisition of Hutchinson and also for cost to get ready for that joint venture with Qualcomm and also the M&A cost concerning InvenSense.
And the rest of - half of the SG&A was due to that increase of that sales activities and R&D. And when it comes to R&D and this is mainly for that new product development for the high-frequency components and secondary batteries and also enhancing process developments and the other R&D expenses for that manufacturing innovation. Next, let me talk about the nine months total in the end of the Q3. The sales were JPY904 billion and increased by 1.7% year-on-year basis and on the nine months basis and again this year also we have all-time high revenues. When it comes to the operating income, it was JPY76.8 billion and also 1.2% increase and also again with the net sales, we have record high operating income. And the net income was JPY57.1 billion, it was 1.2% increase. The last of all, let me talk about [indiscernible] forecast of the full-year basis forecast. In the first half, [indiscernible] foreign exchange rates we have changed it and in the foreign exchange rates through the Q4 would be JPY110 to the dollar and JPY118 to euro, this is the new assumed ForEx rate. We have explained earlier that we could - now we have could close that contract to Qualcomm, so that now we could include that gains from the transfer of business to Qualcomm and that’s the new forecast, including this.
When it comes to that gains from the transfer of the businesses and the income - operating income and income before income taxes JPY149 billion and also JPY120 billion in the income, net income after including this reflections. Ten closing the contracts, now, this high-frequency components would have been not consolidated, so deconsolidated so that at end of Q4, and JPY20 billion of revenues and also an operating income, net income was also JPY2 billion would be minus. So excluding for this impact, now we have - when it comes to sales, now JPY1.140 trillion, when they announced it last time but now, JPY30 billion was increased from this, so that in total JPY1.17 trillion. But on the other hand we have some negative impacts for example that the deconsolidated that JPY20 billion so that if we deduct this, it was JPY1.150 trillion. Operating incomes what we announced last time JPY76 billion and increased by JPY10 billion to JPY86 billion, but now we deduct JPY2 billion of this deconsolidation, so in total JPY84 billion. So after this onward, we’d like to achieve that sustainable growth so that’s why we like to by taking advantage of this business collaboration with Qualcomm and like to expand the profits and revenues by the three strategic products and the segments but also we like to further accelerate and speed up the structural reforms. In Q4, we’d like to invest JPY20 billion for further enhancing that business.
In HDD heads, and without the basis for the domestic wafer and a basis with [indiscernible] business and also we need to impairment a long-lived asset for that and also when it’s changing, that’s the metal magnet business and when it’s transforming, that alters the product portfolio, more focusing on the automobile and the industrial equipments. So, also we need to invest for this and including that the impairment of long-lived assets and also when it comes to aluminum [indiscernible] capacitors, we also would like to just - and shifting from that kind of, the biased product mix to that more of that focusing on the automotive markets and expanding the products. We also have to just invest for that goodwill and impairments of our long-lived assets, all this included. And further, we would like to make further investments for the structural reform. Taken all this into considerations including the gain from the transfer of business, net sales would be JPY1.15 trillion, operating income would be JPY230 billion and income before income tax would be JPY212 billion and the net income would be JPY145 billion [indiscernible] upward revisions and also and earnings per share would be JPY1,149.34, this is revision. And when it comes to the gains from the transfer of business, we like to reinvest this and the gains for that [indiscernible] focus areas so that we’d like to stay the same for the dividends from the JPY60 through the second half and annual dividends with JPY120.
That's all, thank you very much. Thank you.
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