Investor Relations | IR Events | Performance Briefing

[ 3rd Quarter of fiscal 2006 Performance Briefing ]Q&A

Q1. My question concerns the profitability of ceramic chip capacitors. Could you talk briefly about the third-quarter performance, the fourth-quarter outlook and prices for these products?
A1. As Mr. Enami mentioned earlier, capacitor sales in the first half were down by about 10% year on year. However, sales have rebounded since the beginning of the second half, so we expect sales for the second half to rise roughly 10% year on year.

Regarding the profitability of capacitors in fiscal 2006, we expect earnings to be worse than in the previous fiscal year. We don't expect a third- and fourth-quarter recovery to be enough to fully offset the poor performance in the first two quarters. That said, third-quarter earnings were better than in the first half. We are also projecting a fourth-quarter profit margin of about the same as the third quarter. But, as I said, we still expect annual earnings in capacitors to fall short of fiscal 2005.

Regarding prices, in the third quarter they dropped at a rate of above 10%, compared to the same period a year ago.
Q2. I'd like to hear Mr. Kamigama's views on the impact of Seagate Technology's acquisition of Maxtor Corporation on operating results next fiscal year and thereafter.
A2. If unit-volume shipments to Maxtor in the second half of fiscal 2006 are 100, we are projecting shipments of 75 and 50 in the first and second halves of fiscal 2007, respectively. We are looking at various factors and strategies. However, I can't say anything specific about this today.
Q3. Maxtor has not announced the launch of high-end type HDDs, or 160GB/P products, and you mentioned earlier during your presentation on the HDD head launch schedule that there have been further delays with the mass production of 160GB/P heads at TDK. Given this situation, should we assume that Maxtor will switch to Seagate products and not TDK's 160GB/P heads for high-end type HDDs?
A3. Regarding 160GB/P HDDs, we expect Maxtor will qualify both Seagate's heads and TDK's heads in parallel for certain models that have fewer disks. Accordingly, we will continue to provide support for all 160GB/P products.
Q4. I have two questions. The first concerns the Lambda Power Division and the battery business. Could you provide sales and earnings figures for each of these businesses for the third quarter?

My second question relates to the large increase in projected sales for the recording devices sector for fiscal 2006. TDK is now forecasting full-year sales for this sector of 304.0 billion yen, which represents an approximate 29.0 billion yen increase from your previous forecast. Please explain what accounts for this increase in terms of customers, business and so forth. Also, while you have raised your sales forecast by 29.0 billion yen for the full year, operating income isn't projected to increase. Why?
A4. The Lambda Power Division contributed sales of 11.7 billion yen in the third quarter of fiscal 2006. Sorry, but I cannot give figures for the battery business.

Let me now explain the components of the increase in projected sales in the recording devices sector. Firstly, there has been little change to our forecast for sales to Maxtor, meaning that sales volumes to other companies are increasing. Secondly, higher demand accounts for approximately 22% of the increase in our sales forecast. That means growth in HDD demand is around 22% in terms of the number of heads. The third reason is that we have won business from captive head makers. Growth in sales to some makers has been higher than the increase in total head demand.

You asked about why our earnings are not increasing in line with sales. One reason is severe discounting. The second major reason is that production yields have fallen a little due to the launch of 125GB/P products.
Q5. My first question concerns ceramic chip capacitors and the year-on-year comparison of prices given earlier. How did prices trend in the third quarter compared with the second quarter? In other words, on a quarterly basis, I'd like to know if prices have settled down or whether they are drifting lower at the same rate. Also, what are your current forecasts for production capacity and orders?

My second question concerns heads. Please explain quarterly sales trends using the index you always use.

Thirdly, you have earlier provided forecasts for Maxtor on an indexed basis. If one assumes the second half to be 100, what are your forecasts for the first and second halves of fiscal 2007? I remember TDK initially projecting a 4 point increase in market share for fiscal 2007. Your projection for a 50% drop in shipments to Maxtor equates to a share of about 4 points, perhaps meaning that overall head sales will not decline. Please comment on this.
A5. The discount rate for ceramic chip capacitors in the first and second quarters was large. In the third quarter it was slightly lower, suggesting that the discount rate is leveling off. Supplies were tight in the third quarter, which explains why discounting pressure wasn't that great. Orders have been very strong since around October, outstripping production capacity. If production capacity was 100, orders were 109-120. We think that orders in the fourth quarter will be lower than in the third quarter.

Let me now look at head shipments. At our last earnings conference we projected third-quarter shipments of 119, assuming fiscal 2005 fourth-quarter shipments were 100. Actual third-quarter shipments were 123. We are projecting fourth-quarter shipments of 118, the same as previously forecast. We said earlier that shipments to Maxtor would fall. But if overall shipments in the second half of fiscal 2006 are 100, we are projecting shipments of 102 and 105 in the first and second halves of fiscal 2007, respectively. So we are projecting a slight increase in overall shipment volumes in the head business for fiscal 2007.
Q6. Please confirm restructuring expenses for the third and fourth quarters. Also, please comment on whether the profitability of capacitors and heads will improve further to the high level of fiscal 2005. If you are projecting an improvement, when do you expect it to happen?

In capacitors, you stated that quality assurance strengthening measures continue to be taken. Given that prices and orders aren't that bad, I assume that these ongoing measures to strengthen quality assurance are hampering your efforts to improve profitability?

Concerning the head business, you said that you are expecting a slight increase in sales volume overall next fiscal year. Should we assume therefore that 160GB/P and 180GB/P products and new products for 2.5-inch HDDs will help to lift profit margins? Or is it best to assume that there will be no improvement in profit margins because of problems with production yields when these products are launched and because you won't be able to cut costs? Please comment on the profitability of heads and capacitors next fiscal year.

My final question concerns growth prospects for the company as a whole. With Maxtor and Seagate having announced plans to merge, isn't it possible that TDK may have to raise profit margins and take other steps to counteract the impact of this merger in order to continue growing? What measures is TDK planning to sustain growth under these circumstances?
A6. Restructuring expenses through the end of the third quarter were roughly 2.2 billion yen. Most of these expenses were incurred in the recording media segment. Having budgeted for restructuring expenses of 4.5 billion yen for the full year, we plan to use the remaining 2.3 billion yen in the fourth quarter. In addition, we plan to spend an additional 2.0 billion yen for restructuring electronic components in the fourth quarter. So we expect to book 4.3 billion yen in restructuring expenses in the fourth quarter.

Regarding the announced merger of Seagate and Maxtor and steps to ensure that TDK continues to grow, we recognize that we must use other businesses to cover the loss of sales we were expecting from Maxtor. This might mean executing structural reforms faster than planned, for example. There are various possibilities.

Regarding your question concerning the head business, about whether new 160GB/P and 180GB/P products will be highly profitable, we don't expect production yields of these heads to be a problem. However, we don't know what will happen at HDD makers, including with respect to product reliability. Because of this uncertainty, it is difficult to predict whether the final production yield will be a problem for us. So there is not much I can say at this point.

In the head business, it is important that we help our customers compete successfully. So we mustn't be preoccupied with high profitability alone. You asked about whether we could sell TMR heads (new products) at high prices. Pricing is an important element of our head business strategy. We need to strike the right balance between profitability and backing up our customers. Therefore, we want to set prices that are reasonable. You asked if there are any other measures we can take in the head business. Please understand that I've said all I can.

I'd now like to talk about our forecast for a recovery in capacitor earnings. Since the beginning of the fourth quarter we have taken various actions to improve profit margins. While we resolved most problems in the third quarter, there is still work to do in terms of profitability in the fourth quarter. We are keeping additional people working on inspection in different production processes. We will continue to work to maintain overall quality in the fourth quarter by spending more than was budgeted on quality control in order to retain the trust of customers. That being the case, we don't expect to see an improvement in profitability until the first quarter of fiscal 2007 at the earliest.
Q7. TDK's share of the capacitor market has fallen slightly. What do you plan to do about this?
A7. We are examining this issue and taking various actions with respect to materials development, processes and capital expenditures to raise our market share, which is now down slightly. We are determined to regain our previous market share in the next fiscal year.
Q8. I'd like to clarify one point concerning HDD heads. Earlier it was stated that hard disks are in short supply and that HDD manufacturers might change their new product development programs based on the availability of components other than heads. Given how far advanced Seagate, the largest HDD supplier, is in perpendicular recording technology, the effect of this component shortage might become a real source of concern. What is TDK's view on this and what measures, if any, do you plan to take?
A8. With respect to 160GB/P products for 3.5-inch HDDs, aluminum-substrate hard disks and longitudinal magnetic recording will probably be used. We've talked to media manufacturers and believe that supply won't be a problem. However, there are concerns about a shortage of glass-substrate hard disks for 2.5-inch and smaller HDDs that use perpendicular magnetic recording. Because of this, we feel that we must be prepared to use longitudinal magnetic recording as a backup. We are presently working on having products based on this back-up method confirmed by customers.
Q9. Over the last few years, HDD manufacturers have been choosing to produce HDD heads and other components in-house. This trend is illustrated by recent developments such as the acquisition by Seagate, which manufactures most components internally, of Maxtor, a company that produces hardly any components in-house. And Western Digital has acquired HDD head maker Read-Rite. As a result of these and other industry developments, TDK is one of only two companies in the world that specialize in manufacturing HDD heads. Some people think that there is only enough room for one company in the future. What is TDK's view?
A9. That is a difficult question. HDD makers that produce heads in-house are not necessarily winning the game. There is no question that Seagate is a strong player, but closer observation is needed to determine whether these HDD manufacturers will prevail in the long run. TDK is looking at various scenarios.
Q10. My question concerns whether the decrease in HDD head shipments to Maxtor can be offset by higher sales to other customers. The forecasts you gave earlier called for a slight increase in head volumes next fiscal year compared with fiscal 2006. Where do you see shipments rising and falling? Now that Maxtor has been acquired by Seagate, it will become a competitor. Due to this situation, at what price will TDK sell HDD heads to Maxtor?
A10. Shipments to Maxtor will decrease but we expect to increase volumes to other customers. Furthermore, we don't expect to see a drop in volumes next fiscal year. Because there won't be a sudden drop in sales, we believe that fixed expenses won't pressure our earnings. Regarding your question on our pricing strategy for sales to Maxtor when it becomes part of Seagate, at this stage, we plan to keep prices the same as in the past.
Q11. In your fourth-quarter forecasts for electronic components, you are projecting a substantial fall in sales compared with the third quarter, but no change in earnings. Furthermore, excluding fourth-quarter restructuring expenses, your plan represents a high level of earnings. Is this realistic? Also, you said that 2.0 billion yen would be spent on structural reforms in electronic components. What areas are targeted for restructuring?
A11. Regarding electronic components in the fourth quarter, we expect to generate the same level of profits as in the third quarter even on lower sales. This is because earnings on capacitors and other products are expected to improve from the third quarter, when earnings didn't rise in proportion to higher sales. Another reason is the Lambda Power group, which became a consolidated subsidiary in October 2005. As has already been announced, our plans call for fourth-quarter earnings at this group to be higher than in the third quarter.

Another reason is the Lambda Power group, which became a consolidated business unit/entity/group in October 2005.

2005 marked TDK's 70th anniversary. To celebrate this milestone we plan to increase the annual dividend per share to 80 yen. We hope to consistently increase the dividend in the future. We also returned profits to other stakeholders during the third quarter to celebrate our 70th anniversary. These expenses were incurred only in the third quarter. Because we don't expect to record these expenses in the fourth quarter, we hope to achieve our earnings goal.

The additional 2.0 billion yen planned for structural reforms in the fourth quarter will target mainly magnetic products and high-frequency components. We have made considerable strides in improving profitability in these areas, but profits are still elusive.
Q12. In the electronic devices sector, sales of inductive devices rose markedly. Specifically, what products were responsible for this growth? Also, how has the profitability of inductive devices changed? What is your outlook for growth in the next fiscal year and beyond?
A12. Sales of mobile phone components that we developed in the previous fiscal year are growing. Sales of surface mount inductive devices, multilayer components, are also growing considerably. As a consequence of this growth, the profit margin in inductive devices has improved significantly. We are determined to use our core technologies to grow from this base next year and beyond.