Investor Relations | IR Events | Performance Briefing

[ 1st Quarter of fiscal 2007 Performance Briefing ]Q&A

Q1. My question concerns capacitors. Could you give us your view of the market environment and supply-demand situation during the first quarter? Some mobile phone manufacturers have been lowering their production levels, but how was demand in the market generally?
A1. You are right that some mobile phone manufacturers reduced their output in the first quarter. However, our orders were brisk as a whole. In fact, because of this market buoyancy, we recorded a 19% year-on-year increase in sales of capacitors in the first quarter.
Q2. I'd like to know what progress TDK has made with its plans to increase production capacity of capacitors. At the previous earnings release conference, you stated that output would be increased by around 10 to 20%.
A2. We are currently producing roughly 14.0 billion units per month. At the previous earnings release conference, we said that we planned to invest in facilities to increase monthly output to around 17.0 billion units in the second half of the current fiscal year. We are proceeding according to plan and expect to reach this level by the third quarter of fiscal 2007.
Q3. Rival capacitor manufacturers are taking steps to ramp up their capacity by more than TDK. If possible, could you explain why TDK is taking a conservative approach by increasing output by only 10 to 20%?
A3. It's debatable whether our plan to augment output by 10 to 20% is overly conservative or not. But I want to make it clear that in no way are we curbing capital expenditures. We are aware that we must quickly raise production of high- and large-capacitance capacitors, a core technology of TDK. Consequently, we aren't adopting an overly cautious approach to capital expenditures.

We're looking at various approaches from a number of angles. At this stage, we have sufficient factory floor space to expand output to 20.0 billion units per month. Our policy is to invest in augmenting our facilities according to orders from customers, that is, demand forecasts. In other words, we are prepared to make substantial investments in facilities in response to our customers' production plans to increase our sales. Put another way, we will make capital investments to grow sales of products with high and large capacitance and products for other applications.
Q4. My question concerns the outlook for quarterly sales of capacitors. Assuming the first quarter of the past fiscal year is 100, actual sales in the first quarter of fiscal 2007 were 119 and your forecast is for second-quarter sales of 130. Please comment on the likelihood of achieving this projection based on current orders.
A4. Orders are brisk at present, so we expect to achieve our forecast of 130 for the second quarter.
Q5. Operating income in the electronic materials and components segment was 4.3 billion yen up on the previous fiscal year's first quarter. My question concerns the factors that contributed to this increase. As I see it, there were three groups of factors: the increase attributable to the Lambda Power Division and battery company TDK acquired in fiscal 2006; the net effect of lower earnings in HDD heads but higher earnings in capacitors; and earnings from other products. Could you explain specifically what contribution each of these groupings made to the increased operating income?
A5. Capacitor operating income increased from the first quarter of the previous fiscal year. However, operating income from HDD heads declined by about the same amount as this increase, effectively cancelling out the higher capacitor earnings. The 4.3 billion yen increase in operating income, therefore, was due to higher earnings from products other than capacitors and heads.
Q6. At the previous earnings release conference, you projected head shipments to Maxtor of 45 and 0 for the first and second halves of fiscal 2007, respectively, assuming unit-volume shipments for the second half of fiscal 2006 to be 100. Has there been any change to that outlook?
A6. Not really. Our current forecast for the first half is almost the same as our previous forecast. On a quarterly basis, however, first-quarter orders declined more than we expected. But second-quarter orders are not expected to fall by as much as we had initially thought. The net result is that there is no change to our outlook for the first half. Profitability in the first quarter was adversely affected, however, by a lower-than-expected capacity utilization rate.
Q7. My question relates back to your forecasts for sales of capacitors. TDK recorded first-quarter sales of 119 on an indexed basis and is forecasting second- and third-quarter sales of 130. But you said earlier that the additional production capacity, which would increase output from 14.0 billion units per month to 17.0 billion units per month, will be available at the end of September, or start of October this year. If that is the case, then it would seem that your plans to increase production bear little relationship to your forecast for flat sales between the second and third quarters. Can you explain this?
A7. Production capacity and sales are not always linked. First-quarter production was around 14.0 billion units. When we said that output would increase to 17.0 billion units in the third quarter, that doesn't mean that monthly production will remain at 14.0 billion units to the end of September and then suddenly increase to 17.0 billion units from October. We are actually increasing output by around 1.0 billion units a month. In other words, we are gradually adding capacity. Our current capital expenditure plans are for the additional investments combined to lift capacity to 17.0 billion units by the end of September.
Q8. By how much do you expect unit prices of capacitors to fall?
A8. By about 7% on an annualized basis.
Q9. The recording media segment posted an operating loss of 1.6 billion yen for the first quarter. Excluding the restructuring expenses of 0.8 billion yen, the loss was effectively 0.8 billion yen on a continuing operations basis. Will losses be confined to the first quarter? Do you expect to return to profitability in this segment in the second quarter and thereafter?
A9. Yes, we think that operating losses will be restricted to the first quarter. From the previous fiscal year through the first quarter of fiscal 2007 we restructured this segment, with actions centered on Europe. The first-quarter operating loss reflected the fact that a certain number of employees who had planned to leave TDK by March or April remained until the end of June. But this was factored into our business plans, so we were right where we expected to be at the end of June. In the absence of these expenses, we expect to post profits from the second quarter onwards.
Q10. Do you expect to break even for the full year in the recording media segment? Or do you expect a better result than that?
A10. The third quarter is the busiest time of the year for the recording media business, so we have high hopes for earnings to recover in the second half. We expect earnings in the second half to at least cancel out the 1.6 billion yen loss in the first quarter. So we are expecting to break even or post a small profit for the full year.
Q11. My question concerns forecasts for HDD heads. Given that you are assuming volume to decline but sales to rise, does this mean that you expect unit prices to increase? Or is this projected increase in sales based on the beneficial effect of exchange rate fluctuations?
A11. Exchange rate fluctuations.
Q12. I would have expected first-quarter earnings to rise without the beneficial effects of currency fluctuations. Is it correct, therefore, to assume that problems concerning capacity utilization caused by lower orders from Maxtor meant that sales, although in line with plan, weren't reflected in earnings?
A12. Yes.
Q13. Your full-year forecasts call for a slight decrease in HDD head market share from 32% to 31%. But earlier you said that there is no change in your current forecast for the first and second halves for Maxtor orders from your initial forecast. Seagate has been gaining market share in 2.5-inch HDDs recently, so I would expect there to be some effect on TDK's existing customers. In light of this, is TDK making greater efforts to help customers to become more competitive? What can TDK do to help its customers compete next year?
A13. There is no question that determining how to work with customers is a key issue for TDK. We plan to cooperate with customers in various ways to help them take full advantage of their strengths. I can't go into the details of this cooperation, but we will tailor our approach to the needs of each customer.
Q14. Can't you be more specific about how you will enhance collaboration with customers?
A14. In terms of new products, one area is perpendicular recording, although we've just launched products based on this technology. We plan to strengthen collaboration with respect to heads, media and other areas to propose solutions to our customers. This is our first priority.
Q15. My question concerns HDD heads. Shipments to Maxtor in the first quarter fell by half compared with the last quarter of the previous fiscal year and overall volume was down 14%. Based on this overall decline, is it correct to assume that shipments to customers other than Maxtor were flat? How did shipments to customers other than Maxtor trend as a whole?
A15. We worked to expand sales to other customers, but we were unable to increase sales enough to cover the decline in shipments to Maxtor.
Q16. Shipments to Maxtor dropped in the first quarter and you are forecasting little change in the second quarter. Do you, therefore, expect shipments to decline by 50% thereafter?
A16. We expect shipments to fall 50% in the first half.
Q17. So you are saying that shipments to Maxtor will fall 50% in the first half and be zero in the second half?
A17. Yes, that's our outlook.
Q18. So your business with Maxtor won't continue?
A18. That's right.
Q19. So you are saying that while shipments to Maxtor will fall in the second half, shipments to other customers will increase, with the net result that there will be no change in shipments to existing customers?
A19. Yes.
Q20. Comparing the first quarter with the last quarter of the previous fiscal year, can you confirm that operating income in the electronic materials and components segment effectively declined 5.4 billion yen?
A20. Operating income in the electronic materials and components segment declined by about 3.0 billion yen, with one factor being HDD heads.
Q21. HDD head sales declined about 16.0 billion yen, which had a significant impact on earnings. But what about earnings in businesses other than HDD heads in the first quarter compared with the fourth quarter of fiscal 2006?
A21. Operating income increased in businesses other than HDD heads.
Q22. Indexed capacitor sales of 119 were slightly lower than your first-quarter plan of 122. What was behind this decline?
A22. Orders were exceptionally strong, but production was 2 points below our original plan.
Q23. Did actual performance differ from your initial expectations for the first quarter in respect of the three product categories making up the electronic devices sector? And what is the outlook? I think your plan for fiscal 2007 is for growth in high-frequency components.
A23. If anything, sales of inductive devices exceeded our expectations. High-frequency component sales were lower than expected, but this decline was covered by inductive devices, meaning that, as a whole, the electronic devices sector is performing largely in line with forecasts.
Q24. So there is no major change to your initial forecasts in the three categories of the electronic devices sector?
A24. At its earnings conference yesterday, Densei-Lambda stated that it expected sales to increase. Although this should benefit our results, we still expect overall sales in the electronic devices sector to be largely as forecast.

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