Investor Relations | IR Events | Performance Briefing

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

Q1. Would you please give indexed quarterly shipment figures for heads? Also, please discuss the background to your results and forecasts, specifically restructuring in the hard disk drive industry and the poorer performances by peer companies.
A1. Assuming head shipments in the first quarter of fiscal 2006 were 100, shipments in the first and second quarters of fiscal 2007 were 111 and 130, respectively. For the third and fourth quarters we are projecting 133 and 128, respectively. The second-quarter growth in shipments was driven principally by increased production at PC-related customers and higher demand in the IT sector. Growth has continued in volume terms in the third quarter, but the pricing situation is difficult, as was explained before.
Q2. My question is for Mr. Kamigama. Since your appointment as president, have you discovered anything new as you surveyed the company that might have influenced you in formulating future strategy? Also, how do you intend to tie that in with your strategy? Could you tell us how the past five months have shaped your thinking?
A2. In the first four months of my presidency, I visited customers and most TDK plants in Japan, with the exception of the Mikumagawa facility in Kyushu. I've actually been to some facilities twice. My impression is that TDK still has many good points and strengths. Heading the list is business units that do everything starting from materials. I came across several breakthroughs that with a little more effort could be made much better. I intend to include those in the medium-term management plan we are currently formulating.
Q3. Looking at it from the opposite perspective, did you find anything that was worse than you thought?
A3. Yes. However, I believe those areas can be improved, too, depending on the approach taken. Basically, I think we have considerable strength in businesses where we do everything starting from materials. If we work harder on our manufacturing methods, materials and facilities, I believe we will be even better. More so than new fields, I feel that our first priority must be to ensure that existing operations function as well as they can.
Q4. My question concerns ceramic capacitors. I believe that TDK currently has a production capacity of 17 billion units per month. Have you made a decision on any additional investments to ramp up output going forward? If so, when do you plan to have that capacity online? Also, will the additional investment target different areas? Finally, what are your latest thoughts on the operating environment, demand-supply situation as far as you know at present for the October-December and January-March quarters?
A4. We are running the production lines of ceramic capacitors smoothly, having completed the capacity expansion at the end of September. We have also confirmed the production stability from the technical aspects. As a whole, we are currently running the lines to maintain capacity utilization at 100% in the current quarter, too. Therefore, as was said previously, we have completed the capacity expansion process to reach a monthly output target of 17 billion units.

Regarding further increases in output, it's been said in some quarters that we've been too cautious up to now with regards to capital expenditures, but we recently decided to bring forward investment. We plan to do as much as we can this fiscal year to bring new capacity gradually on stream from April next year. Our goal is to raise output to 20 billion units per month.
Q5. I calculate that effective operating income rose 3.0 billion yen between the first and second quarters in the electronic materials and components segment. Could you confirm that for me? Could you tell me in terms of order of increase what products accounted for this change between the quarters? Also, will restructuring expenses in the second half of the fiscal year be 1.0 billion yen?
A5. Recording devices, more specifically heads, saw the largest increase in operating income between the first and second quarters. This sector was followed by electronic devices, electronic materials and other electronic components, in that order. Electronic materials booked restructuring expenses, mainly in respect of magnetic products. We have budgeted for restructuring expenses of 4.1 billion yen for fiscal 2007. Since we incurred around 3.1 billion yen in the first half, these expenses will be roughly 1.0 billion yen in the second half. Here, again, restructuring will basically center on magnetic products. All planned restructuring is already complete with respect to the recording media segment.

HDD head volumes are increasing, but we also recognize that falling sales prices will gradually affect our results in this area. In contrast to this, we increased output of capacitors at the beginning of October. In addition, because margins have increased considerably since September, we believe that capacitors can compensate for the fall in HDD heads. Besides that, we don't expect much change in electronic devices. Regarding recording media, with no restructuring expenses and the third quarter the busiest period of the year, we expect to post a profit.
Q6. I'd like to confirm one point. Am I right in saying that while sales rose by between 7% and 8% in HDD heads from the first to the second quarter, the margin rose by only 1 point?
A6. The margin rose by at least that.
Q7. You are assuming that HDD head sales will fall in the second half from the first half. How do you expect sales prices to change between the two halves? Please go into more detail about your assumptions for head prices.
A7. We expect prices to fall by about 10% in the second half from the first half.
Q8. Assuming that the price decline was about the same in the first half, will the annual decline be around 20%?
A8. Sales prices thankfully didn't fall by that much in the first half. But a larger decline is expected in the second half.
Q9. What is the current ratio of HDD heads with femto sliders on a volume basis? What is the outlook in numerical terms, if possible?
A9. The actual ratio in the second quarter was 43%. We are expecting ratios of 55% and 61% in the third and fourth quarters, respectively.
Q10. At the previous earnings conference, you said that the second quarter would likely be between 25% and 30%. What is the reason for the large increase?
A10. It reflects the switch to new products.
Q11. The problem of some manufacturers' batteries catching fire has made the news in recent times. Please comment on the stance that the battery company TDK acquired is taking toward this issue.
A11. There are many types of batteries these days, but our batteries are mainly of the polymer type. Experts have been employed to revamp lines with the view to improving our quality even further. The policy at the present time is to concentrate on single cell batteries as much as possible and not actively enter the market for high capacity batteries.
Q12. Mr. Kamigama, you said before that one of TDK's strengths is that its businesses begin from the materials stage. Could you be more specific about the businesses you were referring to? The power supply business appears to also be involved right from the materials stage. But, realistically, by how much do you think you can raise earnings in this business? The power supply business is a tough business to be in at present, but what is your actual profit margin target?
A12. One materials business we think we can grow more is magnetic materials. The relationship with power supplies is one area. Where power supplies are concerned, we naturally hope that Densei-Lambda will switch over completely to TDK's transformers. We believe that we can capture synergies here. And we believe that we can raise the profit margin and strength of this business by doing this. I'm sorry but I can't be specific as to our targeted profit margin.
Q13. TDK is strong in HDD heads, but competition with HDD manufacturers that also produce heads in-house is no doubt difficult. Ultimately, I believe that if TDK doesn't sell its HDD heads at the same price as it costs these companies to produce their heads internally, TDK's customers will struggle to compete. Mr. Kamigama said the only way is to produce higher quality products. But at the previous earnings conference, or perhaps the one before that, someone stated that it was necessary to think of other approaches. What options does TDK have in competing with these captive head makers? Moving forward, what approach will you take to avoid having to cut prices as volumes decrease?
A13. When I was in charge of our head business, I said that we would look to win business from captive head makers. In fact, captive head makers are accounting for a steadily increasing share of head sales. It's a fact, but if we seek to earn more business, price will be a factor. Regarding your question about what we are doing about this, we are currently looking at various approaches. Because of commercial sensitivities concerning customers, I'm afraid I can't be more specific. You'll see the results of those efforts in the future.
Q14. You said that sales of power supplies were 25.4 billion yen. How much in sales did Densei-Lambda contribute to TDK's sales in the first and second quarters? And what contribution did it make to operating income in the first and second quarters?
A14. The 25.4 billion yen is only for Densei-Lambda. This figure doesn't include TDK's sales of power supplies. So Densei-Lambda contributed sales of 25.4 billion yen. In terms of earnings, it contributed around 0.8 billion yen. As Densei-Lambda stated the other day when it announced its results, the company doesn't expect to generate a profit in the current term because it plans to write off goodwill in its entirety. However, based on the SEC standards that we use, Densei-Lambda's earnings contribution was about 0.8 billion yen in the first half. We expect the contribution to be slightly more in the second half of fiscal 2007.
Q15. By how much are Densei-Lambda's second-half sales and earnings expected to increase?
A15. Densei-Lambda's full-year sales are projected at between 52.0 billion yen and 53.0 billion yen. You can estimate expected earnings based on this.
Q16. What share of sales volume did TMR heads and PMR heads represent in the first and second quarters? What is your outlook for the third quarter onwards?
A16. TMR heads based on longitudinal recording technology accounted for 25% of sales volume in the first quarter, with the remaining 75% accounted for by GMR heads based on longitudinal recording technology. In the second quarter, TMR heads based on perpendicular magnetic recording (PMR) represented 6% of sales volume and TMR heads based on longitudinal recording technology represented 31%. The remainder was accounted for by GMR heads based on longitudinal recording (63%). Regarding the third quarter, we are projecting shares of 45%, 5% and 50% for TMR heads based on longitudinal recording, TMR heads based on PMR and GMR heads based on longitudinal recording, respectively.
Q17. Given that TMR heads based on longitudinal recording technology accounted for 37% of sales in the second quarter and you are forecasting a share of 50% in the third quarter. Still, do you have to think that the unit sales price will drop?
A17. Yes.
Q18. I have one question concerning heads. What time frame are you looking at with the various strategies you are formulating at present? A strategy that envisions TDK's circumstances two to three years hence is no doubt different to a strategy that targets short-term earnings. What do you see as your highest priority at present and what is the timeframe for executing the strategy?
A18. That's a very difficult question to answer. Firstly, we have positioned the period to the end of next year as the first step of our strategy. The next step would start at the beginning of 2008. This is the basis upon which we are currently devising our next medium-term management plan.
Q19. Could you give me the projected breakdown of operating income for the full year for the electronic materials and components segment and the recording media segment?
A19. We expect to almost break even for the year in the recording media segment, with profits in the third and fourth quarters absorbing the loss of 2.3 billion yen posted in the first half of the year. Since we are projecting operating income of 82.0 billion yen for the company as a whole, that means we are forecasting operating income of 82.0 billion yen for the electronic materials and components segment.
Q20. Could you please give restructuring expenses again on a quarterly basis?
A20. Restructuring expenses in the first and second quarters were 0.9 billion yen and 2.2 billion yen, respectively, for a total for the interim period of 3.1 billion yen. In terms of our budget for the year of 4.1 billion yen, we therefore have 1.0 billion yen left. At this stage, we expect to incur these expenses in the third quarter. Naturally, there is a chance that as we take restructuring measures we will incur additional expenses.
Q21. Sales in the electronic devices sector rose considerably from the first quarter to the second quarter. However, from past question-and-answer sessions my impression is that earnings haven't risen to the same extent. Why is that? The electronic devices sector is divided into three product categories. Could you also tell us how each of those categories is performing?
A21. In terms of sales, there was a relatively large increase in the inductive devices category between the first and second quarters. Operating income also rose between these quarters. However, sales of sensors and actuators were virtually flat. Densei-Lambda sales grew around 1.0 billion yen, but it generated operating income of 0.3 billion yen and 0.5 billion yen in the first and second quarters, respectively. While sales increased as a whole in this product sector, sector operating income didn't increase that much. Inductive devices made the largest contribution to higher operating income.
Q22. What is the outlook for the second half of the year in the electronic devices sector?
A22. The sector has continued to perform strongly in the third quarter so far, and if things continue as they are, inductive devices sales and earnings will increase. However, I can't say anything definitive at the moment about the third and fourth quarters.
Q23. Will inductive devices continue to be the central driving force in this sector from the third quarter onwards?
A23. Yes, we don't think that will change.
Q24. I'd like more information about HDD head prices. I understand that prices dropped by between 11% and 12% in the past year. Before you said that prices would drop by 10% in the second half from the first half. How much of a drop does that amount to in percentage terms for the full year then? At the outset of the year, you were assuming a drop of 15% for the full year, but is that actually the case now? What is your feeling about prices for the full year?
A24. We expect price difficulties in the second half. We are therefore anticipating a decline of 18% for the full year, above our initial forecast of a 15% drop.
Q25. Is that a conservative outlook? HDD manufacturers are facing an increasingly competitive environment. If there is indeed that sort of fall in prices because market conditions have changed and because of seasonal factors over the next few months, what then does next year hold in store? Is your forecast conservative? Or is it based on actual requests from customers for discounts?
A25. In terms of trends, we think that severe discounting will continue. Consequently, we plan to respond to this.
Q26. What will be your response if prices fall at the same pace next fiscal year?
A26. This is the first step that Mr. Kamigama referred to before.
Q27. I'd just like to confirm what you are thinking. I understand that we have to wait for details of the next medium-term management plan, but would I be correct in assuming that your greatest focus will be on improving businesses with low profitability? Or should we assume that the focus will be on accelerating sales growth through mergers and acquisitions to increase the top line? Also is it likely that you'll take another look at restructuring expenses? What are your plans over the next two to three years in terms of completing work that still needs to be done to finish off internal operating structures?
A27. Based on my observations over the past four months in the job, we must grow areas where we are strong further. In particular, we will grow magnetic materials. We will do everything we can to grow areas that we intend to grow. With respect to weak areas, we can't leave them as they are. We are thinking of where to pull resources from, and where to concentrate those resources. I can't say anything now, but I believe we must think about conducting M&As, as necessary, in the medium term or just beyond that.
Q28. Is that the end of the restructuring expenses for now?
A28. I think that we have essentially finished the current cycle of restructuring.
Q29. In your head business, you have HDD media technology. I believe that there is an increasing number of opportunities to use that technology in combination with your head technology. Do you see HDD media as having increasing potential to become one of your businesses in its own right in the future? Or will it remain part of the head business as a proprietary technology as in the past?
A29. New technologies like discrete media that was announced at the previous CEATEC conference will be vital for magnetic recording and hard disks in the future. We announced this technology because if you don't research the TMR and PMR combination and how heads will change in step with new technologies you'll be left behind. Regarding our level of involvement in the media business, we aren't planning to turn this technology into a business at this point in time. However, if this technology is widely used, we will work to improve it further.

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