Investor Relations

[ Financial Results for Fiscal 2007 Performance Briefing ]Q&A

Q1. Please repeat your forecasts for first- and second-half sales and earnings in the recording media segment for fiscal 2008.
A1. We are forecasting first-half sales in the recording media segment of approximately \45.0 billion. Projected sales for the second half are roughly \15.0 billion because of a decline in sales resulting from the scheduled transfer of the consumer products business in this segment to Imation Corporation around the end of the second quarter. We are thus projecting annual sales of about \60.0 billion for the recording media segment. In terms of earnings, we expect a small profit for the full year. In fiscal 2007, this segment recorded an operating loss of \2.2 billion, but we expect an improvement of just under \3.0 billion year on year.
Q2. How much profit do you expect from the \15.0 billion in projected second-half sales?
A2. We expect only a small profit. While we will still have the consumer products business in the recording media segment in the first half of fiscal 2008, the transfer I referred to will mean we will no longer record these sales in the second half. Sales in the second half will center on sales to corporate customers, mainly of LTO-standard tapes. Although sales will fall in the second half, we expect to make a profit.
Q3. Using an index, what were HDD head shipments on a quarterly basis?
A3. Equating the first quarter of fiscal 2006 to 100, as in the previous fiscal year, HDD head shipments in fiscal 2007 were 111 in the first quarter, 133 in the second quarter, 131 in the third quarter and 131 in the fourth quarter. In terms of forecasts for fiscal 2008, because we are unable to announce detailed predictions at present, we would prefer to wait until the outlook becomes clearer before saying anything more.
Q4. What are your quarterly sales forecasts for capacitors?
A4. Equating fiscal 2006's first quarter to 100, quarterly sales of these capacitors in fiscal 2007 were 119 in the first quarter, 131 in the second quarter, 129 in the third quarter and 130 in the fourth quarter. I can't comment on quarterly sales forecasts for fiscal 2008, but for the full year we expect sales of capacitors to increase by approximately 18%.
Q5. Chairman Sawabe has said for some time that TDK's goal is an operating margin of 15%. Is that still true?

I have some more questions about the projected extent of improvement in your medium-term management plan in the electronic materials and electronic devices sectors, more precisely, ceramic capacitors, and the magnetic products and inductors, which belong to Magnetics Business Group, or power device products businesses. Could you rank these in terms of the extent of improvement you expect? Are high-frequency components targeted in your plan and has their strategic positioning changed?
A5. I will uphold the 15% goal you referred to. In terms of sales, we expect the largest improvement in capacitors and similar improvement in the magnetic products business, which together includes inductors, transformers and ferrite cores. Next in order of improvement would be power supplies business.
Q6. How about profit margins for the products you have just talked about?
A6. Capacitors have by far the highest profit margin in terms of the plan, whereas the magnetic products business is expected to post a big improvement in sales. We expect the power supplies business to record big improvements in both sales and profit margin.
Q7. Do your current plans for HDD heads include the effect of acquiring HDD head-related assets from Alps Electric Co. Ltd? What are the premises incorporated in your annual plans in terms of prices and volumes?
A7. Our plans are premised on how much business we think we can win with our technical capabilities assuming that we will remain in competition with Alps Electric. It is difficult to give exact figures, but we expect the situation with prices and volumes to be difficult in the first half compared with the previous year. In the second half though, we expect to expand volumes by launching high-performance products based on perpendicular magnetic recording technology.
Q8. You said TDK incurred structural reform expenses of \5.6 billion in the electronic materials and components segment in fiscal 2007 and that you expect to incur structural reform expenses of \6.2 billion in fiscal 2008 for the company as a whole. Could you break this figure down by segment?
A8. Structural reform expenses in the electronic materials and components segment in fiscal 2007 were \5.6 billion. By product sector, \3.1 billion was incurred in electronic materials, \1.1 billion in electronic devices, \0.3 billion in recording devices and \1.1 billion in other electronic components. For commercial reasons concerning our relationships with other stakeholders, we can't at this time provide you with a breakdown of the \6.2 billion in projected structural reform expenses for fiscal 2008.
Q9. TDK is pursuing cost reductions in HDD heads by focusing on more compact products. What share of shipment volume did femto sliders represent in the fourth quarter or do they represent now? How many more sliders are you able to cut per wafer by making products smaller? And what contribution will this make to cost reductions?
A9. Femto sliders accounted for 32% of shipment volumes in the first quarter of fiscal 2007 and 32% in the second quarter, before increasing to 45% in the third quarter and then 54% in the fourth quarter. We expect these sliders to account for an increasing percentage of shipment volumes in fiscal 2008. To be more specific, 62% in the first quarter, 69% in the second quarter, 77% in the third quarter and 81% in the fourth quarter. For commercial reasons, I can't comment on the number of sliders produced per wafer or the exact cost savings.
Q10. Your fiscal 2008 projections call for operating income of \90.0 billion. Could you tell us what products will drive growth in earnings and by how much? Please also talk about how you see sales trending in regards to each product sector. If there are any one-off factors incorporated in your forecasts, please comment on those as well.
A10. Compared with the previous fiscal year, higher sales and earnings from electronic materials centered on capacitors will be the largest contributor. Next is electronic devices. We also expect an improvement of around \3.0 billion in the recording media segment. This is followed by projected higher earnings, albeit small, in other electronic components. We thus expect higher sales and earnings in these three product sectors and one segment. In contrast, our \90.0 billion in projected operating income assumes lower sales and earnings from HDD heads.
Q11. The second slide in the HDD head presentation materials showed demand and market share forecasts. You are also assuming sales price declines of 13% and 8% on a yen basis and dollar basis, respectively. The rate of HDD price erosion is relatively high, particularly in respect of 2.5-inch drives. In this context, are you assuming that you can absorb the difference in rate of price decline between HDDs and HDD heads with an improved product mix? What degree of price decline do you think you can cover?
A11. The average price includes both single HGA (Head Gimbal Assembly) and HSA (Head Stack Assembly). Consequently, the figures include the impact of the product mix. As you point out, sales price erosion in HDDs is severe, making for a difficult pricing environment for HDD heads. However, we are determined to maintain performance by doing our utmost to expand volumes as much as possible and by taking various other steps.
Q12. How much does your plan assume HDD head prices will actually decline by?
A12. By 10% on average.
Q13. How much did TDK invest in the capacitor business in fiscal 2007 and how much have you earmarked for investment in fiscal 2008 and 2009? Capital expenditures for the industry as a whole, including TDK, represent between 20% and 30% of sales. What are your plans for fiscal 2009 based on this?
A13. You asked how much we plan to invest in the multilayer ceramic chip capacitor business in fiscal 2008 and fiscal 2009. As Mr. Kamigama mentioned earlier, we have budgeted a total of \50.0 billion for the next 2 years. I can't tell you how this will be allocated though. The \50.0 billion includes investments in existing plants, but the lion's share will be invested in new production facilities.
Q14. How much will production capacity increase before new facilities are online in 2008 compared with current output?
A14. We plan to increase production capacity by approximately 20% in fiscal 2008, compared with fiscal 2007. And we are planning to increase output by a further 20% or so in fiscal 2009, compared with capacity in fiscal 2008.
Q15. So you expect production capacity to increase 20% at existing production bases only in fiscal 2008 and by only another 20% in the following year even with new production facilities on stream. Is that right?
A15. Yes.
Q16. What is your view on the supply-demand balance after new plants are ready from the spring of 2008 onward?
A16. We expect demand for digital consumer products to grow in fiscal 2008. The Beijing Summer Olympics should also boost demand. As a result, we expect higher demand for electronic components. However, the situation in fiscal 2009 is likely to be more difficult after the Beijing Summer Olympics and there is a conceivable risk of a correction. It is too early to really comment on numbers.
Q17. In that sense, wouldn't it be advisable to bring forward construction of the new production facilities so they are up and running earlier? Is spring next year the best timing to commence operations?
A17. Yes.
Q18. Have there been any changes in how you see the HDD head operating environment? For example, are you gaining confidence in competing and winning with your technology? Do you now have a decisive edge over Seagate? Have customers become stronger or are they weaker? Please comment on your prospects for competing in the current environment.
A18. I think TDK is leading the way in technology. We think that perpendicular magnetic recording technology is working more in favor of our business compared with customers with vertically integrated business models. Perpendicular recording technology is a new technology and thus full of various possibilities. Up to now, areal recording density has been raised in steps. But the situation is a little different with perpendicular magnetic recording technology. With this technology, through combinations of head and media and various combinations of peripheral technologies to find ideal matches, recording capacity is actually being raised dramatically. As was discussed earlier, in terms of the product launch schedule, we are seeing some customers quickly launch new products with high areal recording density, while other customers are slow out of the blocks. We believe that customers who are captive head makers and those with vertically integrated business models are at a slight disadvantage when it comes to these combinations I have just talked about. Customers that procure components can think up various combinations of technologies and are expected to raise areal recording density by around 100% this year. TDK hopes to launch products with high areal recording density by cooperating with customers. At the same time, we will pursue low-cost products, which as you know are important for supporting profitability in the HDD business, where products are becoming commodities.
Q19. My question concerns HDD heads and the current situation with regards to whether the wafer and slider processes are becoming more difficult and technological differences are emerging. For example, is it your view that every company is able to manufacture wafers, but that it is now easier to establish a technological difference in sliders?

In this regard, what is your strategic approach to the processing of wafers and sliders? Is it that you should produce them together? Or is it that they should be produced separately if a customer so requests?
A19. Where perpendicular magnetic recording is concerned, there are various combinations because each company has their own wafer design and because it depends on matching heads with media. When it comes to actually processing these though, high-precision dimensional accuracy is required for read heads. Compared with conventional longitudinal recording, extremely high-precision control is required also for the write head with perpendicular magnetic recording. At present, neither wafer nor sliders dominate and control the characteristics of recording. Technological difficulty is increasing in the processing of both. With wafers it is increasing in respect of design and process, while with sliders more precise control of two parameters is required.

In terms of our strategy for the processing of wafers and sliders, ideally, the answer is "yes" to your question about whether they should be processed as a set. However, from a business strategy perspective, sometimes there is no choice but to separate the two.
Q20. Earlier it was stated that TDK expects sales of capacitors to rise 18% year on year in fiscal 2008. Why is this possible when production capacity is only expected to increase by 20%? In other words, is my understanding correct that your forecast is premised on there being no fall whatsoever in unit prices of capacitors?
A20. The reason this sort of assumption is possible is that there are various growth products. For instance, we expect to see increased sales of high- and large-capacitance products with high unit prices. We also expect growth in products for special applications. Put another way, because we plan to improve the product mix by growing sales of products with high added-value, we expect to raise sales by 18% with a 20% increase in production capacity.
Q21. My question concerns the HDD head business. If areal recording density increases at this pace, it won't be long before we see products based on discrete track media. What is your current thinking on your business model here and will you produce this media?
A21. We discussed this at a previous presentation, but TDK is working on discrete track media as a new media technology, viewing it as a future technology. However, TDK is not thinking of producing this media itself. This has always been our policy. The earliest discrete track media would be available on the market is around next year. At present, because small-diameter HDDs are embroiled in fierce competition with NAND flash memory, we are proceeding with technological development with cooperating media manufacturers to introduce this technology in these products first.