Investor Relations

[ 1st Quarter of fiscal 2008 Performance Briefing ]Q&A

Q1. I have a couple of questions. My first question concerns operating income in the electronic materials and components segment. Operating income, excluding restructuring expenses, in the fourth quarter of fiscal 2007 was 21.0 billion yen. Yet operating income was only 17.6 billion yen in the first quarter of fiscal 2008. Could you tell me what changes there were between the quarters in each product sector?
A1. Compared with the fourth quarter of fiscal 2007, earnings from electronic materials were largely unchanged, while earnings in electronic devices fell. Earnings were also lower in recording devices and fell slightly in other electronic components.
Q2. Am I right in assuming that lower earnings from HDD heads accounted for most of the decline in operating income in the electronic materials and components segment between the fourth quarter and first quarter?
A2. HDD heads and also electronic devices accounted for most of the earnings decline. The Densei-Lambda Group, which is part of the electronic devices sector, generated extremely strong earnings in its UPS (uninterruptible power supply) operations in the fourth quarter of fiscal 2007. These strong earnings weren't present in the first quarter, resulting in the quarter-on-quarter difference in earnings.
Q3. How did capacitors perform?
A3. Capacitor earnings in the first quarter were about the same as the fourth quarter.
Q4. My question concerns total operating income. In the first quarter, TDK recorded operating income of 16.1 billion yen and in the second quarter you are projecting operating income of around 29.0 billion yen. What product sectors are expected to account for the higher earnings between the first and second quarters?
A4. Regarding operating income for all products combined, it's hard to say that first-quarter sales themselves rose because of the beneficial effect of the weaker yen on electronic components overall. However, we expect capacitors as well as other products to grow in the second quarter. Likewise, HDD head sales are also expected to grow. The problem, though, is that we think it will be difficult to achieve our planned interim operating income of 45.0 billion yen with increased sales in the second quarter alone.

As we explained at the May earnings release conference, we have decided to transfer the TDK brand recording media sales business to Imation Corporation. While we will book a gain on this transfer, that gain won't top up earnings on full year basis (but, it will on half year basis). That's because we will also record restructuring expenses in the second quarter in conjunction with the business transfer. We also plan certain restructuring activities for the remaining Recording Media business in the second half. Therefore, all Recording Media business related restructuring expenses will negate the gain on transfer. This is the premise for our interim operating income forecast of 45.0 billion yen.
Q5. Could you give us an idea of the sort of increase in earnings you expect in capacitors and HDD heads from the first and second quarters?
A5. We expect capacitor earnings to increase by around 2.0 billion yen. We also expect HDD heads to generate additional earnings of more than 2.0 billion yen.
Q6. Please comment on changes in HDD heads from the start of the fiscal year. Using the usual index, please give us the trend in terms of volume for each quarter. I understand that your assumption for sales price discounts was 15% last year and 10% this fiscal year on average. How has this assumption changed? More than anything else, though, I'd like to know what movements you expect on a quarterly basis due to price responses in the first quarter. In addition, please tell us whether there has been any change as a result of your price response in terms of the share and usage of 120GB and 160GB products based on second- and third-generation perpendicular magnetic recording technology (PMR) for 2.5-inch HDDs. Your market share in HDD heads is unchanged, but is this likely to increase based on adoption of your products by customers?
A6. Equating the first quarter of fiscal 2007 to 100, HDD head shipments in the second, third and fourth quarters of that fiscal year were 117, 118 and 119, respectively. Using the same base, HDD head volumes in the first quarter of fiscal 2008 were 116. With regards to prices, the decline in prices in the first quarter was a severe 19%. This was mostly due to an increase in the number of products in the 160GB class for 3.5-inch HDDs. As these products are now sold in large quantities, price discounting was extremely severe in this category, leading to the large year-on-year fall of 19%. But because of the release of new products based on PMR going forward, we expect the average price to increase. That said, pressure on sales prices is continuing to mount, so in the longer run even prices of these products will fall. At this stage, we expect sales price discounts for the full year to be around 15%.
Q7. What are your expectations in terms of volume?
A7. I can't comment specifically on the outlook, but I can say that we think volumes will increase substantially in the second and third quarters.
Q8. I have a question about your profit expectations for the recording media segment. Do you expect to cover the first-quarter loss with second-quarter earnings to post a positive result for the interim period even with the inclusion of restructuring expenses?
A8. Naturally, with the inclusion of the gain on transfer of the TDK brand recording media sales business, we expect the recording media segment to post a positive earnings result.
Q9. Can we assumed that you are aiming to at least break even in the recording media segment in the second half of fiscal 2008?
A9. Due to the transfer of the TDK brand recording media sales business, only development and manufacturing operations will be left in this segment. We want to at least break even with just these operations.
Q10. My question concerns the likelihood of TDK being able to achieve its first-half plan despite the fact that first-quarter operating income in the recording media segment was lower than expected. Do you expect to make up for that with electronic materials and components segment?
A10. The fact is that the weaker yen is having a positive effect on our results as a whole and we expect that this will at least cover the drop in the recording media segment.
Q11. I would like to confirm a few things about HDD heads. Earlier you said that originally you were forecasting a price decline of 10%, but now you're saying that you expect prices to drop by 15%. At the same time, you haven't changed your assumptions for market share or other conditions. In spite of that, you are expecting sales to rise, aren't you? Where do you expect that increase to come from? The price has dropped, but there have been no changes in assumptions for market share or volumes. I don't see how sales will rise given that you are also assuming an exchange rate of 110 yen to the U.S. dollar. It just doesn't add up to me. First-half HDD head sales are rising, but why is that?
A11. We have in fact changed our assumption for volume. We are expecting volumes to increase.
Q12. My question concerns HDD heads. Could you tell me what the shares of sales of products based on third-generation PMR technology were for 3.5-inch and 2.5-inch HDDs in the first quarter? Also, how will these respective product mix shares change through the second half of the fiscal year?
A12. I don't have any materials with me that break down PMR generations by product, but I can give you an idea of the composition of PMR-based products as a whole. In the first quarter, PMR-based products represented 27% of all HDD head sales at TDK. The TMR ratio was 76%. From the second quarter onward, we expected the share of PMR-based products in the sales mix to rise to 49% and then 62% and 64% over the next three quarters.
Q13. How much did HDD head sales change on a yen basis in the first quarter of fiscal 2008 compared with the fourth quarter of fiscal 2007?
A13. They declined 5%.
Q14. Based on the HDD head shipment index figures you gave, volume declined 2.5% from the fourth quarter of fiscal 2007 to the first quarter this fiscal year. Usually, that would mean an overall decline in unit price of around 2.5%, but could you tell me whether there was a large drop in prices that would squeeze margins?
A14. There was a considerable impact from the drop in prices.
Q15. I'd like to know more about the reasons behind the fall in prices. Did prices fall because customers were battling competition and there was pressure from them for discounts as a result? What were the reasons for management deciding to lower prices?
A15. We lowered prices because of the competitive forces faced by customers. In other words, if we had maintained high prices for HDD heads, our customers would have found it extremely difficult to provide an adequate response to reductions in HDD prices. Because we conduct our business with the support and understanding of our customers, we try to continue our business by cooperating with customers and providing products at an acceptable price to them.
Q16. Were structural reform expenses booked in the first quarter? If so, how much?
A16. There were almost no structural reform expenses in the first quarter.
Q17. First-quarter operating income was 16.1 billion yen and you are projecting 28.9 billion yen for the second quarter. If you achieve your second-quarter projection, it would represent a 12.8 billion yen increase on the first quarter. You said earlier that you were assuming that HDD heads and capacitors would each generate an additional 2.0 billion yen in earnings, or 4.0 billion yen combined. There must be other reasons therefore for the remaining 8.8 billion yen of the projected increase. What product sectors do you expect will generate this additional profit?
A17. The remaining 8.8 billion yen in additional profit over the first-quarter result relates to the gain on the transfer of our recording media sales business. As of today, because the deal hasn't been closed, it is difficult to estimate the exact amount of the gain due to share price and forex fluctuations-Imation is paying us in both shares and cash. That said, this is the main reason for the additional profits of 8.8 billion yen.

However, because we expected to record this gain as well as expenses of about the same amount during the current fiscal year, this gain on transfer will not add to our projected operating income of 90.0 billion yen for the full year.
Q18. Earlier, you said that you had no choice but to agree to lower prices of your HDD heads to help your customers out. However, it seems to be that your customers' competitors have become stronger and widened the gap on them. At the very least, this appears to be the case with earnings. On the other hand, given technology trends and other factors, the assumption now is that HDD head earnings won't increase much in the long term. Has something happened so as to change that? Or has the situation become even more difficult? Could you give us your thoughts on how you see HDD head profits trending from hereon over the medium term?
A18. Commoditization of HDDs is unavoidable. The situation is difficult, but we are doing what we can.
Q19. HDD head shipment volumes are rising but profits are flat. That has been the trend over the past few years. Do you think there is a strong likelihood of this situation continuing?
A19. Yes.
Q20. I have a question about capacitors. Things were quiet as a whole in the first quarter, not just at TDK but across the industry. Given current conditions, how do you see the market shaping up after all capacitor manufacturers finish making investments to boost capacity next fiscal year? I think it is probably advisable to bring your new production facility on line as soon as possible next year, but what are your plans at this point? If there has been any change with regard to the current situation of the new plant, please also comment on that.
A20. There has been no change. We want to get the new plant up and running in the April-June quarter next year. All companies are building new facilities to ramp up capacity. We think that demand will be robust this fiscal year in the lead-up to the Summer Olympic Games in Beijing, China. But we're not sure what will happen after that. Looking at capacitors from a medium-term perspective, though, we expect to see finished products become more powerful and equipped with more sophisticated features. In that sense, we think there will be market demand for smaller, thinner chip capacitors with higher capacitance. We are building the new plant to cater to this demand.
Q21. How are order inquiries for capacitors at the moment?
A21. We have seen no drop-off in demand, including for capacitors for digital home appliances and PCs.
Q22. Sales hardly rose in the April-June quarter. I thought you had orders, but weren't you able to fill them? What was the situation?
A22. As I think we explained at our earnings release conference on May 15, our plans assumed almost flat sales in the April-June quarter compared with the January-March quarter. In that sense, the first-quarter result was in line with plans. However, demand for low ESL capacitors used in CPUs dropped, hurting our sales.
Q23. So you're saying that sales were steady except for this factor? Do you expect to see a further improvement in underlying demand?
A23. Rather than steady, I would prefer to say that sales are progressing in line with plan.