Investor Relations | IR Events | Performance Briefing

[ 3rd Quarter of fiscal 2008 Performance Briefing ]Q&A

Q1. My first question concerns the structural reform expenses expected in the fourth quarter. Specifically, whether the figure of 6.2 billion yen for the year is unchanged, and about the costs needed to liquidate a subsidiary. Can you confirm whether or not additional charges will arise in the fourth quarter, or if the 1.6 billion yen in the third quarter was the last of these charges? After that, please tell us what kind of discussion has emerged with respect to restructuring charges for the upcoming fiscal year.
A1. I have given a figure of 6.2 billion yen for restructuring charges. The first, second and third quarters saw us use a total of 5.4 billion yen of that amount. As of now, we intend to use the remaining 0.8 billion yen in the fourth quarter, and do not foresee this figure increasing in any dramatic way. Regarding your question about costs needed to liquidate the subsidiary, rather than costs for closing operations, these relate to a reduction in asset values in foreign currency translation adjustments. The reason for this is that we made investments while the yen was weaker, and the yen has since become stronger. In other words, as the losses accompanying liquidation were realized in the third quarter, there will be no affect on the fourth quarter. As for restructuring charges in fiscal 2009, since we are about to compile our business plan, I cannot comment since I do not yet know the full story company-wide.
Q2. How are liquidation costs categorized in the statements of income?
A2. They are treated as part of selling expenses.
Q3. Next, I would like to confirm something regarding HDD heads. Could you please give us third-quarter figures using the usual index? Also, what is your outlook for the fourth quarter and the first half of fiscal 2009, specifically April to June, and July to September? In addition, can you elaborate on the decline in unit price, which I believe was 6% in the second quarter, for the third quarter and the estimated decline in the fourth quarter? If possible, could you also tell us whether the 73.5 billion yen fourth-quarter target for HDD heads includes suspension assembly sales?
A3. Equating the first quarter of fiscal 2007 to 100, the third quarter of fiscal 2008 was 155, and we project the fourth quarter to be 131. As for the upcoming fiscal year, we are still formulating our business plan, so I cannot offer much detail, but we expect first-quarter shipments to be roughly the same as in the fourth quarter of this fiscal year. Concerning the decline in unit price, the year-on-year decline for the third quarter was 7%, with the unit price likely to be down 11-12% for the year. The suspension assembly business is not included as part of forecasts for the fourth quarter.
Q4. Will this business be included under other electronic components?
A4. That has yet to be decided, but suspension assembly sales may be classified under the same product sector as HDD heads.
Q5. This is a follow-up question on HDD heads. You anticipate that sales volumes will fall some 15% in the fourth quarter compared to the third. Can you give us a hint as to whether this expected quarter-on-quarter decline in head sales volumes is merely a reflection of larger trends in the HDD industry, or is it a conservative estimate based on the information you have at hand? In addition, if the share of products based on perpendicular magnetic recording (PMR) technology is growing, how did this increase in the first half and how is it trending in the second? Also, the environment appears to be one in which TDK has taken a commanding lead, has stabilized unit prices, and is poised to watch earnings rise. Looking at your roadmap for third- and fourth-generation PMR-based heads, my question is this: is TDK in a position to expand its lead in the upcoming fiscal year?
A5. Although we expect to see figures drop in the fourth quarter, what we are seeing is sales volumes declining in step with demand. The fall we are experiencing is not unique to TDK. In fact, we think this decline may simply be seasonal in nature.

In answer to your next question, we have no indicators as yet of the overall percentage share of PMR-based products since specific figures are not compiled on PMR-based products. That said, PMR-based products accounted for 54% of our shipments in the third quarter, and we expect them to grow to account for more than 60% in the fourth.
Q6. TDK is now the leading merchant supplier of heads. This is exactly the position you were aiming for more than six months ago. From a sustainability standpoint, as you develop the market for 160GB/P heads for 2.5-inch HDDs, and after that 250GB/P heads, do you expect the situation seen in the third quarter to continue into the next fiscal year? Or conversely, do you expect to widen your lead over others?
A6. In developing the technology in this area, we expect to also make headway with captive manufacturers as a technology leader, which I believe will enable us to demonstrate just how dominant our position is.
Sustaining and accelerating the pace of technology development should allow us to extend our current position into the second half of the upcoming business term.
Q7. The level of profitability in the HDD head business seems to have risen in the third quarter. Is it reasonable to think that you will see profitability in fiscal 2009 on a par with that of the third quarter? It is improbable that average unit prices for PMR-based products will fall if new products are developed fast. What is your take on all of this?
A7. Production and shipment volumes were both fairly sizeable in the third quarter, indicating that at minimum, we have the capability to achieve similar performance of that kind. Going forward, we hope to sustain profitability by speeding up the pace of technology development, while at the same time raising our market share.
Q8. My next question concerns capacitors, one of the products for which sales have recently declined. How have growth rates in the second half of this fiscal year altered your views on this product? Can you outline for us whether the reasons for the downturn owed to problems unique to TDK, or problems with the industry as a whole? Also, can you elaborate on pricing and the current situation as you see it based on the information you have at hand?
A8. In the third quarter, sales rose 0.7% year on year, but declined 6.7% compared to the previous quarter. In the fourth quarter, performance should more closely resemble what we typically expect for this business. That is, sales typically drop in January and February after the Christmas sales season in the third quarter. Although demand is expected to pick up from March, sales are likely to be 9% lower year on year in the fourth quarter. Initially, we predicted that sales would grow between 8-10% for the full term. However, in light of performance up to the third quarter and the fourth-quarter estimate, sales for the full 12 months of this fiscal year are now expected to rise by about 1%.
Q9. Sales seem to have dropped significantly since the interim period. Why?
A9. As I have stated before, the main reason is that we lost share due to a lack of production capacity in the first half of the year, which caused problems with delivery lead times.
Q10. How does the industry look now, for example, in terms of prices and orders?
A10. It is hard to say with regard to the entire industry, but we have seen prices in our capacitor business fall by 7% year on year.
Q11. Do you consider the fourth-quarter estimate to represent a typical seasonable correction? What sort of trend did you see in December and January, and what trend do you see for February? Also, please give us an up-to-date assessment of the sales and order situation.
A11. I cannot give specific order figures, but we saw orders peak in October ahead of the Christmas sales season. Orders slowed somewhat in November and December. Compared to a typical year, we saw components for the Christmas sales season ordered sooner than usual. Declines in January and February are normal, with a recovery in sales expected to take place from March.
Q12. On a monthly basis, what changes, if any, are there to the scheduled launch of the new factory at Yurihonjo?
A12. The construction of the new plant buildings is planned to be accomplished in April. We will gradually install new equipment during the first and second quarters of the upcoming fiscal year, as we take steps to put a full-scale mass production framework in place by the second half of the year. At this time, there are no changes to this schedule, which is moving forward smoothly.
Q13. This question is for Mr. Araya. In the course of assuming responsibility for both ferrite cores and transformers, what kind of initiatives have you pursued up to now? My guess is that some of these have enhanced profitability in some way, but can you describe for us the kind of success these efforts have met with?
A13. Ferrite cores and transformers have been grouped under the Magnetics Business Group since the beginning of the current business term. First off, TDK Xiamen (China), which is chiefly responsible for initiatives targeting ferrite cores and transformers, has taken steps to improve transformer productivity and design new product models. As a result, transformers have undergone nearly double-digit percentage growth in sales compared to the previous year. For ferrite cores, as you know, there has been some loss in sales due to price increases sparked by sharply higher costs for certain raw materials, as well as ongoing steps to set our products apart by discontinuing less profitable lines. We also discontinued television-related production, which has been another factor in lower sales. As we gain a firmer handle on these issues, together with the transformers I mentioned earlier, we will enact initiatives aimed at creating products that are more compact, in light of sharply higher prices for raw materials. As for transformers for digital consumer electronics, we are solidifying our position in the run up to next fiscal year as we prepare to take a more aggressive and determined posture going forward.
Q14. How about profitability?
A14. Without question, transformer profitability has improved. Meanwhile in ferrite cores, although we are enacting structural reforms, profitability remains relatively unchanged from the previous year.
Q15. Let me ask you about HDD heads again. Looking at the launch schedule for 250GB/P products for 2.5-inch HDDs, there appears to be variation, with some companies slated to begin mass production from May, and others set to start from October. Are you pursuing any initiatives to bring the product launch schedule forward? Also, I don't think a single captive manufacturer is mass-producing 120GB/P products. What is the industry environment like with respect to 250GB/P products and what are the terms dictating competition?
A15. Competition is most intense for 2.5-inch products, with six companies vying for dominance. But as you said, the launch speed for new products is causing differences among these firms to emerge. With the PMR technology format, for example, the combination of the head and the media (disk) is important, not just the head itself. TDK, for its part, in cooperation with manufacturers involved in the external sale of disc media, is continuing to provide new technology to those customers creating products that incorporate advanced technology. In this way, we operate a business that works to enhance the competitive strengths of our customers. As a HDD head manufacturer, we suspect that the speed at which customers launch new products will largely depend on the way in which they choose to put TDK to use, as is also the case with media manufacturers.
Q16. Looking at the year-end Christmas sales season this year, how many companies do you think as of today will be able to unveil 250GB/P products for 2.5-inch drives?
A16. While I cannot give a definite number, we think there will be several companies out there with the ability to do so.
Q17. I know you explained earlier, but can you elaborate on the changes in operating income between the second and third quarters? By comparison, the change in earnings was much larger than that in sales. In a breakdown by product, what sort of impact has this had? Similarly, what do you expect to see in terms of earnings from each product in the fourth quarter, based on your plans as of now?
A17. Comparing the second and third quarters by product, as mentioned earlier, recording media improved by 2.1 billion yen. Comparing the same two quarters, the biggest change was in recording devices, followed by other electronic components and electronic devices. Coming in last was electronic materials.
Q18. I also take it that earnings have improved in electronic devices and electronic materials, where sales have been falling, compared to the second quarter?
A18. Sales declined but earnings indeed improved thanks to improvement in less-profitable products.
Q19. Of the 8.5 billion yen improvement, how much of that was accounted for by HDD heads? If possible, a ballpark figure would be nice.
A19. I would say maybe somewhere around half.
Q20. My next question concerns inductive devices. If we subtract third-quarter results from your current business plan, it appears that the decline in electronic devices over the third and fourth quarters is expected to be less than that of electronic materials. Compared to the capacitors you discussed earlier, I get the impression that sales of inductive devices are relatively stronger. Mr. Araya, what can you tell us about the inductive device market at present?
A20. As of now, the order curve itself is shaping up like one that we typically expect. In a normal year, the order curve will increase from the second quarter, be relatively unchanged for the third quarter, and experience a drop of between 5% and 10% in the fourth. In this respect, the current business term has not been much different.

If there has been a change worth noting, it is that order growth in December was lower than anticipated. However, a closer look reveals that growth was higher than normal in October and November, putting the curve in the third quarter on track with that from a typical year. Moreover, a normal year will see growth from December to January. But again, a closer look shows that perhaps inventory adjustments were part of figures for this period. Although production in China will likely decline in February, at the moment, no major changes are foreseen in terms of the actual production volumes of end products at customers. For this reason, I think it is likely that order growth will pick up in March.
Q21. As you have explained, earnings from HDD heads rose pretty substantially in the third quarter. With customers continuing to face severe operating conditions, does TDK intend to lower prices? If, for example, you opt to do so, are you capable of maintaining the same profit margins? So my first question is this: now that profits are emerging, what is the best avenue for putting them to use?
A21. If customers see value in the competitive strength of new products, then we can generate a margin of profit commensurate with that value. We are pushing forward with technology development to ensure that this happens. However, looking at trends in the HDD industry as a whole, the price of the drives themselves is falling as these products find use in a rapidly growing range of non-PC applications. From TDK's standpoint as a component supplier, we will certainly cooperate with customers in various ways. That said, we plan to pursue technology development that will enable us to consistently maintain profit margins, especially as we put relevant expertise included in our recent purchase of assets from Alps Electric to good use.
Q22. To follow up, if we look solely at PC production, recent numbers are not very encouraging. Yet HDD production is doing extremely well. Can you share with us what you know about the source of this gap?
A22. I can tell you that the demand for external drives is growing. I also think that a variety of markets are opening up beyond the conventional PC distribution channel. There is also significant demand for replacement drives.
Q23. I assume that as far as you know, no major problems are lurking that could cause this growth to cool off. And am I correct in saying that there is no impression on your part that HDDs have simply been overproduced?
A23. I have no indication that that is the case. The growth is real, and we have customers that are doing quite well in the external hard drive business.
Q24. I have a couple of questions regarding HDD heads. For 2.5-inch products, while it seems that some inventory reductions are forthcoming, you expect volumes to drop by 15% from the third to the fourth quarter. For example, compared to the second quarter, volumes grew by 10% in the third quarter, so what are customer inquiries for this business like right now? Is the situation really such that a 15% drop seems likely? For 160GB/P products, in particular, I think that some customers will quickly launch drives this quarter. My guess is that TDK's share is likely to rise quickly atop these customers, so can you tell us what the situation with respect to orders looks like for you?
A24. I cannot speak for the development plans that customers may or may not have. What I can say is that from January through March, especially for 2.5-inch drives, 1 platter 125GB/P and 250GB/P segment forecasts are somewhat lower than before for each of our customers. There may be some slight variation here or there depending on the storage capacity in question. I have definitely heard some saying that the market would be attractive if preferences turned to storage capacities of 160GB/P or 320GB/P. My hunch is that most customers are focusing their efforts on preparing for that shift.
Q25. So I assume it is safe to say that based on the level of inquiries, you see sales volumes declining roughly 15% between the third and fourth quarters?
A25. At the moment, that is how it looks.
Q26. My next question concerns strategies for expanding market share. One strategy could see TDK build on its share among captive manufacturers. Another would see non-captive manufacturers winning out, and raising your share that way. Which of these scenarios seems most likely to you? On a related point, what percentage of growth in 2.5-inch product customers do you think is possible within the year?
A26. Captive and non-captive manufacturers are equally important customers for us, so we do not usually think of them in separate terms. We hope to spur growth in TDK's HDD heads by tailoring them to the particular needs of our customers.
Q27. If memory serves, your HDD heads are not found in Hitachi's 2.5-inch products. With 160GB/P apparently facing an uphill battle in the market, do you see the inclusion of your heads in Hitachi's products as a possibility? What are your thoughts?
A27. At TDK, we are constantly working to make the delivery of our products to customers possible, no matter what form that outcome may take.

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