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[ Financial Results for Fiscal 2008 Performance Briefing ]Q&A

Q1. What sort of sales figure is TDK targeting for capacitors in fiscal 2009? If, as you said, the average unit price dropped 6% in fiscal 2008, could you tell us a little more about the degrees of unit price erosion and volume growth that you expect in fiscal 2009?
A1. Your questions are how fiscal 2009 sales will compare with fiscal 2008 and what sort of volume growth we are expecting in fiscal 2009. We expect capacitor sales to be roughly flat in fiscal 2009, growing by 1% or so.
We expect unit price erosion to be in the high single digits in fiscal 2009, excluding currency factors. In terms of the measures we plan to take, we are targeting volume growth from increased capacity as the new production at the Honjo plant comes on stream. We also see some gains in sales from improvements in the product mix. We expect these factors to neutralize currency effects and discounting, resulting in about the same level of sales as in fiscal 2008.
Q2. How does manufacturing productivity at the Honjo plant compare with the old Akita factory?
A2. For one thing, lead times will be shorter. We expect production lead times to be around half of what we achieved previously.
Q3. As per usual, I would like to ask how shipment volumes for HDD heads varied by quarter in fiscal 2008, along with your projections for fiscal 2009. Also, could you please comment on expected unit sales price trends in fiscal 2009?
A3. If we index the level of volume sales in Q1 of fiscal 2007 at 100, then fiscal 2008 sales were 116 in Q1, 141 in Q2, 155 in Q3 and 130 in Q4. We are forecasting sales in Q1 of fiscal 2009 at 130, the same level as the quarter just ended. We expect volumes to recover from Q2 of fiscal 2009 onward, with our market share rising to our target figure of 33%. We think that fiscal 2009 conditions will be challenging in terms of unit prices. In yen terms, we are assuming price erosion by at least 15% over the full year.
Q4. Your view is that flat volume growth between Q4 of fiscal 2008 and Q1 of fiscal 2009 is down to market factors?
A4. Correct.
Q5. I would like to discuss TDK's overall earnings structure. According to the figures you released, operating income for the electronic materials and components segment was 76.0 billion yen in the year just ended (fiscal 2008). Allowing for one-off charges, what was this figure in actual terms, and what are you forecasting for operating income for this segment in fiscal 2009 excluding one-off charges? And, could you first explain what profit growth in which segments accounts for the 80.0 billion yen forecast for fiscal 2009? It seems to me that a substantial jump in profits is implied from the first to the second half of the year. Could you please explain?

In other words, as I see it, only 3.0 billion yen of the 5.9 billion yen charge is included in the fiscal 2008 segment operating income result of 76.0 billion yen for electronic materials and components. You said that expensing of intangibles and costs related to the tender offer bid (TOB) came to 1.7 billion yen. Could I get you to confirm what the fiscal 2008 figures for the electronic materials and components segment were excluding one-off factors?
A5. The actual cost of restructuring was 5.9 billion yen. Of that, recording media accounted for 3.2 billion yen and the other 2.7 billion yen was electronic materials and components. The TOB-related costs of 1.7 billion yen were basically due to electronic materials and components as well; they related to HDD heads and other products. So, for that business segment, the extraordinary factors were costs of 2.7 billion yen and 1.7 billion yen, or 4.4 billion yen in total.
Q6. Can we assume that most of the forecast 4.7 billion yen restructuring charge for fiscal 2009 is attributable to electronic materials and components?
A6. We plan to book the entire projected restructuring charge of 4.7 billion yen against electronic materials and components.
Q7. Are you expecting the recording media business segment to break even in fiscal 2009?
A7. Now that we have finished reorganizing the recording media segment, we expect it to be profitable-even if the figure is not that large. Excluding the gain on transfer, the loss in fiscal 2008 was 4.1 billion yen. We expect the segment to return to profit in fiscal 2009, which would generate a net earnings improvement of about 5.0 billion yen.
Q8. Your forecast for consolidated operating income in fiscal 2009 is 80.0 billion yen, most of which will be generated by the electronic materials and components segment. Since this figure allows for a 4.7 billion yen restructuring charge, if we calculate the starting level in fiscal 2008 in "real" terms as 76.0 + 4.4 = 80.4 billion yen, then this implies a year-on-year improvement of around 3.0 billion yen. Could you break this assumed figure down for us, telling us which product sectors will generate more profit and which less?
A8. The product sectors where we expect profit growth are as follows: in electronic materials we are looking to ferrite cores and magnets, even though it has taken quite some time to respond to sharply higher raw material costs; in electronic devices-inductive devices, power supplies and high-frequency components; in recording devices, on the other hand, we expect profits to fall slightly due to the effects of discounting. We see other electronic components also generating higher profits.
Q9. Is projected operating income growth for capacitors in fiscal 2009 negative?
A9. As I said before, we expect sales of capacitors to be more or less flat. Due to growth in sales volumes and a variety of improvements, we expect to be slightly ahead of fiscal 2008 in terms of profits.
Q10. So, other than recording devices, you expect profit growth across all product sectors?
A10. Basically, that is correct.
Q11. In the same vein, are you expecting profits to be higher in the second half of fiscal 2009 than in the first half? Could you rank the product sectors in this regard?
A11. We are expecting profits to be higher in the second half of fiscal 2009 than in the first half for electronic materials, electronic devices, recording devices and other electronic components. We think that the magnitude of this effect will be relatively uniform across these product sectors.
Q12. TDK's fiscal 2009 projections appear to be much more weighted toward the second half than in previous years. Does this reflect the fact that the figures are essentially targets, or is it more to do with the dip in performance in Q4 of fiscal 2008? Do you have confidence that you can achieve these forecasts? Or are there parts where you are more confident than others?
A12. As you say, there are some areas where we are more confident of our forecasts than others. Capacitors are probably the area where there is the greatest uncertainty. Although the products we are currently making at the recently completed facility are not what you might call new, there is still something of a question as to whether the plant will be able to handle some new product lines that we couldn't manufacture in the past. That will be the important test for the new facility in the ramp-up phase.
Q13. From your perspective as a company that is involved in both the HDD and flash memory controller businesses, could you give us your view on when growth in the hard disk market will peak in either volume or value terms?
A13. Solid-state drives (SSDs) are a new development that you must consider if you are in the hard disk business, because SSD is a technology which makes obsolete and replaces HDD technology. Given our involvement with controllers for SSDs, we investigated the business opportunities of SSD, and decided to start it. The SSDs fitted to laptops are quite highly priced, but then there is the question of whether users will be prepared to buy a laptop fitted with a 64GB, 128GB or even 250GB or larger SSD due to the high price. Another potential use for SSDs is in industrial applications, where superior security can be obtained even with the smaller-capacity drives. We see HDDs remaining the dominant choice for applications that require high speed and reliability coupled with a low cost. We do not see the entire market switching over. For personal use, where users want high capacity plus good cost performance, I find it hard to see the HDD being displaced in the near term. If the market does shift toward SSD, we think that combinations with HDDs will provide a reasonable cost solution in servers where speed is required.
Q14. So you are saying that, based on a five-year prospective view, you would expect growth to continue in the hard disk market?
A14. Yes, that is our view.
Q15. My second question concerns the polymer battery business. Growth has been sustained since the ATL acquisition in 2005, but has there been any change in the underlying business? Are you still expecting growth to continue during fiscal 2009?
A15. As you commented, ATL's performance continues to improve year after year. In terms of whether we see this trend extending into the future, the question turns on the prospects for the two rechargeable battery markets for ions and polymers. We are focused mainly on the polymer market. Although the ion segment of the market remains the larger of the two, we believe that people are now looking at polymer batteries again. We expect higher growth in the polymer segment, and so we would rate ATL's growth prospects as good.
Q16. Assuming that profits in the capacitor business remain basically flat in overall terms, would you not be likely to miss your forecast if major problems arose at the new production plant at Honjo? Since market pricing dominates in this sector, the question is what sort of production costs you can obtain with the new facility. What do you believe are the conditions for avoiding any problems with the Honjo facility in its start-up year?
A16. A smooth, problem-free ramp-up at the Honjo plant depends on whether we can mass-produce certain products where we have not achieved much volume as yet. The other question is whether we can devise new production methods to replace any items where current yields are not acceptable at the new factory. So the question is whether we can generate high production yields with high quality. We are quite confident on the latter point. The issue boils down to the amount of production volume that we can generate with those products that we couldn't manufacture in the past.
Q17. And the question of price?
A17. Well, certainly, due to the depreciation costs, there may be a short period where profits are constrained somewhat by the relationship between sales volume, revenue and depreciation. However, since manufacturing productivity at the new plant is so much higher, I expect that such a situation would improve within six months or so.
Q18. Second, I would like to ask a question regarding TDK's strategy in HDD heads. As I see it, although you have gained an extremely high share in the 2.5-inch and high-capacity sectors, when it comes to the previous generation of HDDs you appear to be struggling-for example, in non-high-end 3.5-inch disks. How do you plan to boost your market share with those products that are not cutting-edge technology or a full generation behind? What is your strategy in the older generation sectors?
A18. I think that your question may just be another way of asking whether TDK is losing out in the market for 3.5-inch HDDs. We have to execute a strategy that assumes average unit prices will fall by more than 15% per year, as you heard from Mr. Kobayashi. As for the mature product lines, we expect this business to make good progress going forward in partnership with Magnecomp Precision Technology Public Company Limited (Magnecomp).
Q19. My question concerns HDD heads. In terms of gaining market share, do you plan to achieve this by increasing your share of HDD heads with existing customers or by acquiring new customers-or by using a mixture of both approaches? I would like to confirm whether the latest forecast assumes the acquisition of any new customers.
A19. That's an extremely important question. While we do see the possibility of business starting with new customers, nothing has been decided yet. I believe that Mr. Kobayashi will be making a decision in due course.
Q20. President Kamigama, wouldn't any such decision be extremely difficult to make in the context of TDK's relationships with existing customers?
A20. I'm sure that Mr. Kobayashi (responsible for the HDD heads business) can give us an opinion on that point.
Q21. Could you comment please?
A21. The fiscal 2009 sales forecast does not assume any contributions from the start-up of business with new customers. It also assumes business as usual with all of our existing clients.
Q22. What sort of conditions would you need to start dealing with a new customer in this business? For instance, would you want to sign a five-year purchase contract? I suppose that if there were no restrictions then starting a new business relationship might pose problems, and then you might also think that relationships with existing customers preclude it. What conditions would allow it for TDK?
A22. This question poses a number of different issues. You will have to forgive me for not commenting any further, since it involves detailed strategic considerations.
Q23. So, as far as fiscal 2009 is concerned, the plan to boost market share assumes that you can raise your market share with existing customers?
A23. Yes.
Q24. You mentioned that you expected price erosion for HDD heads to exceed 15% this year, but for any customers with whom you trade in U.S. dollars the recent bout of weakness of the greenback against the yen will mean that prices have hardly fallen. So, even if you cut prices by 15%, in competitive terms you may be no better off because the dollar-based price that customers pay is no lower than before. You may find that there is no improvement in the situation even with a 15% discount.
A24. What do you mean by "improvement"?
Q25. I mean that a 15% fall in yen-based prices translates into virtually flat prices in U.S. dollar terms.
A25. The price will be slightly lower even in U.S. dollar terms.
Q26. So you are not willing to compete and win customers based on prices, are you?
A26. This goes back to the earlier question of the difference between products that are cutting-edge technology and the mature products. Naturally, the latest technology can command a premium, and so we adopt a high-price strategy in that sector. With the mature product lines, however-such as the 3.5-inch HDD heads from one generation ago, for example-there is a question about what approach to take. It's difficult to answer this question in terms of precise figures. In general terms, though, our strategy is to raise yields and maximize production efficiency and thereby achieve the most profitable cost profile.
Q27. "Real" operating income was 77.0 billion yen in fiscal 2008 and you are forecasting 85.0 billion yen for fiscal 2009, which means an improvement of around 8.0 billion yen. And yet you are likely to face a drag of 20.0-30.0 billion yen due to the strong yen, as well as an increase in depreciation costs in the region of 10.0 billion yen. What is your projected mix of positive and negative earnings growth factors? How do you expect to generate "real" operating income growth of 8.0 billion yen?
A27. The fiscal 2008 profit result included a gain on transfer of operations of 15.0 billion yen. We are also assuming that the value of the currency will appreciate by around 14 yen compared with the previous year. Normally we expect each one-yen shift against the U.S. dollar to have an impact at the operating income level of about 2.0 billion yen, which implies losses due to currency translation effects of 28.0 billion yen. So we have to absorb 43.0 billion yen. Higher production volumes will be one factor. We expect an increase in production volumes in fiscal 2009 to improve profitability by reducing costs. Also, during fiscal 2008 we faced a number of issues that dragged down profits, including rising material costs, poor production yields and low productivity in some areas. We expect positive benefits to accrue in fiscal 2009 as the situation improves with these issues. Finally, although it is nothing to be proud of, we do have some loss-making products. We plan to reduce the losses or, in some cases, cut unprofitable lines out of our range. Through a combination of these actions, we expect a real year-on-year improvement in the cost-of-goods-sold ratio at the consolidated level.
Another thing that we must do is to raise the quality of earnings. In particular, a key challenge for us is to lower the break-even point for our production facilities. In China, labor costs are no longer ridiculously cheap. Our aim is to achieve suitable cost reductions and double productivity. While we cannot realistically double productivity across the board, I think we can make a lot of progress if we approach the issue with that kind of ambition.
Q28. I believe that the capacitor market is improving rapidly in some sectors. Does TDK have any evidence yet to confirm such a trend?
A28. No, we have not seen any evidence to support a rapid recovery.
Q29. I have two separate queries regarding HDD heads. Following on from an earlier question, how do you justify the assumption of a 2-point gain in market share during fiscal 2009? Is it based on those firms supplied 100% by TDK gaining share within the HDD market, or are you assuming that those customers for whom you supply about 30% of their requirements will gain a greater weighting within TDK's shipments? Or is there some other thinking involved? Please tell us the assumptions behind your forecast of higher market share. Also, when do you expect this increase to occur? The data from Q4 of fiscal 2008 and Q1 of fiscal 2009 suggest that TDK's market share has slipped, so when do you expect this trend to reverse?

Second, please tell us about the impact of the two acquisitions from fiscal 2008 of the Alps Electric assets and the facility supplying HDD suspension assemblies. In particular, what was the sales and profit contribution of the latter in fiscal 2008, and what effect do you expect in fiscal 2009? Also, how large are external sales, and will you use any of the output for internal production purposes?
A29. In terms of market share gains in the current year, we expect to see customers solely supplied by TDK generate growth within the HDD market. We also expect significant growth from one particular internal-production customer that is doing well at the moment, notably with 250GB 2.5-inch drives. Our thinking is that TDK's market share will tend to increase as customers come to us for those products where we can deliver a technical advantage.
Turning to the second point, the benefits from the purchase of assets and know-how from Alps Electric will come through in the second half of fiscal 2009. As mentioned earlier, productivity improvements and cost reductions at our facilities in China are the key. We will be applying some of the expertise accumulated in Japan by Alps at our production facilities in China. We expect this to provide us with a number of critical insights and to deliver efficiency gains. Magnecomp, the manufacturer of HDD suspension head assemblies, has to date mainly supplied Seagate and Western Digital. We have had virtually no business with Magnecomp prior to this. During fiscal 2009, we plan to accelerate approval processes for using the Magnecomp-supplied assemblies within the TDK product lineup. We hope to boost volumes this way.
Q30. There was a sales contribution of about five months from Magnecomp during Q4 of fiscal 2008. What was the effect on profits of that? Also, are we to understand from the earlier comment that Magnecomp's sales of HDD head suspension assemblies to external customers are set to increase in fiscal 2009?
A30. Magnecomp's sales account for roughly 10% of the sales of the HDD heads business group. I'm sorry, but can't give profit information.
Magnecomp joined the TDK Group last November, so the sales contribution in fiscal 2008 was for December and the first quarter of 2008, or just over four months of sales. I can tell you that the business was profitable during that period.

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