Investor Relations

[ 3rd Quarter of fiscal 2009 Performance Briefing ]Q&A

Q1. Could you please tell us output levels and capacity utilization rates for HDD heads and capacitors in the third and fourth quarters?
A1. Capacity utilization with HDD heads averaged 60-70% in the third quarter. We expect it to fall below 50% during the fourth quarter, when it will reach around 40%. For capacitors, capacity utilization was approximately 50% in the third quarter and we are expecting it to drop into the 30% range in the fourth quarter due partly to the impact of inventory adjustments.
Q2. Next, I would like to ask a question regarding the guidance you provided that the sales of EPCOS would decline further in the January-March quarter. Could you explain what steps TDK is taking or plans to take going forward to avoid posting a loss in fiscal 2009?
A2. With regard to EPCOS, we said before that we had booked structural reform costs of 400 million yen in the third quarter. At this stage, we expect to book a further 400 million yen in such expenses in the fourth quarter. The task that lies ahead of us is to identify EPCOS facilities and other operational areas where there is overlap so that we can quickly create synergies by eliminating duplication. We plan to commence this process in due course.
Q3. Presumably capacity utilization in April and beyond will depend on the level of orders. Can we safely assume that orders will have rebounded to third quarter levels by then?
A3. As you rightly point out, the situation will depend on order levels. Based on the current conditions, our aim is to get our inventories down to appropriate levels by the end of March and have sufficient production capacity on hand to fill any orders that start coming in from that time. This is the position we want to get to during the fourth quarter.
Q4. You said before that restructuring costs at EPCOS would be only 400 million yen or so per quarter. Do you really think that TDK has done enough to ensure that the business will return to profitability in the coming fiscal year? Is restructuring now over, or, following on from TDK, do you expect to book additional restructuring charges for EPCOS next fiscal year? Also, in terms of expensing, what standards will you apply in booking goodwill based on the operating condition and future prospects of the business?
A4. We do not imagine that structural reform costs of 400 million yen per quarter will be sufficient in the case of EPCOS. TDK has acquired an equity stake in EPCOS of around 95%, and since October we have held a total of four steering committee meetings to guide and accelerate the planned business combination. Next time, we will hold extremely detailed discussions with a view to deciding our next actions. Accounting treatment is a part of these discussions, and our decisions will include whether to write down any assets especially in the current fiscal year following the accounting rules.
Q5. As per usual, could you please give us indexed quarterly sales and shipment volumes for HDD heads and capacitors? With HDD heads, my understanding is that TDK has boosted the efficiency of back-end processes using equipment purchased from Alps Electric. When do you expect the changes to be complete, and what sort of benefit are you anticipating? Could you give us any indication of when you expect to see some visible improvement -- particularly in light of what is happening at the moment at Fujitsu in this area?
A5. If we index the level of sales in the first quarter of the previous year at 100, then fiscal 2009 capacitor sales were 88 in the first quarter, 90 in the second quarter and 60 in the third quarter. We are forecasting sales of around 50 for the fourth quarter. With HDD head shipment volumes, if we index the level of sales in the first quarter of the previous year at 100, then fiscal 2009 sales were 112 in the first quarter, 127 in the second quarter, 109 in the third quarter, and we are projecting 76 for the fourth quarter. We have already begun to see improvements in back-end processing during the second half of fiscal 2009 and we have made considerable progress in realizing these changes. Unfortunately, the massive drop-off in output has masked any positive result, but at least we are seeing definite improvements in this area.
Q6. To improve profit margins on HDD heads, what sort of steps are you taking so that you can make a similar amount of profit with sales volumes of only, for example, 70% of the usual level? What are you doing to lower the break-even point?
A6. As you say, we are indeed in the middle of implementing some fairly drastic structural reforms. Our aim is to completely rebuild our production set-up in fiscal 2010.
Q7. Can we assume that the restructuring at EPCOS will not be cashflow-negative in real terms?
A7. Essentially, cash flows out only when restructuring measures involve personnel. With facility disposals or asset write-downs there are no implications for cashflow, and so no cash outflows are expected in this area. The situation is different at EPCOS, so there is some uncertainty here. However, the costs of 400 million yen booked for Q3 and Q4 are personnel-related, I believe.
Q8. Shipment volumes for HDD heads have dropped considerably in the fourth quarter. At times like these when capacity utilization falls, what trends are you seeing among the vertically integrated HDD manufacturers? Are you seeing any moves among such firms to raise capacity utilization for internal head production, which might be the better option for these companies? If these customers are shifting toward in-house supply, how confident are you that they will return to buying HDD heads from TDK once demand picks up again in the April-June and July-September quarters?
A8. When conditions for HDD heads worsen considerably, we would expect those customers with in-house capabilities to make greater use of them. However, as long as our products are sufficiently attractive in terms of supplying required technology, we would expect customers to continue buying them. At this point in time I cannot say anything about the sales volumes involved, but I do expect that TDK will continue to receive orders from customers who appreciate the technology and value we provide.
Q9. Doubtless these customers are continuing to order TDK heads as they have done up to now, based on the technological attractiveness of the product. But have they given TDK any purchasing commitment - for example, to buy a certain percentage of their HDD head requirements from you?
A9. I cannot comment on that except to say that we believe our customers value TDK for the combination of technology and cost that we offer.
Q10. In relation to the acquisition of EPCOS, TDK is planning to book a one-off goodwill charge of 5.0 billion yen in the current fiscal year. What level of goodwill charge-offs do you expect to arise on an ongoing basis from fiscal 2010? And what sort of run rate are you projecting for the portions of goodwill that you can amortize? Also, given that you will need to write down inventory assets from an accounting point of view, what level of write-down do you expect to record at the end of fiscal 2009?
One further question - in a press release, EPCOS has announced plans to downsize its workforce. How much do you expect such actions to lower fixed costs from fiscal 2010?
A10. Goodwill is in the 50-55 billion yen range. Of this figure, we expect to charge off around 5.0 billion yen in the current fiscal year, which, as I mentioned before, will include inventory. In valuing this inventory, which in the case of EPCOS is finished goods that can be sold at a profit, we will be adding the profit margin to the production cost. Since we will be applying the FIFO method, the additional profit component will be expensed in the current fiscal year. This is included in the projected 5.0 billion yen charge for fiscal 2009.

In addition, we plan to amortize any intangible assets over five, eight or ten years depending on the nature of the asset in question. Once we add a six-month charge-off for the period from October to March, it comes to around 5.0 billion yen. From fiscal 2010 onwards, we will be expensing the amortization of intangible assets only. We expect the annual figure to be in the order of 2.0 billion yen. Over and above that it will be pure goodwill, which we expect to calculate based on any asset impairment in the context of how much cash the business actually absorbs. That's how we plan to treat this. I apologize, but I am afraid that I do not have any information at this time on the effects of the planned workforce reductions.
Q11. I believe I can ask this question because a regional newspaper has covered the story. According to the press article, TDK is planning fundamental changes in its trading relationship with Yuri Kogyo and some other capacitor-related subcontractors by August this year. Could you please provide us with more details of what you plan to do and what the effects will be, including any figures if possible? If you have no figures, what sort of structural changes will be involved in personnel and expense terms?
A11. We are progressing with the restructuring of production in the Akita area, which includes partner production sites. First, we are building integrated production lines within the Akita area. That means that partners will transfer some of their operations to undertake onsite contract manufacturing for TDK. In addition, based on the current order book and forecasts, we have asked Mutsumi Kogyo to suspend supplies to us from August. In terms of the other TDK Group facilities in that area, our wholly owned subsidiary MCC is also working to integrate its operations into our production system based on an onsite contract manufacturing set-up. Overall, this program to boost production efficiency and integrate the various partner sites in the area will entail some job losses. I cannot say at this time exactly what magnitude of cuts will be involved, but we plan to push forward with structural reforms along these lines.
Q12. I would like to address my question to Mr. Kobayashi. Currently we are seeing the arrival of 500GB/P products in the 3.5-inch HDD sector and 250GB/P products in the 2.5-inch sector. Basically, as I understand it, with a few exceptions most of TDK's customers are using single-platter drives, but many of the companies that you do not supply are using double-platter drives. Some customers appear to be tempted to go the double-platter route in an attempt to maintain current in-house production ratios, but presumably this would be unsustainable from a cost-competitiveness point of view because the 250GB or 500GB platters would be costly in a double-platter 4-head configuration. Moving forward along the technology roadmap might, I imagine, tend to depress in-house production ratios as a matter of course. Can you say whether this is happening with some of TDK's customers?