Investor Relations | IR Events | Performance Briefing

[ 1st Quarter of fiscal 2010 Performance Briefing ]Q&A

Q1. I have some questions concerning capacitors and heads.

Firstly, how has profitability improved in capacitors between the fourth quarter of fiscal 2009 and the first quarter of fiscal 2010, and what do you expect the trend to be going forward? I'd be interested to know if there has been any change since the beginning of fiscal 2010. President Kamigama said three months ago, in the last Earnings Conference that all that was left to do was to execute plans and strategies given visible improvements. From that point, there has been a rapid increase in demand and I expect that meeting it has been difficult. Considering the recent industry changes, is executing plans and strategies still the only thing you have to do? Or have new, different issues emerged that mean a return to profitability could take time? Could you please explain the current situation simply and also touch on problem areas?
A1. Let me answer your questions. Profitability has naturally improved sharply between the fourth quarter of fiscal 2009 and the first quarter of fiscal 2010. However, as we said before, we are currently taking various steps to restore profitability. With integration of mass production systems almost complete, we are making improvements. The first-quarter improvement was in line with our expectations. And we are implementing various measures to make further gains in the second, third and fourth quarters. But things are more difficult than expected and circumstances are challenging.

In terms of production, capacity utilization was 70% in the first quarter and we expect it to rise another 10 percentage points in the second quarter. I expect that everyone is the same, but production is tight. The capacitor industry has seen a rapid rebound in terms of volume, and I think this is largely the case for Japanese manufacturers. I expect that our capacity utilization is pretty similar to other companies. To be sure, the fall in prices has made things difficult. I won't go into details here, but suffice to say that we plan to review our position again.

If I could add one thing, the price competition has been fierce, as is always the case in this industry. And as we said earlier, the pricing situation could get worse in the second half. We will do what we can, but even that might not be enough.
Q2. Putting aside the external environment for the moment, I'd like to confirm a few things about internal operations. You explained that you decided to integrate mass production systems and implement other measures at the start of the current fiscal year and this was done in the first quarter. However, I understand that achieving profitability in the second half, which was your original goal, looks difficult. Assuming this understanding is correct, what are the current problems? And what do you see as being the fundamental issues, including whether you can develop a competitive edge over other companies?
A2. As you said just now, we did most of what we planned in the first quarter. One of the positive elements is that there is still room to make productivity improvements as a result of the consolidation of production bases. We will be able to lower costs by raising productivity on higher volumes. In terms of the competition, our position is that we don't plan to compete on volume in the cheap general capacitors segment. Rather, we plan to concentrate on developing products for value-added markets. We want to compete on the strength of our products, including these products. We have also one or two proposals for cutting costs. With the realignment of bases complete, we will take steps to improve efficiency a little more in both Japan and overseas.
Q3. Does that include back-end processes overseas?
A3. Yes. TDK has bases overseas that carry out the taping process for capacitors. So using those bases efficiently and productively is one more theme for us.
Q4. The second area I have some questions about is HDD heads. Could you please explain using the index you always use how you have reassessed overall HDD volume, head assumptions per HDD and market share. Looking at the latest projection, it seems that sales aren't expected to rise from the first quarter, excluding forex fluctuations. Why is that?
A4. Let me answer your question beginning with volumes. Assuming the first quarter of fiscal 2009 was 100, volumes in the second, third and fourth quarters were 113, 97 and 69, respectively. Volume recovered to 106 in the first quarter of fiscal 2010 and we expect a further recovery to 116 in the second quarter.

Regarding HDD volumes and head numbers, based on the various information we have obtained, while things are changing by the day, it is clear that volumes are increasing. At this point, however, we can't see past the middle of the third quarter, which is why we have raised our second-half forecast only slightly. We expect to get a clearer picture of the increase by the second half of this quarter. To be honest, it is just a little difficult to comment on overall volumes and number of heads at the moment.
Q5. What is your market share target?
A5. It is over 30%, around 32%.
Q6. I may be laboring the point, but I expect that you have expanded your customer base with current products and that there has been a generation shift. Am I correct in saying this?
A6. Given the launch of new products and other factors, I believe that we can achieve that market share.
Q7. Isn't an even higher share possible? It seems to me that a share of between 30% and 32% should be easy to achieve, but I'd like to hear what you think about that.
A7. I think we can achieve a share of around 32% plus.
Q8. You have indicated that you do not intend to compete on the basis of price in cheap-priced general-purpose products. But please explain your stance on using overseas bases, including for front-end processes, over the medium term.
A8. One is that we will not try to do anything that we don't have the ability to do. We will look at prices and volumes according to our capability.
Q9. EPCOS' net sales in the first quarter were 37.0 billion yen. What is the forecast for the second quarter onward and when do you expect EPCOS to become profitable? If possible, please break down your first-half consolidated net sales projection of 370.0 billion yen.
A9. I'm afraid I cannot comment on forecasts for the second quarter onward because EPCOS is still a publicly listed company.
Q10. My question concerns the first-quarter break-even point. Thinking about your product mix, the break-even point should have been lowered because your high-margin products did well in the first quarter. Is my understanding correct? Please give us a little more detail.
A10. HDD heads performed relatively strongly, so we should have generated more earnings. However, overall earnings were low because of some loss-making businesses. Capacity utilization was 70% in June, but capacity utilization was low in April and May and we cleared inventories, so figures were comparatively poor. However, we expect figures to get a little better in the second quarter and thereafter.
Q11. I'd like to know more about capacitors. When you answered an earlier question, you said that price erosion was greater than expected. With the underlying pricing environment having improved, I would have thought prices would hardly have fallen. Is it that price-based competition is severe in low-capacitance capacitors, but not that severe in high-capacitance products?
A11. When we referred to severe price erosion, we weren't referring to the fall in average prices. There was a slight depreciation of the yen in the first quarter, but as I said earlier, we carried out reviews of unprofitable products. Again, it's not that average prices themselves were severe. I was talking about the market environment and in the context of general-use capacitors. There are of course many industry players in this sector of the market and they compete by lowering prices. Even in large and high-capacitance products, particularly strong-selling product sectors, the entry of new players, such as the Korean company mentioned earlier, has caused severe price competition.
Q12. I would have thought that prices wouldn't have declined that much in those areas because supply is tight. Isn't that the case?
A12. That's not the case. Price competition is extremely severe. As I said before, competition is fierce. That fact is that companies are offering strong-selling products at low prices.
Q13. Has that been the situation since the beginning of the year? Or have things changed since the beginning of the year when I think output was low and supplies tight. Or has price competition persisted since the beginning of the year as you see it?
A13. Even though demand was low in the January-March quarter, pricing was severe for the products we just mentioned. That is still the case. Price-based competition has always been severe for products that sell in large volumes.
Q14. Today, you talked about DC-DC converters and magnets for hybrid electric vehicles and electric vehicles in the context of the global environment. What share of sales do DC-DC converters and magnets for eco-cars represent now? And what is TDK's market position in DC-DC converters and magnets? I don't know much about the DC-DC converter field in particular, but who are the market players?
A14. Our competitors in DC-DC converters are Toyota-affiliated companies like Denso and Toyota Industries Corporation. Shindengen Electric Manufacturing Co., Ltd. is another competitor. We have business relationships with around six companies in Japan and overseas, including companies we have signed non-disclosure agreements with. Sales still only account for around 5% to 10% of total sales in the Power Systems Group. Increasing sales is the key point going forward.
Q15. I would like to know about cash flows. One thing I would like to know is your plan for capital expenditures over the next three years. Around half your capital investments have been in HDD heads and the profits they have generated have enabled you to make substantial capital expenditures. But are you planning to make the same capital investments over the next three years? Or will you change how cash is used? That is, will the cash flow from HDD heads be invested in other divisions?
A15. We plan to restrict investments to around 40.0 billion yen in the current fiscal year. We plan to raise this slightly next fiscal year and the year after. We invested about the same amount consistently in HDD heads through the past fiscal years. However, there is now no longer a need to make investments to raise capacity. We also acquired HDD head assets and facilities from Alps Electric Co., Ltd. However, we must still invest in R&D, that is, new technologies. We have invested in development heretofore, but we must now think about investing in mass production and when to make those investments. I don't think it will be this fiscal year, but most likely next fiscal year. As we said before, we must reinvest in HDD heads in two fiscal years from now.
Q16. My question concerns HDD head production capacity. Shipments may be a record in the next quarter depending on circumstances. Looking at the situation on a quarterly basis, will there be a bottleneck in terms of capacity? The bottleneck probably won't be in front-end processes. But if you don't raise capacity in back-end processes, won't you face some challenges as you look to increase market share? Am I right to assume that you won't need to make additional investments?
A16. As our president said earlier, given that we acquired HDD head facilities from Alps Electric and other factors, we aren't thinking of making large investments to ramp up production capacity over the medium term.
Q17. I have a question for Mr. Enami. Unrealized profits were much larger than normal at around 0.6 billion yen per month in the first quarter. Therefore, total unrealized profits are around 1.8 billion yen. Would I be right in assuming that because capacity utilization will improve, these unrealized profits will be realized in the next quarter, the third quarter?
A17. Unrealized profits are earnings on the transfer prices of products made in Japan when there are exported overseas. They are realized when these products are sold to non-group companies. However, when they are kept in the group, the profit included in inventories is not realized and is excluded on consolidation. In the course of a recovery, even if inventories are the same level of 10.0 billion yen, the unrealized profit included in inventories, which may have been only 5% before, will increase to 10% and to 15%. That is unavoidable during a recovery.

However, assuming the market improves from the first quarter to the second quarter and then from the second quarter to the third quarter, unrealized profits will increase as long as inventory is not reduced. An increase in unrealized profit in itself is no problem at all if we have the necessary inventory. This actually helps at the demand declining stage, because unrealized profits give an opposite impact to the profitability. The problem occurs when we have too much inventory. We incorporated unrealized profits in our presentation for the purpose of explaining whether progress is being made with structural reforms, but an increase in unrealized profits in itself is not bad as long as we don't have excess inventory.
Q18. In terms of synergies with EPCOS, what are the strengths of the products? Looking at DC-DC converters for electric vehicles and hybrid electric vehicles first, I believe that EPCOS has aluminum and film capacitors, but how do you view these products in terms of their features, applications, etc.? Where do their strengths lie? Also, what synergies do you expect to capture when your R&D frameworks come together in the future? Will the strength inherent in producing products internally come to the fore?

My second question is about high-frequency modules. I believe that you will derive benefits from producing SAW filters within the group. But how do you plan to leverage this strength? A certain Kansai-based manufacturer is extremely strong in high-frequency modules, but how do your strengths compare with theirs? In terms of the market environment, do you plan to compete in high-frequency modules going forward? For example, will you enter the market when you think the time in right because of changes in the front-end process in technological terms?
A18. Electrolytic capacitors and film capacitors are not used in DC-DC converters for electric vehicles at present. Ordinary power supplies are being used quite a lot in the switching power supplies made by TDK-Lambda, but no EPCOS products are being used. So there are possibilities. Prototypes are being made at present and the next step will be to evaluate them.
Q19. I would like to know how you will produce distinctive products that match well with products EPCOS produces in the power supplies business and turn this into a strength.
A19. Capturing synergies will take some time. Very few EPCOS products are currently used in power supplies products for the domestic market.
Q20. Do EPCOS' products match in terms of capacitance?
A20. There is no problem in terms of capacitance. Basically, EPCOS excels in large capacitance products, so we must look at aluminum products first.

Regarding your question about SAW filters, EPCOS and the Kansai company you mention probably have a 50/50 share of the market. EPCOS has strengths and weaknesses though. We plan to compensate for their weakness with our head thin-film and micro-processing technologies. Much is possible through joint development, including the use of facilities. When 4G comes of age, when frequencies are higher, we see many possibilities to work with EPCOS.

Before we talked about modules. Well, EPCOS is quite strong in modules. We believe there are various areas where we can capitalize on EPCOS' strengths. On the other hand, a weakness of EPCOS is that it doesn't possess High Q value materials for LTCC module boards. TDK has such materials. TDK hasn't had filters up to now, so we see a good combination developing.
Q21. From your explanation just now, do you mean to say that TDK's thin-film technologies will be incorporated in SAW filters?
A21. Yes. In fact, we're working together on a prototype now. We're dividing the work, with EPCOS responsible for the packaging.