Investor Relations | IR Events | Performance Briefing

[ 2nd Quarter of fiscal 2010 Performance Briefing ]Q&A

Q1. At the previous earnings release conference, I believe you remarked that TDK was aiming for a market share in HDD heads of 32% plus. Where do things stand as of now? In particular, could you share your sense of TDK's potential from next fiscal year onwards, when products for 2.5-inch HDDs will be at and above 300GB/P?
A1. Right now, I believe that our share in heads is somewhere around 32%, and there's a good chance that this will improve by another percentage point to 33% in the fourth quarter.

As for our 320GB/P products for 2.5-inch HDDs, my sense is that we can supply these products at a relatively high production yield.
Q2. You reported an average capacity utilization rate of 80% for the second quarter. In what ways did this rate vary by product? Specifically, could you share whether this played out more strongly or weakly in capacitors, HDD heads, batteries, magnetic materials, and power supplies? Also, it would be great if you could offer your third-quarter outlook for each of these categories.
A2. There was some slight variation in our 80% average capacity utilization. I believe in capacitors, the second-quarter rate was around 85%. It was about the same in HDD heads, and 70% in magnets, the latter of which is admittedly not very good. The rate in magnetics was 75%, and 80% for other products. In the third quarter, the rate for capacitors should rise to about 90%. HDD heads will likely be over 90%, and magnets around 80%. The rate in magnetics should be 80%, while other products will be unchanged at 80%. Our capacity utilization in SAW filters is I believe around 80%, but this will probably rise to about 90% in the third quarter. In film and aluminum electrolytic capacitors, our capacity utilization is 70%, but this should also improve slightly going forward, probably to around 75%. Our capacity utilization for piezo injector-related products is still less than 60%. Although we think this will improve somewhat, with Europe's automobile situation still shrouded in uncertainty, you should expect this rate to remain flat, at about 60%.
Q3. For structural reform expenses, can we assume that the figure of \3.1 billion for the year remains unchanged? Also, can you describe how these expenses will likely emerge in the third and fourth quarters?
A3. We think that structural reform expenses for the year will be \5.3 billion. That breaks down into \1.7 billion and \1.4 billion spent in the first and second quarters, respectively; and an estimated \1.2 billion and \1.0 billion for the third and fourth quarters. Since the third and fourth quarters will coincide with the EPCOS business combination, it is possible that these figures could grow by several hundred million yen.
Q4. The president stated that the real action phase for integration benefits with EPCOS is just beginning. Over the roughly one year of carefully preparing for this step, as things stand now, where do you see synergies emerging faster than you anticipated? Then conversely, where do the most daunting obstacles remain? If possible, please give your response by business segment. Also, what specific shape will these benefits take? Will it be higher sales or will it emerge as profit? Can you share your view of what we can reasonably expect to see in the third and fourth quarters? Since it might be difficult to discuss figures for EPCOS, can you offer a qualitative assessment of what you perceive?
A4. To recap your questions, you're asking what we can expect from the EPCOS integration in the third and fourth quarters, what things, if any, have been more challenging than we anticipated, or if certain things are likely to be delayed. As you mentioned, I can't give figures on certain areas, but my sense is that the pace of benefits is gaining quickly in high-frequency components, particularly related to mobile phones and base stations. For the latter, we should start to see benefits in the third quarter. For mobile phones, we anticipate benefits emerging from the fourth quarter onward. Mutual technology exchanges have also begun in transformers. To give an example, our respective production processes contained parts that were automated and parts that weren't. Researching our respective processes and exchanging automation technology raised our overall automation rate, which has yielded benefits in certain areas. In mobile phones, including the market itself, I'm convinced that TDK components can make headway by borrowing from EPCOS' strengths. Similarly, I believe that synergies will create new ideas and products, and that we will produce a number of synergies in mobile phones. This is a field where benefits can be expected.

An area that has been somewhat disappointing thus far is aluminum electrolytic and film capacitors. I wanted to target the Japanese market a little more aggressively, but lingering issues in our marketing structure instead resulted in delays.

We are expecting synergy effects in sales of high-frequency components, aluminum electrolytic capacitors and film capacitors. In transformers, we anticipate production-side synergies.
Q5. In multilayer ceramic chip capacitors (MLCC), you stated that the Company has gained a relatively solid foothold, and will aggressively go after low-priced notebook PCs in the coming fiscal year after moving to a leaner business structure in the second half of this business year. I'd like to probe this topic a bit more since this is the first mention of it. Has this strategy been planned all along, or has something emerged in this quarter that prompted this particular decision to tackle notebook PCs again? Can you elaborate a little more here?
A5. Let me begin by discussing what we have learned over the last six months. For starters, we have already seen benefits from what we call the integration of mass production systems. As with other businesses, the capacitor business too has to move quickly to push things forward, while flexibly pursuing a variety of strategies. In this context, we've seen benefits emerge from efforts to integrate mass production systems in ways specifically designed to enhance speed.

Another point is that we made significant strides in reducing costs during the first half of the year. With our bases and products corresponding on a 1-to-1 basis, the content of both is now highly transparent, and we've seen improvements. I consider this to be just one more of the benefits made possible by the integration of our mass production systems.

One more point, and this relates to new products, is that the integration of our mass production systems has enabled us to easily assess the present status of each product, making any problems readily apparent. For example, discussions at our production sites are centered on achievements and things that we still need to work on.
Q6. I'd like to ask about your index for HDD head volume, including for the second, third, and fourth quarters. Also, I know you were asked earlier about capacity utilization, but given the shortfalls in hard disk inventories, the typical approach I've been hearing is not to adjust production much ahead of January to March of next year. For its operations, though, TDK is in a position where it has to have and stockpile inventory. Put differently, does the Company have the production framework and inventory levels to allow for full-on capacity utilization to carry it on through January to March? And could you share your thoughts on capacity utilization in heads as the fourth quarter approaches?
A6. For the head index, if we think of the first quarter of last year as 100, then the first quarter of this year was 106 and the second quarter was 126, with 134 and 126 expected for the third and fourth quarters, respectively. As for capacity utilization ahead of January to March, as was touched on earlier, demand for that period is looking to be strong among some customers and weak among others, so there's nothing definitive I can say at this time. However, I don't see any particular problem with the figures we're targeting; and as for inventory, we aren't looking to stockpile, but rather to pursue well-managed production.
Q7. This question is about currency exchange rates. You reported that forex movements lowered net sales and operating income for the second quarter by \20.4 billion and \6.2 billion, respectively, versus a year ago. What impacts did the U.S. dollar and the euro have in producing this outcome?
A7. Since EPCOS was not present last year, exchange rate effects essentially applied only to TDK as it was prior to the integration. Accordingly, there was virtually no effect from the euro. I think we can safely say that most of the impact we felt was related to the U.S. dollar.
Q8. Regarding your roadmap for HDD heads, in your 2.5-inch conversions as of right now, what upper limit of GB/P per media do you see perpendicular magnetic recording (PMR) as able to meet? What are you targeting as a successor to PMR? Are you envisioning discrete tracks, or perhaps thermal assists? Can you tell us which of these at this time seems the more likely option?
A8. In terms of our roadmap for heads, if we're talking about 2.5-inch disks, then TMR readers can handle up to around 1 terabyte per square inch. Perpendicular magnetic recording will continue to be used for writers. As for media, products using discrete track technology will likely appear sometime between 2011 and 2012. I think thermal assists technology will likely appear in 2012.
Q9. In the run-up to the year-end sales season, what features, if any, have you noticed in orders and shipments from July to October compared to a typical year? Can you also explain the extent or degree of any seasonal adjustments you foresee beyond December?
A9. You're asking if we've seen any unique features in demand appear for the year-end sales season in and around September or October. While there is some talk out there suggesting that some are trying to move the Christmas and year-end sales seasons forward, I haven't seen much compelling evidence of this. If we look at electronic components, orders came in steadily in September, and have been slowing down a bit in October. In contrast to last year, demand appears to be recovering for the year-end sales season this year. With that said, the cautious attitude out there remains unchanged. I also think that there's still no real confidence about how final demand will turn out. That's why I believe that TDK too has to stay fairly vigilant with respect to inventory.
Q10. Let's discuss the movement in operating income from the first to the second quarter, excluding EPCOS. Sales were up \16.0 billion and profits rose by \10.0 billion. You said sales growth came roughly equally from recording devices and electronic components, while the increase in operating income stemmed more from electronic components. Could you elaborate a bit more on this point?

In terms of products, are there any changes to report? For instance, are there areas where inventories are rising, or perhaps falling?
A10. Compared to the previous quarter, second-quarter sales for TDK as it was prior to the consolidation of EPCOS rose \16.5 billion, with operating income increasing by \10.0 billion. I'll explain why the improvement in electronic components played such a major role in operating income. One reason is that recording devices had previously delivered profits in the first quarter, and contributed similarly to second-quarter profits. The extent of possible improvement, therefore, was comparatively smaller given the already relatively high level of profit from these products. In contrast, since first-quarter performance in electronic components was far from stellar, the amount of improvement in the second quarter was large compared to this previously low level. The end-result was that electronic component-related products carried fairly substantial weight in the monetary improvement we reported.

Finally, while there's no denying that inventories increased for some products, there were virtually none for which these increases were extreme.
Q11. Earlier you touched on thermal assist recording and discrete track media in your discussion of heads. These respective technologies represent read and write techniques, which suggests to me that their adoption would occur in parallel. While adopting both together would likely offer the greatest benefit, is there any debate about whether in practice one should be adopted before the other, rather than simultaneously? In light of industry trends, do you have an outlook as to where thermal assist recording technology might fit into your roadmap?
A11. Just as you've stated, the relationship between thermal assist and discrete track technologies for HDD heads is such that shifting to discrete track technology for continuous media would greatly enhance the effectiveness of thermal assist technology. I believe that both discrete track and thermal assist are technologies that will eventually require drive-side integration. In that context, I think that in terms of order, media manufacturers will adopt discrete track technology first, which they will then combine with thermal assist, thus making it possible to achieve even higher densities.
Q12. Could you tell us of synergies you expect with EPCOS in the power supplies business? Specifically, I'm looking for any outlook you might have on synergies with EPCOS from the standpoint of the power supplies business. For example, are there any EPCOS components that TDK can use as power supply components, and what types of synergies do you anticipate in products used in automobiles?
A12. To give an example of power supply products for automobiles, we are channeling resources into DC-DC converters, which are products used in electric vehicles (EVs) and hybrid electric vehicles (HEVs). For the film capacitors found in DC-DC converters, we are now moving to produce those that differ from our current film capacitors in-house.
Q13. My question is for Mr. Araya. You stated that ceramic chip capacitors have dropped market share in the area of notebook PCs. What level of impact has this development had in terms of sales? Could you also share your thoughts on the conditions and schedule for your business reentry into products for notebook PCs?
A13. The impact on sales, I believe, is just under 10%. Now let me explain the market reentry you just mentioned. Essentially, the change in notebook PC trends occurring today is a shift from netbooks to the adoption of lower cost versions of these products, including the next generation of PCs with thinner form factors.

If you look at the products we offer that can meet these market demands, you'll see we had a major problem. That problem, simply put, was cost. Looked at this way, the problem is whether we can deliver cost-compatible products from the standpoint of the materials used and the characteristics that customers want. At this point, the possibility that we can do this is growing larger. Our target schedule for reentry is around the fourth quarter of the current business term.
Q14. You've established a new company called TDK-EPC Corporation. What do you perceive as the company's strengths and weaknesses?
A14. EPCOS' strength is that it has a pretty powerful presence in modules in the high frequency and wireless fields, particularly SAW filters. Given that relationship, you could argue that one of the benefits of purchasing EPCOS is that TDK can pretty aggressively make inroads with mobile phone manufacturers. On the other hand, from a manufacturing standpoint, EPCOS, as an accomplished German manufacturer, has created rather impressive manufacturing processes thanks to its longtime passion around the art of manufacturing. With that said, I suspect that the approach to manufacturing at TDK and in Japan may be better at linking these processes, as well as in terms of the flow of goods and people. Drawing these two styles together is going to be a very exciting experience, I imagine.
Q15. Earlier you told us about your index for the hard disk market. I'm hoping you can share some data using the index you always use on the hard disk market on a fiscal year basis, as well as head numbers (average number used per HDD) and market share for the fiscal year. Also, could you tell us whether the reason for the projected rise in market share from the third to the fourth quarter is the result of a change in product generation, or if any other factors may be involved?
A15. Because demand related to heads and drives has been so shaky this year, giving a figure for volume is actually more difficult than one might think. As of now, I would say we're looking at total demand of around 570 million to 580 million units. In HGA demand, since the number of heads is more than three, volume is roughly a multiple of this estimate. As for market share, we think around 33% is likely for this coming March, and about 32% for the full fiscal year. Since the number of new products where we enjoy advantages is likely to grow, we anticipate that this will translate into an increase of around one percentage point.
Q16. In your approach to capacitor inventories, is your policy to limit any substantial increases? With some other companies saying that they intend to boost inventories, can you describe for us the relationship between the capacitor market and growth in inventories?
A16. Let me talk about our approach to capacitor inventories. Inventories are, naturally, pegged to the anticipated level of sales. We think there won't be any substantial departure from typical seasonal variations in the second half of the current fiscal year. Of course, many elements of uncertainty remain, but we don't believe there are any factors present that warrant aggressive efforts to carry inventory.