Investor Relations | IR Events | Performance Briefing
[ 3rd Quarter of fiscal 2010 Performance Briefing ] Q&A
- Q1. Please comment on numerical differences between amounts in the third quarter and amounts in the fourth quarter. For instance, in the third quarter, structural reform expenses were \2.0 billion and EPCOS goodwill amortization was \1.9 billion. How much will these expenses be in the fourth quarter? I'm particularly interested in the amount of structural reform expenses. I'd also like to know how the structural reforms to be implemented in the fourth quarter will benefit the company next fiscal year. Please explain these expected benefits by product sector.
I also have a question about the expected tax refund of \9.4 billion resulting from the ruling by the National Tax Tribunal on your transfer pricing taxation case. You said that you would reverse deferred tax assets, but what assumptions have you made regarding this when formulating your earnings projections for the current fiscal year? Please provide figures.
- A1. We reported structural reform expenses of \2.0 billion in the third quarter. For the fourth quarter, we expect these costs to be in the range of \5 billion to \6 billion. In the third quarter, we recognized amortization expenses of \1.9 billion, but this figure included a one-time element. We therefore expect these expenses to fall to around \1.5 billion in the fourth quarter of the current fiscal year. In terms of the structural reforms we plan that will give rise to the \5 billion to \6 billion in costs, as many of you know, there are some businesses that we need restructure. We want to and intend to do something with these businesses.
You asked about the transfer pricing taxation case. TDK's assertion was largely accepted by the Tribunal, whose ruling resulted in it rescinding \14.1 billion in incremental income. As we have already paid taxes in accordance with earlier correction notices, we expect to get back around \1.6 billion in interest on those overpaid taxes. Collectively, therefore, we expect a tax refund of close to \16.0 billion. The tax on that amount at a rate of 40% is just over \6.0 billion. On the other hand we'll effectively get back \9.4 billion, so the post-tax earnings will increase by around a net amount of \3.0 billion. Net income for the nine-month period to the end of the third quarter was therefore around \13.0 billion if this \3.0 billion is added to the net income of \10.0 billion. Adding the earnings we expect from normal operations in the fourth quarter would give post-tax earnings of between \15 billion and \16 billion for the full year. However, we are projecting consolidated net income of only \7.0 billion for the fiscal year ending March 31, 2010, with the difference related to the reversal of deferred tax assets.
- Q2. I expect there are several businesses targeted for structural reforms. Specifically, what business fields are you referring to and what do you plan to do in the way of structural reforms? It's also important for me to know what benefits you expect your actions to yield next fiscal year.
- A2. The reason we are bringing forward structural reforms at this juncture is to generate benefits next fiscal year and thereafter. There's not much time left in the current fiscal year, but we will do as much as we can to ensure that the benefits are large next fiscal year. All business divisions are targeted for structural reforms, but we hope to derive benefits in the capacitor and magnetics businesses in particular.
- Q3. So no structural reforms are planned for EPCOS?
- A3. That's right.
- Q4. My question concerns capacitors, specifically multilayer ceramic capacitors (MLCC). Could you tell us how much earnings improved by in the October-December quarter compared to the July-September quarter? Did you generate a profit or just break even in the third quarter? In the past, you've said that you expected the capacitor business to return to profitability during fiscal 2011. Do you expect the return to profitability to be earlier than that now? Furthermore, what is the current capacity utilization rate? For example, is ramping up production capacity a pressing issue as some people suggest?
- A4. We can't tell you in specific terms the extent of the improvement in earnings in the third quarter, but what I can say at least is that it was close to our initial plan for the third quarter. Unfortunately, however, we still aren't profitable in those operations. We hope to move back into the black from March through the first half of next fiscal year on the back of an expected increase in sales.
In terms of capacity utilization, we have completed the integration of mass production systems and current capacity utilization is close to 90%. We are working hard at present to raise production volumes. Measures to increase productivity include reallocating equipment.
- Q5. So you're still not planning to raise capacity?
- A5. We are working quickly to raise capacity through the steps we are taking now.
- Q6. A rate of 90% is close to full capacity. To what extent are you aiming to raise production capacity through efficiency gains?
- A6. We can probably raise capacity by 10% by reallocating equipment. We also hope to raise capacity through improved productivity.
- Q7. You said that you are on track with your plans to turn profitability around. It seems to me that sales are a little higher than you expected. In this context, could you give me an idea of how much you reduced the loss by between the second and third quarters? Was it something like half?
- A7. It wasn't quite half, but we reduced it by around 40%.
- Q8. Structural reform expenses in fiscal 2010 look like they'll be around \10 billion. How much are you projecting them to be next fiscal year?
- A8. We actually intend to execute some reforms in the fourth quarter that were originally planned for next fiscal year, so we don't expect structural reform expenses to be that large in fiscal 2011.
- Q9. Does that mean you are projecting expenses of several billion yen for fiscal 2011?
- A9. Yes, in that vicinity.
- Q10. Could you give me your HDD head shipments on a quarterly basis as well as an indication of TDK's current market share? Also, what are your projections for next fiscal year?
- A10. Let me give you the HDD head figures, setting the first quarter of last year was 100 as in past presentations. On that basis, the first quarter of this year was 106, the second quarter was 126 and the third quarter was 137. We are projecting about 134 for the fourth quarter. We currently have a head market share of 32%, but would like to increase that.
- Q11. Initially, you were projecting capital expenditures of \41.0 billion. Why have you raised your projection to \63.0 billion?
- A11. We had forecast capital expenditures of just over \40 billion for fiscal 2010, so allow me to explain why our forecast included a figure of \63.0 billion this time. In the first half of last year, we invested in facilities only to see demand plummet due to the impact of the Lehman Shock, which prompted us to curtail capital expenditures in the second half. Nearly \20 billion in capital expenditures for facilities and structures that we were looking at last fiscal year slid into the first half of the current fiscal year. Consequently, annual capital expenditures on an approval basis are expected to be largely as planned in the range of \40 billion to \45 billion.
- Q12. What is your forecast for capital expenditures for next fiscal year?
- A12. We expect them to be higher than in the current fiscal year because we have constrained capital expenditures quite a lot on an approval basis this fiscal year. That said, we don't intend to increase them substantially.
- Q13. It has been reported that you will increase investment in HDD suspensions. Could you tell me how much you earmarked for this investment in the initial capital expenditure projection of \41.0 billion and the current projection of \63.0 billion?
- A13. We plan to invest roughly \10 billion in suspensions over the next three years. Please understand that we don't plan to invest the total amount immediately.
- Q14. I have a question concerning your HDD head production capacity. I would like to confirm your thinking as regards your capacity for fiscal 2011. In the past, you said that you could increase production without investing in front-end processes. But how much spare capacity do you have at present and to what extent can you increase production with current facilities? Also, you showed a product launching schedule for 375GB/P head products. How many heads do you expect to ship?
- A14. To answer your question about HDD head production capacity, we are making preparations in our head business assuming 10% to 15% annual growth in hard disk drives. While we aren't planning major investments, we need to upgrade technologies in all processes. We believe that we can meet demand by reinforcing our operations in this way. I can't give you specifics, but we are also making preparations so that we are able to meet demand next year.
As we mentioned today, we are continuing to develop 375GB/P products. However, customers decide HDD capacities themselves and heads are used in drives of varying capacities. They could be used in 1TB drives or 500GB drives. We can't answer questions on how the market will develop as a whole, but we are working to ensure that we commercialize products that can cater to a mix of customer needs.
- Q15. I get the impression that rather than becoming the most commonly used products, 375GB/P products will find a niche. Am I right?
- A15. We believe that 375GB/P products will bridge the gap to the next 500GB/P products. However, we can't say at this point how that will take shape.
- Q16. I'd like to ask about improvements in multilayer ceramic capacitor productivity. You said that you will look at introducing equipment and ways to improve productivity. What progress are you making and how will that be reflected in your operations next fiscal year?
- A16. I believe your question about capacitors concerns processes that were talked about in December. We have finished looking at specifications and are now preparing facilities for the first half of next year, when we plan to start some lines. As soon as we confirm things are working smoothly, we plan to begin mass production in the second half of fiscal 2011 as originally planned.
- Q17. When do you expect to bring online the first production line?
- A17. We should have completed preparations by the first half of fiscal 2011. We are actually close to that point now.
- Q18. If successful, when will all lines be operational?
- A18. It should take about half a year from that point, so we are still planning for all lines to be operational in the second half of next fiscal year.
- Q19. How do you intend to raise your HDD head market share next year? You probably can't go into details, but a rough idea would be fine. The number of companies is limited, so will you try to raise share with specific customers for instance? Or will your approach be to raise share little by little across your customer base? Capacity of 2.5- and 3.5-inch HDDs will also probably increase as will areal recording density, but is the forecast based also on the launch of 375GB/P products?
- A19. We have received specific forecasts from customers planning to increase production. Besides continuing to meet demand from these customers, we will leverage our technological advantage to target various customers. In these ways, we aim to expand our market share.
- Q20. In your explanation before, you said that the reason behind the fall in battery sales was the absence this year of special demand in the previous fiscal year. However, I seem to recall that I heard battery sales for PCs dropped in the second quarter because of product problems. You have said that you expect notebook PC demand to increase considerably going forward. However, I have heard from other companies that expanding sales for notebook PCs isn't easy going because of product problems. Could you tell me how things were in the second and third quarters so that I have a clearer picture?
- A20. In the past, we have had problems with some batteries, but this didn't have a major impact. We received large orders from a specific customer in the past, but we don't have this customer now. Business with other customers is basically as it has always been.
- Q21. So that means that while you have lost that one customer, the number of other customers is steadily increasing?
- A21. Yes.