Investor Relations | IR Events | Performance Briefing

[ 2nd Quarter of fiscal 2011 Performance Briefing ]Q&A

Q1. First, within capacitors, what share of 2Q sales is accounted for by ceramic capacitors?
A1. Ceramic capacitors accounted for approximately 65% of capacitor sales.
Q2. How did monetary sales and profitability for ceramic capacitors change from the first quarter?
A2. Net sales were largely flat compared to the first quarter, while profitability suffered relative to the first quarter due to the stronger yen.
Q3. What are your projections for 3Q ceramic capacitor sales and earnings?
A3. A drop in sales of approximately 7% to 8% appears likely at this point. In terms of profitability, while we will make up for some of this decline through cost reductions and other measures, it is unlikely these steps will cover all the decline.
Q4. What share of sales does rechargeable batteries account for in the Other sales category, and what changes did you see during the quarter? Also, you stated at the start of the term when asked that TDK planned to boost rechargeable battery production capacity by around 20 percent. Has this plan changed in any way?
A4. Rechargeable batteries account for about 60% of Other sales. Our plans to augment production capacity are unchanged at this stage.
Q5. How did net sales trend relative to the first quarter, and what are you projecting for the third quarter?
A5. Net sales grew by roughly 30%, and we are forecasting growth of several percent in the third quarter.
Q6. Please detail the progress made on your medium-term management plan. In doing so, could you touch on the sense of speed you're witnessing within TDK, synergies with EPCOS, profitability in capacitors, and earnings expansion, particularly as you look for ways to meet plan targets in today's changing environment? My impression is that business performance is headed in a direction that is unlikely to contribute much to progress towards the 10% operating income ratio and \100.0 billion operating income targeted for fiscal 2013 without faster progress in these areas. Given the situation, what kind of breakthroughs are you expecting, or what approaches are you considering for delivering the profit growth vital for high and improved earnings next fiscal year regardless of changes in the business climate?
A6. TDK has frequently been said to be highly dependent on HDD heads, so our efforts to improve passive components is becoming more pronounced. Synergies, especially with EPCOS, are materializing quite rapidly, and I suspect that we can further accelerate this trend. There are also several investments for next term that we have completed ahead of schedule. Film and aluminum electrolytic capacitors are performing strongly, most notably in the energy field, and we hope to extend growth in this business next term through investment. In the communications field, we're investing in high-frequency modules, notably new products for smartphones, which we plan to roll out next fiscal year but perhaps as early as the end of the current term. Preparations are moving ahead steadily, with sights set on the coming fiscal year. This is one of the bright points.

Another issue is the urgent need to ramp up production of ceramic capacitors overseas, particularly general-use products, given the yen's greater-than-expected appreciation. The power supplies business has also improved substantially atop sales to the infrastructure sector, so we can expect strong performance here as well. We intend to work hard going forward to realize greater growth in passive components.
Q7. HDD production appears to have bottomed out and be headed towards recovery. Can we assume then that there are no changes in the index you spoke of earlier even given the immediate business climate?
A7. That is correct.
Q8. Over the course of doubling production efficiency in China, TDK has purchased the back-end processing assets of Alps Electric Co., Ltd. and downsized its workforce with near perfect timing. In addition to these, what is the nature of your two-year project, what segment does it affect, and which products was the project launched to improve profit margins for?
A8. To date, we have boosted production in China around labor-intensive manufacturing processes. For one, all of these processes will be automated. In as much as possible, we hope to use high-efficiency automated equipment for this task. This alone represents a substantial improvement. Similarly for back-end processing, as you might expect, we are pursuing rationalization in all areas that rely on human skills. While changes in some areas may stand out more depending on the product, our fundamental plan is to carry out this work at every production site. We are also making plants more efficient, a drive that will include, for example, combining tasks formerly split between two separate plants. HDD heads will continue to be targeted for further rationalization. This is especially the case for fabrication processes, where we will possibly need to look for additional improvements. For these reasons, there will be some things at each plant that can be accomplished in 18 months, and other things that will require 2 years. While there have been some scheduling delays, we have no option but to double total efficiency over a span of two years.
Q9. You explained that base consolidations and closures with EPCOS would lead to lower expenses, as well as greater efficiency, going forward. What monetary benefits have you reaped thus far, and what benefits do you anticipate will come in the future?
A9. My guess is that greater room for more robust improvements exists for former EPCOS plants than for former TDK plants.
Q10. Earlier, you mentioned that the HDD market for this term will see shipments on the order of 640 million units. Setting the second quarter at 100, what do you expect to see in the third and fourth quarters? Also, relative to the 640 million unit figure for this term, can you give any guidance for the kind of projections we should be making for the coming fiscal year and the one thereafter?
A10. This year is exceptionally unique, in that HDD numbers are likely to be flat for the second, third and fourth quarters. Demand for drives will probably remain firm next year and beyond, so we expect to see close to 10% annual growth.
Q11. What do you project TDK's share in HDD heads will be during that period of growth next term?
A11. We hope to have a 32% to 33% share during the coming fiscal year.
Q12. Looking at SG&A expenses for the second quarter, since sales are virtually unchanged, it appears that the SG&A expenses ratio is worsening. Can you comment on the factors driving this trend?
A12. The SG&A expenses ratio was slightly higher than in the first quarter, with sales eroded by a stronger yen. Among the line items that increased were research and development, up \0.8 billion from the first quarter, and structural reform expenses, included in SG&A expenses, which rose \0.3 billion.
Q13. Could you comment more on heads, specifically on any changes and outlook for capacity utilization at wafer plants? Based on investment in wafers, cutbacks seem to have been made from around September. When will these cutbacks bottom out and when should we expect to see investment rise again? Looking at the industry environment right now, a shortfall in the large-capacity hard disk range appears to be looming, and there are rumors of trouble for certain products. Are these issues likely to trigger any changes on your end? I'm especially interested in hearing your outlook given that TDK has a large share of the large-capacity HDD market.
A13. First, regarding wafer capacity utilization, operations were in full throttle in the first quarter, but in the second began to drop off from September. Capacity utilization in the first quarter was over 90%, with the 2Q level at around 85%. Capacity utilization in the second half is presently expected to be between 75% to 80%. Some uncertainty still remains regarding the fourth quarter at this time. If demand in Asia ahead of the Lunar New Year rebounds, then we intend to raise capacity utilization for wafers again.

As for talk that the HDD industry is facing a possible shortage in large-capacity hard drives, this range is relatively resistant to such issues, but there is also no sense on our part that a shortfall is particularly imminent at this time.
Q14. The release of single write and a variety of other technologies seems to signal a trend towards larger drive capacities. Are there any technology initiatives, either current or forthcoming, under way in the HDD head industry to cope with these larger capacities? In terms of overall technology trends, is your sense that things are going to keep moving rapidly towards high-end products, or is there going to be a temporary lull in this trend going forward? What can you tell us on how this trend is taking shape?
A14. For our part, we are looking to make heads that use energy assist technology an industry standard, which we think could trigger the next big breakthrough on the HDD head side of the equation.
Q15. How is the roadmap looking? Particularly in the case of single-write products, my intuition is that this will put a burden on hard disk manufacturers. What order do you see for the roll out of single-write technology?
A15. From the HDD head perspective, we see a shift first from PMR (Perpendicular Magnetic Recording) and TMR (Tunneling GMR) to single write, followed by a switch to energy assist.
Q16. Aluminum electrolytic and film capacitors are performing well. A variety of developments are also set to emerge from the second half of the year, among them plans to establish a new business targeting eco cars. In terms of pathways regarding synergies with EPCOS and the use of aluminum electrolytic capacitors as internally produced components, are there any developments we can expect to see from the second half or the coming fiscal year?
A16. In these areas, TDK is not really involved in consumer market products. Our target is mainly industry, notably products for the infrastructure and automotive electronics sectors. Even here, though, the bulk of our sales are not to Japanese customers. That's why, although it will take longer, we are using the former TDK's marketing channels to promote sales expansion. Film capacitors are the first products we anticipate will make inroads among Japanese manufacturers. And we have already begun using them for internal production. As for the likely order, we first expect to expand film capacitor sales among Japanese manufacturers, followed by aluminum electrolytic capacitors. We anticipate growth particularly in film capacitors for automotive applications, but this will probably happen after 2012.
Q17. This question is about HDD head prices. Right now, HDD prices have fallen substantially, resulting in fairly adverse market conditions. What assumptions are you making regarding HDD head prices?
A17. One measure we can take to maintain prices is to use new offerings to change the overall product mix. But to be perfectly honest, it is difficult to tell right now whether the next 500GB/P product will rapidly gain a foothold or not. Consequently, we will probably need to take a slightly critical view with respect to prices in the second half of the year.
Q18. Let's say, hypothetically, that cloud computing became the dominant force in the HDD market, and that this resulted in lackluster growth mainly for 2.5-inch drives, versus growth in large-capacity drives for high-capacity data centers. My guess is that TDK has had a strategy in place for raising its share should this scenario happen, given the extremely sensitive recording density of its HDD heads, especially for 2.5-inch drives. If this growth, however, was instead in products like servers, which currently account for a small part of TDK sales, what actions would you take to secure a winning position in such conditions going forward? Would you dramatically raise recording density and reduce the multiple platters typically found in servers to reduce costs, and do you think that strategies of this kind would even be effective in such an environment?
A18. Our commitment to maintaining sales prices by boosting drive capacity through technological innovation remains unchanged. As I mentioned before, we will respond to larger drive capacities through the rapid introduction of new technologies. In conjunction, we will also likely need to create a framework responsive to both ends of the market, including by pursuing various cost reduction and efficiency measures in China. There are customers who buy 100% of their units from TDK, so we want to meet their needs with a structure that enables us to create both products for large-capacity drives and general-use products at a low cost.
Q19. My sense is that the cost of heads and components used in high-capacity drives is small relative to 2.5-inch drives. So my gut feeling is that the impact of reducing HDD costs will fall heaviest on the HDD manufacturers. Is this accurate? HDDs for servers, for example, are quite expensive.
A19. The market purely for high-speed servers is extremely limited. The HDDs used in cloud computing today are nearline drives, or roughly equivalent to 7,200-rpm drives. We think these types of drives are produced at a cost largely reflected in their actual price. What we are seeing is the gradual formation of a completely different market from that of truly high-end HDDs for enterprise servers.
Q20. I'd like to ask about your plan for the second half of the year. TDK is targeting \62.0 billion in operating income for the year. Subtracting the \37.2 billion posted in the first half, that leaves a projected \24.8 billion for the second half. Comparing both halves of the year, you stated that you expect to book a charge of \3 to \4 billion for structural reform expenses in the second half. Adding these costs back, the forecast of nearly \30.0 billion in operating income in the second half breaks down to \15.0 billion per remaining quarter. You are assuming an exchange rate of \80 to the dollar, so once this effect is considered, won't \15.0 billion in operating income per quarter prove a difficult target?
A20. Structural reform expenses were about \0.7 billion from the first half of the year. Our initial plan to book roughly \3 to \4 billion in charges in the second half remains unchanged.

As for exchange rates, although our projection was \80 to the dollar, the rate during the first half was \89. So we expect to experience a negative effect of around \9.0 billion from the first to the second half.
Q21. TDK posted 2Q operating income of \17.0 billion. So assuming, for example, an exchange rate of \80 to the dollar, the operating income would be at a level of just under \15.0 billion, correct? This is just a simple calculation. Your plan basically calls for doubling this in the second half of the year. Taking the second-half growth in high-frequency components you previously mentioned into account, the image one gets is that this will provide something of a buffer, am I right?
A21. One issue is whether the \80 to the dollar assumption will hold. The yen could possibly become even stronger. The situation is incredibly obscured right now, which is why we haven't changed our assumption.
Q22. How has TDK been impacted by the recent escalation in the price of rare earth? For example, what are inventory levels like for materials like neodymium and dysprosium? Also, could you touch on when TDK is likely to feel the actual impact of elevated prices? In short, does TDK face any risk that losses from rare-earth magnets will expand going forward? And can you discuss TDK's strategy from next year, including for procurement?
A22. As you've suggested, there will definitely be an impact of some kind on income. For dysprosium, our inventory level is fine for the current term. We also have a stockpile. But for neodymium, while we're okay for the rest of this fiscal year, we have no option but to raise prices. We are currently in negotiations with customers, but income from these rare-earth magnets will be impacted to some extent. Our own improvement efforts, including rationalization, will continue, so that we can minimize the impact on income as much as possible.
Q23. What is your actual and projected capacity utilization for ceramic capacitors for the second, third and, if possible, the fourth quarters of the year?
A23. 2Q capacity utilization was somewhere between 90% to 95%. We expect it to be around 85% in the third quarter, which we project is the lowest level it will fall to.
Q24. Can you offer any guidance as to when any possible impact on pricing might happen? Plus, I know there are many factors to consider, including calls for lower prices and price revisions from the new year or next spring, but what is your outlook for price impacts going forward?
A24. Looking at trends to date, the simple average sales price in the second quarter rose very slightly over the first quarter. In a variety of different senses, this indicates that changes have occurred in our product mix. Since demand for products used in consumer electronics is softening, I think we have to incorporate a certain amount of decline in unit prices in our pricing strategies.