Investor Relations | IR Events | Performance Briefing

[ 1st Quarter of fiscal 2012 Performance Briefing ]Q&A

Q1. Please explain why operating income fell in comparison with the corresponding quarter of the previous fiscal year.
A1. Besides one-time expenses?a ¥3.1 billion charge for changing our pension plan and a ¥3.1 billion impact from the Great East Japan Earthquake?the biggest factor behind the ¥5.6 billion operating income result was a drop in sales prices of HDD heads, which exceeded our expectations in the latter part of the first quarter. Another reason was lower sales of high-frequency components. So, lower sales for these two reasons were the main reasons for the operating income result.
Q2. Could you comment on the trend in terms of orders so that I can get an idea of your second-quarter performance in the passive components segment?
A2. At the previous earnings release conference, we said that we expected sales in the July-September quarter to rise around 10% compared with the April-June quarter. As of now, we expect a quarter-on-quarter increase of 5% to under 10%.
Q3. What is your outlook for capacity utilization in the second quarter?
A3. In the first quarter, particularly April, the natural disaster resulted in a drop in capacity utilization for ceramic capacitors. From that level, we expect capacity utilization in the second quarter to rise by around 5 percentage points.
Q4. My questions concern HDD heads. What were volumes in the first quarter? What is your outlook for the second quarter onwards?
A4. First-quarter shipment volumes were slightly lower than we expected. Using an index where the first quarter of the year ended March 2011 is 100, fiscal 2012 first-quarter shipments were 95. From the second quarter onwards, we expect a 5 point increase from the first quarter to 100.
Q5. What is your outlook for the HDD head market and TDK's market share?
A5. We foresee fewer major changes in shipment volumes in the HDD market as a whole due to seasonal factors. In fact, the market is likely to flatten out. Regarding market share, there are still elements of uncertainty at present, because we are in a period of transition with restructuring anticipated among customers. Nevertheless, we think that we should be able to maintain our present market share.
Q6. What is your outlook for sales from the second quarter onward?
A6. For passive components, we project growth of 5% to under 10% from the first quarter to the second quarter, and similar growth from the second quarter to the third quarter. We expect double-digit growth in rechargeable batteries, which are performing well. HDD head sales volumes will probably be flat, but cost reductions through rationalization efforts, particularly in China, should enable us to generate earnings.
Q7. My question concerns the average percentage drop in unit prices for HDD heads. What was the rate of decline in the first quarter? And what is your outlook for the second quarter onwards?
A7. The unit price dropped by approximately 6% in the first quarter compared with the fourth quarter of fiscal 2011, due to changes in our product mix. In fact, product mix has a large bearing on average prices. We expect prices, including average sales prices, for former products to continue declining. From the second quarter, we expect prices to decline by 2% to 3% on a quarterly basis.
Q8. Please comment on current supply and demand for ceramic capacitors and unit prices in the first quarter of fiscal 2012.
A8. Orders for ceramic capacitors were brisk in March and April, but dropped in May in the wake of that brisk demand. Orders rebounded slightly in June. Market conditions as a whole, however, aren't necessarily robust, with production of televisions and PCs weak, and conditions in the Japanese automotive market anemic in the first quarter. That said, orders bottomed out in May and are gradually recovering.

Unit prices rose on average in the first quarter compared with the fourth quarter. This rise reflected a change in product mix.
Q9. Is my understanding correct that orders expanded for automotive applications?
A9. Orders for automotive applications were relatively strong in Europe. This strength partly compensated for the drop in Japan. Overall, yes, the automotive sector was healthy.
Q10. I believe that TDK is growing aluminum electrolytic capacitors and film capacitors by leveraging synergies with EPCOS. You are nearing the full-scale launch of products in Japan. What synergies are you capturing in passive components in the current fiscal year?
A10. We aim to expand sales in the Japanese marketplace, particularly in the automotive field. We are also seeing synergies in high-frequency component development in technological terms, such as in joint design of new products.
Q11. Sales of high-frequency components seem to be dipping. What steps are you taking to turn things around in the second quarter and beyond?
A11. At present, sales of high-frequency components are declining because of production cutbacks at major customers. However, we are aggressively increasing customers, including mobile phone and IC manufacturers. As a result, we believe that sales will pick up gradually from the second quarter.
Q12. My question concerns expenses. Corporate and eliminations in the first quarter were ¥7.2 billion, of which ¥3.1 billion represented a one-time charge relating to a change in your pension plan. Subtracting that, corporate expenses were ¥4.1 billion. I think corporate expenses were roughly ¥3.2 billion on a quarterly basis in fiscal 2011. That would mean that corporate expenses rose ¥0.9 billion year on year in the first quarter of fiscal 2012. Why? Also, amortization expenses of goodwill from the EPCOS acquisition were ¥1.4 billion in the first quarter of fiscal 2012. Would it be correct to assume on that basis that full-year expenses will be quadruple this figure, or ¥5.6 billion? Finally, please break down the ¥0.6 billion in structural reform expenses.
A12. Corporate and eliminations include some structural reform costs. We recorded ¥3.1 billion as a one-time charge associated with the pension plan change. Also, ¥0.2 billion of the ¥0.6 billion in structural reform expenses is included in corporate and eliminations. Furthermore, ¥0.2 billion of the ¥3.0 billion impact of the Great East Japan Earthquake is recorded under corporate and eliminations. So, of the ¥7.2 billion in corporate and eliminations, ¥3.5 billion was for one-time expenses. The remaining ¥3.7 billion includes some expenses borne by head office for development and IT.

Regarding amortization expenses of goodwill from the EPCOS acquisition, while we recorded ¥1.4 billion in the first quarter, the full-year amount is estimated to be between ¥5.2 billion and ¥5.3 billion, the same as in fiscal 2011. Regarding the ¥0.6 billion in structural reform expenses, around ¥0.4 billion was incurred for realigning some overseas product bases and streamlining our product lineup. The other ¥0.2 billion relates to one-time expenses in Japan, removal of buildings, base integrations and other actions, as mentioned earlier.
Q13. Excluding one-time expenses, corporate and eliminations in the first quarter were ¥3.7 billion. Would it be correct to assume that corporate expenses will be around ¥3.7 billion each quarter going forward?
A13. Corporate expenses should be between ¥3.5 billion and ¥4.0 billion on a quarterly basis.
Q14. I have a question about passive component demand. Earlier, you said that the recovery in the July-September quarter is weaker than expected, and that this was likely the result of the lingering effects of the Great East Japan Earthquake. However, demand is expected to rise in the third quarter instead. Could you elaborate on your outlook? What accounts for the delayed recovery? Why do you expect a recovery from the third quarter?
A14. One reason for the slow recovery is a longer than expected inventory correction period at customers following brisk demand in March and April. Another reason is production hasn't increased in June and July as much as previously assumed. Moreover, market demand for PCs, TVs and other finished products hasn’t increased as much as expected.

Demand for our products differs by product. Ceramic capacitor sales in the first half have been hurt by the natural disaster. However, we expect an improvement in the third and fourth quarters. Inductive device sales are expected to increase by between 10% and 15% between the first and second halves of fiscal 2012 for automotive applications. We expect double-digit growth in communications applications. However, PC applications might only grow around 5%.
Q15. Please break down your passive components forecast by application.
A15. Aluminum electrolytic capacitors, film capacitors and piezoelectric components for automotive applications have seen quite robust demand. These products are expected to grow steadily. Inductive devices are expected to grow across the board by close to 10% in the second half of fiscal 2012 from the first half.
Q16. Given that you are expecting growth in aluminum electrolytic capacitors and film capacitors, would I be right in assuming that you expect a commensurate increase in earnings in the passive components segment?
A16. Yes.
Q17. My question concerns ceramic capacitors. What was the capacity utilization rate in the April-June quarter, and what is the outlook for the July-September quarter? Also, please comment on profitability in ceramic capacitors.
A17. First-quarter capacity utilization was around 80%. We expect a rate of between 80% and 85% for the second quarter. In order to stabilize earnings, we need to increase sales a little more though, so we are currently taking various steps designed to increase our market share.
Q18. What has been the impact of soaring rare earth prices? Prices soared in June and July, in particular. To what extent do you expect these increases to be passed onto product prices?
A18. Rare earth prices remain higher than expected. TDK already has a system in place to pass on price fluctuations to some customers. For other customers, we are requesting price increases. But, if prices remain at a high level, there will almost certainly be an impact going forward. We hope to be able to minimize the impact as much as possible through internal cost reductions, reflecting price increases in product prices, and taking other actions.
Q19. So did the much higher rare earth prices have a negative impact in the first quarter? And what is the impact in the second quarter? If you can, please put a figure on the extent of the impact.
A19. Rare earth price increases have affected earnings. The impact has been several hundred million yen.
Q20. Could you tell us the status of the new production process for ceramic capacitors? Also, in what areas are you trying to bolster orders?
A20. We are continuing to make investments to ramp up production of ceramic capacitors. The new production process was almost complete as of the end of the previous fiscal year. We are focusing on winning orders for cutting-edge products.
Q21. Does that mean the applications are new products?
A21. We are actively proposing compact products with high capacitance to customers. TDK has had few cutting-edge products compared to other companies in the past, so naturally we are determined to capture orders in this domain.
Q22. You have made more new investments than other companies. Won't that result in higher depreciation expenses?
A22. The structure of the ceramic capacitors industry is such that fixed expenses can be covered by sales volume, but the source of profits is cutting-edge products with high unit prices, as we said earlier. Because we were unfortunately weak in this area, we have worked to strengthen it up to now. Going forward, we are determined to expand in this area.
Q23. I have some questions about HDD heads. Production cost pressures have no doubt mounted in HDDs with prices of voice coil motors (VCMs) and neodymium magnets rising due to the much higher rare earth prices. I would imagine that this situation has increased the downward pressure on HDD head prices. Could you comment on conditions?
A23. HDD prices have come down quite a bit in the market. Existing HDD head products are being manufactured more and more in-house amid this, making the competitive environment as difficult as ever. We plan to step up our response to falling prices by quickly beginning mass production of new high-value-added HDD heads for large-capacity drives. With 500GB/P products for 2.5-inch HDDs, there are various combinations such as two cutting-edge heads with one disk, or three conventional heads with two disks. We believe that we must pursue greater cost competitiveness so we can accommodate different types of products. That's why we continue to promote rationalization to reduce costs at the same time as setting TDK apart from other companies with cutting-edge products. Recently, the life of 320GB/P products for 2.5-inch drives has lengthened. This is one of the reasons for the difficult conditions in which prices have been falling.
Q24. The picture you paint is of 320GB/P products for 2.5-inch drives having a high weight in the product mix, which has led to them being increasingly produced in-house, and that while your share has temporarily dropped as a result you aim to recapture it in the second half. Is that the correct image?
A24. Overall, yes it is.

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