Investor Relations | IR Events | Performance Briefing

[ 2nd Quarter of fiscal 2012 Performance Briefing ]Q&A

Q1. Operating income is projected to increase ¥7.4 billion from the first to second half of the current fiscal year, despite a projected decline of ¥14.4 billion in net sales over the same period. What factors are behind this projected growth in operating income?
A1. The ¥7.4 billion projected increase in operating income from the first to the second half of the year reflects the following factors. The change in our exchange rate assumption from ¥80 to ¥76 will have an approximate ¥4.0 billion negative impact on operating income. The major flooding in Thailand will have an approximate ¥10.0 billion negative impact as well. Sales price discounts will reduce operating income by roughly ¥1.0 billion. Meanwhile, the absence of earthquake-related impacts will have an approximate ¥3.6 billion positive impact on operating income. The absence of one-time costs associated with changes in pension plans will have an approximate ¥3.1 billion positive impact. Furthermore, we estimate an approximate ¥10.0 billion positive impact from various improvements we will make in the second half, as well as from structural reform benefits, including ¥6.0 billion from the sale of land. Moreover, we expect increased sales of certain products, whose sales should rebound in the second half, to make a positive contribution of around ¥4.2 billion to operating income. Other factors should push up operating income by around ¥1.5 billion.
Q2. Flooding in Thailand has reportedly hindered HDD head production for HDD manufacturers. When do you expect HDD head shipment volumes to start picking up again?
A2. We expect HDD head shipment volumes to start increasing in January 2012. Unfortunately, sales volume will hit bottom in November as a result of the recent floods, but will start heading towards recovery in December. However, sales volume will not return to the projected fourth-quarter sales volume index of 106, which was touched on earlier, until January at the earliest. Several customers have been negatively affected by the recent floods. In response, we have been considering various ways of addressing this problem in our HDD business.
Q3. I suspect that the recent floods might also have some impact on the production of HDD suspension assemblies. What impact will this have on the HDD head business?
A3. We produce HDD suspension assemblies at the Thailand-based plants of our consolidated subsidiary Magnecomp Precision Technology Public Co., Ltd. The main plant in Wangnoi has not sustained any flooding-related damage at present. As of today, the water level in surrounding areas had crested at nearly 60 cm at one point, but has since fallen to around 30 cm. Starting today, a team of just under 200 employees, led by engineers, has begun preparations for resuming production. If current conditions don’t change, we should be able to resume production in the first week of November. Given these conditions, we believe that the impact of Magnecomp HDD suspension assemblies on HDD production should be limited to around the first or second week of November. As soon as conditions are right, we should be able to fully resume production and regain any lost ground.
Q4. Could you please go into a little more detail on your initiatives from the second half of the current fiscal year?
A4. The entire TDK Group is subject to the realignment of production bases, the overhaul of unprofitable businesses, personnel cuts and other measures. However, the details of some of these measures are still under consideration, so I cannot comment on them in detail at this time. Looking ahead, we will be focusing on clarifying the profitability of individual products in detail, rather than looking at businesses as a whole. Among unprofitable businesses, certain operations have the potential to generate profits provided that we separate the wheat from the chaff, so we intend to carefully prioritize these areas. Fixed cost reductions will involve workforce restructuring and the realignment of production bases. We will also steadily proceed with the sale of idle assets. Through these measures, we expect to generate benefits of around ¥20.0 billion next fiscal year.
Q5. Could you please discuss your medium-term scenario for how TDK plans to reshape its product portfolio?
A5. One way to reshape the product portfolio is to switch from older products, which inevitably suffer from lower profitability and production efficiency, to new products. However, switching to new products is not as simple as it sounds. Strong business departments can actively roll out new products and boost their earnings power. However, even strong business departments have unprofitable products. Previously, we had a tendency to develop products using only a single technology. From now on, the main thrust of product development will be to develop new products using multiple technologies amassed within the group. The more of these products that we launch, the greater the variety of product proposals that we can make to customers. This will in turn spur progress on the replacement of products in our portfolio. Moreover, consumer products generally tend to have low product prices. Therefore, we believe that it is important for us to properly target areas such as the industrial equipment, automotive, and infrastructure systems markets. In this manner, we plan to approach product portfolio realignment from two perspectives.
Q6. Please provide a breakdown of the projected structural reform benefits of ¥20.0 billion for next fiscal year.
A6. The largest benefits will come from personnel cuts, including the realignment of business sites. This will be followed by fixed cost reductions. Moreover, because our organic EL displays business will be sold in the current fiscal year, the losses from this business will not be incurred from next fiscal year. In other areas, operating cost reductions and other factors will also provide benefits. Altogether, we are projecting total structural reform benefits of ¥20.0 billion.
Q7. My question concerns the HDD head business. What are your assumptions for sales volume for the entire HDD market and for the market share of TDK’s HDD head business in the current fiscal year?
A7. We are assuming overall sales volume for the HDD market of around 600 million units for the current fiscal year. Unfortunately, our market share fell below 30% in the first half. This reflected a drop in sales of desktop-related HDD products that use many HDD heads, due to a change in the production environment at a major customer. In the second half, we may regain a market share of 30% or higher, partly due to a contraction in the market following the floods in Thailand. On a full-year basis, we are expecting a market share slightly higher than 30%.
Q8. Do you have any plans to develop business with the HDD manufacturers that were damaged by the floods in Thailand, including talks on producing HDD heads on their behalf?
A8. TDK’s approach as a company is to cooperate to the fullest extent where possible with its current capacity. We anticipate some problems to arise as we cooperate with HDD manufacturers, such as technical compatibility issues. However, we do not believe that such problems will present insurmountable challenges. That said, one major problem will be how to respond to customers who require more production capacity than TDK has at present. Because this involves TDK’s and customers’ circumstances, we will need a little bit more time to see how the situation will play out. In any case, we recognize that our business environment has changed on many different levels as a result of the floods.
Q9. Several days ago the EU approved the merger of the HDD business of Seagate Technology plc and Samsung Electronics Co., Ltd. EU press documents noted that the merged entity will continue to buy HDD heads from TDK. I recall that when Seagate announced the acquisition, it said that it intended to further strengthen its partnership with TDK. Looking back on these developments, I have the impression that Seagate has every intention of continuing to do business with TDK. The floods in Thailand occurred just as negotiations on this realignment were being finalized. Please tell us what you can about the kind of relationship TDK will have with Seagate going forward.
A9. Regarding the EU press announcement, the situation is exactly as you described. We believe that the merged entity plans to purchase HDD heads from TDK. When integration proceeds this far in many different forms, one key point is how to utilize existing production capacity in the market. Another point is how to hold down investment. Now that HDDs have become a commodity, we believe that these considerations will also become extremely crucial factors going forward. Therefore, we believe that Seagate has a strong economic rationale for continuing to do business with TDK. From a technical standpoint, we also believe that Seagate can utilize the technologies we have cultivated as an HDD head manufacturer. We believe that these considerations form the basis for maintaining the relationship between the two companies into the future.
Q10. When considering heat-assisted HDD heads, the industry will have to make larger capital expenditures in back-end processes and deal with even more difficult technologies going forward. Given the product development roadmap, I believe that HDD manufacturers will find it difficult to remain viable on their own in this field. Considering the next step in the roadmap, along with asset and capital efficiency, I believe that teaming up with TDK is a good way forward. What is your view?
A10. TDK’s strengths lie not only in the front-end process of such new technologies, but also in areas where it can demonstrate its unique capabilities such as by differentiating itself in the back-end assembly process. We believe that expectations are high for TDK to develop technologies incorporating unique features while taking cost into consideration.
Q11. Supply-demand dynamics for HDDs have become very challenging. What rate of decline do you expect for HDD head prices during the October-December and January-March quarters? Also, I believe that production of a considerable number of 500 GB/P heads for 2.5-inch HDDs was initially planned to start in the October-December period. How should we view price trends, including changes in the product mix?
A11. As a result of the recent flood damage in Thailand, we believe that our customers must also adjust their product mixes in many different ways. There are certain products customers would like to produce but find it difficult to do so at present depending on how well they can procure components. For this reason, at this time, TDK is preparing to produce in accordance with the demands of its customers. Therefore, we believe this will limit the rate of decline for HDD head prices. However, in regard to the transition to 500 GB/P heads, at the moment we believe that this trend will pick up to a certain extent, but will take a little more time, due to various negative impacts on the supply chain.
Q12. How much surplus production capacity does TDK have for HDD heads? I thought that the fourth-quarter sales volume index of 106, which was touched on earlier, might refer to TDK’s maximum production capacity. Could you please explain this in more detail?
A12. We still have surplus production capacity in the fourth quarter. The projected sales volume index of 106 takes into account the overall supply chain situation, factoring in negative factors like possible supply chain disruptions in the fourth quarter.
Q13. Following the major floods in Thailand, HDD manufacturers face different situations. Given TDK’s limited production capacity, how will you allocate the supply of products?
A13. Because we run an OEM business, certain parts are common to all customers, while there are individual differences in some parts delivered as HGA, so supply will depend on our production capacity for each company. In this context, the key question is to what extent we can make adjustments to satisfy the demands of customers. Taking into consideration the actual lead times, and the lead time needed to ramp up production capacity, TDK is making production adjustments in order to cooperate with its customers to the fullest extent possible.

Looking at the entire process, TDK’s business consists of front-end wafer processing and back-end slider processing and assembly. Heading toward the fourth quarter, the front-end process is already producing at full capacity. In the back-end process, preparations are underway to ensure that we can cooperate with our customers by moving to full production at their request. We expect to see a variety of changes in economic conditions in the fourth quarter. We will adhere to the approach of extending the fullest possible cooperation to all our customers.
Q14. You said earlier that the major floods in Thailand had negative impacts of ¥23.0 billion on net sales and ¥10.0 billion on operating income. What proportion of these impacts on net sales and operating income will the HDD head business account for?
A14. The HDD head business should represent around 60% of the ¥23.0 billion negative impact on net sales due to the floods in Thailand, with other operations accounting for around 40%. The negative impact of ¥10.0 billion on operating income includes actual losses. Because we quickly removed machinery to a safe location in the HDD head business (HDD suspension assemblies), we believe that there should be no substantial actual losses. As a result, the HDD head business should account for around 40% of the negative impact on operating income.
Q15. In the capacitor business, demand has now slowed considerably for capacitors used in digital home appliances. Add to this a fiercer competitive environment, and I believe that the situation has changed from the conditions described in your previous briefing. What is your outlook for performance trends in the capacitor business, particularly in the third and fourth quarters? Previously, TDK talked about actively implementing strategies targeting the volume zone of the market. Please provide an update on subsequent developments. Also, please comment on performance trends for aluminum electrolytic capacitors and film capacitors in the second half.
A15. As you point out, ceramic capacitors for digital home appliance applications have faced difficulties, with orders falling for these capacitors. However, speaking frankly, TDK does not have very much market share in this sector. Therefore, while there will certainly be an impact, one point to keep in mind is that these products had low profit margins to begin with. On the other hand, sales of capacitors for automotive use have increased. Furthermore, we are seeing strong sales of capacitors for industrial equipment applications, particularly in infrastructure systems. Our current strategy calls for driving further growth in sales of these products.

In regard to small-sized capacitors for use in smartphones, TDK previously had almost no presence in this sector. However, now that its products have finally been qualified by customers, TDK is making new strides in this field. We intend to ramp up production of these products as soon as possible. With strong support from our customers, we are seeing surging orders for aluminum electrolytic capacitors and film capacitors for infrastructure systems. We therefore expect sales of these capacitors to increase in the third and fourth quarters.
Q16. Based on your first-half result and full-year forecast for operating income, TDK is projecting second-half overall operating income of around ¥21.0 billion. How does second-half operating income break down into the third and fourth quarters?
A16. The third quarter is expected to account for around one-fourth of the second-half operating income of ¥21.0 billion, while the fourth quarter should account for the remaining three-fourths.
Q17. In which segment do you plan to include gains of ¥6.0 billion on the sale of land?
A17. At present, more than ¥4.0 billion of the ¥6.0 billion gain will be generated overseas. Because we see these transactions as part of our business activities, we plan to include these gains in the Passive Components segment.
Q18. Am I correct in understanding that the gains on sale of land will no longer be booked next fiscal year?
A18. Yes, you are correct.
Q19. What percentage of actual second-quarter capacitor sales of ¥34.2 billion did ceramic capacitors generate? What was the actual capacity utilization rate for ceramic capacitors in the second quarter?
A19. Ceramic capacitors accounted for around 60% of actual second-quarter capacitor sales. This represented a decline from the first-quarter result. We expect the percentage of ceramic capacitor sales to increase in the third quarter. The capacity utilization rate for ceramic capacitors was around 80% to 85% in the first quarter. It fell below 80% in the second quarter.
Q20. Were you able to substantially reduce inventories in the second quarter?
A20. In April, we saw a special increase in demand associated with the earthquake recovery effort. It took us some time to clear these inventories.

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