Investor Relations | IR Events | Performance Briefing

[ 3rd Quarter of fiscal 2012 Performance Briefing ]Q&A

Q1. What are your HDD head shipment volume projections for the April-June and July-September periods of next fiscal year in terms of the HDD head shipment index?
A1. We are currently projecting an HDD head shipment index of more than 120 for the April-June period, assuming an HDD head shipment index of 100 for the first quarter of the fiscal year ended March 31, 2011. This is based on expectations for sales volumes to start picking up from the latter half of the fourth quarter of the current fiscal year. We are also projecting roughly the same HDD head sales volume in the July-September period. Although we still find it difficult to foresee the overall business environment, we anticipate this level of sales volume at this time.
Q2. What approximate level of profitability is TDK targeting in the ceramic capacitor business, taking into account the latest reorganization of production sites? How do you see this business developing over the medium term? What kind of quantitative improvement can we expect to see next fiscal year, including benefits from the reorganization of production sites?
A2. TDK’s ceramic capacitor business undoubtedly finds itself in a very difficult position in the industry, including in terms of profitability. TDK had already announced the closure of two plants as part of the reorganization of production sites. Looking ahead, TDK will rapidly reorganize the remaining plants according to structural reform plans, while also reorganizing other businesses and restructuring production lines to make them more efficient. Furthermore, I believe that we must identify TDK’s target fields more clearly than we have done in the past. We will step up efforts in the automotive sector even more than before. Customer relationships will remain vital in many different ways, including in terms of materials and production processes. We will further enhance these relationships as we develop business going forward. As explained previously, given the market position of TDK’s ceramic capacitor business, we must re-examine the very nature of this business. Looking ahead, we will need to more clearly identify product development, product roll-outs and related material processes according to the requirements of each market sector, while focusing on producing results on a sector-by-sector basis.
Q3. TDK aims to dramatically improve earnings in the ceramic capacitor business. Does this mean that TDK is targeting an operating income margin of around 10%?
A3. We do not expect that much of an improvement. Our first priority is to restore profitability in the ceramic capacitor business.
Q4. In regard to the additional structural reform expenses and projected benefits, the projected benefits seem considerably lower than those announced previously. Why? What specific projected benefits are targeted by the improvements in business efficiency in inductors and ceramic capacitors? Do the improvements target fixed costs or are they directed more at projected benefits related to processes? Do they target medium- and long-term benefits that will not produce short-term monetary benefits? Please explain this in more detail.
A4. Previously, we announced structural reform expenses of ¥3.0 billion for the second half of the fiscal year ending March 2012 and ¥5.0 billion for the fiscal year ending March 2013. In regard to the projected benefits from the ¥3.0 billion for structural reform expenses in the second half of the current fiscal year, we were speaking of projected benefits including benefits expected from next fiscal year onward. The projected benefits may have seemed larger in some respects because they involved reductions without one-time expenses, such as cuts in operating expenses and fixed cost improvements.
Q5. What are the projected benefits from the additional structural reform expenses of ¥9.0 billion? Also, did you include any of the projected benefits from the additional expenses into the projected benefits announced at the previous presentation?
A5. The projected benefit from the additional structural reform expenses of ¥9.0 billion is ¥4.0 billion. This projected benefit was not included in the projected benefits announced at the previous presentation.
Q6. What are the objectives of the reorganization of the ceramic capacitor business and the inductor business?
A6. In the inductor business, we aim to further enhance earnings at our production sites in Japan. To this end, we have focused on improving productivity in Japan by reorganizing production sites, automating production and taking other measures before capacitor business restructuring measures. In the capacitor business, we aim to deliver results through business restructuring. This will first entail rigorously reorganizing production sites, and then strengthening the competitiveness of our products.
Q7. Could you please go over third-quarter earnings, as well as the fourth-quarter earnings forecast in the HDD head business?
A7. Third-quarter earnings declined primarily due to flooding in Thailand. In the fourth quarter, we expect earnings to pick up based on the sharp recovery in HDD head shipment volume.
Q8.  TDK is projecting recording device sales of ¥55.0 billion in the fourth quarter. This compares with recording device sales of ¥55.2 billion and ¥53.3 billion in the first and second quarters, respectively, of the current fiscal year. Do you expect fourth-quarter earnings in the recording device business to be mostly the same as in the first and second quarters?
A8. Yes. Fourth-quarter earnings should be largely in line with the first and second quarters.
Q9.  Looking at the change in operating profitability from the third to fourth quarters, TDK will go from operating income of ¥7.0 billion in the third quarter to an operating loss of ¥10.8 billion in the fourth quarter, representing a change of ¥17.8 billion. This is based on a simple calculation derived from the full-year forecast. What are the main factors behind this change?
A9. Let’s look at the components of the decline of ¥17.8 billion. First there will be a drop of ¥11.7 billion due to the additional structural reform expenses. The decline in gains on the sale of land from the third quarter will be ¥1.5 billion. However, the flooding in Thailand should have a smaller impact, resulting in a ¥2.8 billion improvement in earnings. Together these factors represent a net negative impact of ¥10.4 billion from one-time charges, out of the total change in operating profitability of ¥17.8 billion. The remaining projected decrease is therefore ¥7.4 billion. The components are negative impacts of ¥1.9 billion from sales price discounts, ¥2.4 billion from a decline in the capacity utilization rate and change in product mix, ¥2.1 billion from a decrease in sales volume, and around ¥1.0 billion from an increase in IT-related costs.
Q10. Looking at structural reform expenses alone, TDK already incurred ¥0.3 billion in the third quarter and plans to record ¥12.0 billion of these expenses in the fourth quarter. In regard to personnel, TDK reduced the workforce by 5,537 employees from September 30 to December 31, 2011. What are your plans for job cuts through March 31, 2012? What is the breakdown of the 5,537 job cuts between Japan and overseas?
A10. Of the 5,537 job cuts, TDK cut around 5,500 jobs overseas and the remainder in Japan, with the latter mostly due to natural attrition. We have already explained that we will cut around 10,000 jobs overseas. By the end of the current fiscal year, we plan to have cut 10,000 jobs overseas. In Japan, we have announced around 1,000 job cuts and we plan to achieve this target during the course of the fiscal year ending March 2013, mainly by reviewing outsourcing arrangements and other practices and through natural attrition.
Q11. TDK will cut 10,000 jobs mainly overseas by the end of the current fiscal year. Of the projected benefits of ¥22.0 billion from structural reform expenses next fiscal year, around how much do you expect to derive from these job cuts?
A11. We currently expect to derive around ¥8.3 billion of next fiscal year’s projected benefits of ¥22.0 billion from job cuts.
Q12. What kind of structural reforms will account for the remaining projected benefits of ¥13.7 billion?
A12. We expect projected benefits of ¥2.6 billion from the reduction of operating expenses, ¥8.0 billion from restructuring of unprofitable businesses, and the remainder from the reorganization of production sites. The combined projected benefits from the job cuts and the reorganization of production sites should account for around ¥11.0 billion, giving ¥22.0 billion in projected benefits for next fiscal year.
Q13. I have several straightforward questions about how TDK is redesigning its ceramic capacitor business. Previously, TDK aimed to break even with monthly net sales of around ¥7.0 billion. Rationalization measures were conducted to achieve this goal, including measures to consolidate production sites and back-end processes, and internally manufacture certain materials. I suspect that the latest decision to close production sites was ultimately aimed at lowering the breakeven point. What net sales are you targeting as your new breakeven point? Will you strive to raise the marginal profit ratio by focusing on development in specific market sectors? Please outline your future strategy. In addition, reorganizing production sites means that part of your business risk will naturally be shifted offshore. How will you address such risks? Referring to the foregoing factors, when do you expect to complete the transformation of the ceramic capacitor business?
A13. We believe that a certain level of business volume is needed to accomplish structural reforms including operational improvements. It is difficult to put a specific figure on the breakeven point. However, since structural reforms will naturally entail prioritization, we expect to lose some business at least temporarily. In the process, as you pointed out, TDK will strive to provide distinctive products with a high marginal profit ratio, while reorganizing the business. In regard to risk, the automotive component business is a sector that requires more of a long-term commitment. In this sense, we intend to pay closer attention to risk than before. We intend to complete a series of reforms by the end of next fiscal year, including raising production efficiency at overseas production sites, in addition to reforms of domestic production sites. Thereafter, we aim for the ceramic capacitor business to start producing concrete results.
Q14. TDK could face risks such as a temporary drop in sales when shifting production sites offshore. How should we view such risks that could impact the income statement?
A14. In regard to shifting production sites offshore, basically, we must first clearly determine what we will produce overseas. Then we must identify the risks involved and how we will address each of them. We have yet to reach the stage of announcing a schedule. However, at the moment, we are convinced that this is the right direction.
Q15. TDK must at least generate sales necessary to maintain R&D activities. I do not think that your current structural reforms will touch these sales. Is it safe to assume that you will undertake structural reforms with the intention of maintaining the current size of the business? Or will you reduce R&D expenses and fixed cost-related areas as necessary based on the assumption that the business will need to be downsized to a certain extent?
A15. We are assuming a temporary, unavoidable downsizing of the business given the reorganization of production sites and other measures currently under way. However, based on this assumption, we will clarify TDK’s distinctive and competitive products as we strive to expand sectors with growth potential.
Q16. The HDD market is currently seeing considerable growth in HDDs for data centers. How would you characterize the HDD head business for data centers? Also, could you please comment on the earnings structure and profitability of this business?
A16. We believe that 3.5-inch nearline HDDs will become the main product for use in data centers. Unlike so-called “high-end” HDDs, such as certain enterprise and other HDDs, HDDs for data centers will basically consist of 3.5-inch multi-disk type drives with a speed of 7,200 revolutions per minute (rpm). Until now, TDK has excelled in 2.5-inch HDD heads, and has expanded business in step with market growth in this sector. In regard to the future 3.5-inch nearline HDD head sector, TDK has conducted product development from around the year before last with the view to accommodating technologies that have a high-speed data transfer rate. We have achieved considerable success. At present, the 3.5-inch HDD market is holding relatively steady. We believe that the nearline HDD sector offers particularly strong growth potential mainly because the number of disks per HDD could increase to 5, compared with up to 4 previously, and the number of heads per HDD could increase from 8 to 10. Accordingly, TDK will concentrate efforts on product development in this sector, with the view to further expanding sales in the fiscal year ending March 2013. In other words, we aim to make inroads into the 3.5-inch nearline HDD sector, alongside the 2.5-inch sector, where we are already highly competitive.
Q17. I have an additional question about the change in fourth-quarter earnings. You just gave a detailed analysis of the main reasons for changes in projected earnings. You noted that HDD head business sales should start increasing in the fourth quarter, and that profitability should return to the level of the first half of the fiscal year ending March 2012. However, factors such as the capacity utilization rate, along with changes in the product mix and sales volume, are still negative for the company as a whole. This suggests that TDK has a considerably negative outlook for businesses other than HDD heads. Is this actually the case? Moreover, I suspect that TDK may curtail production given that inventory figures have started creeping up slightly. What impact will production adjustments have going forward?
A17. Our earnings projections assume that HDD head orders will recover. On the other hand, we still have a negative outlook for passive components. The reason is that amid lower orders for passive components, including falling prices, we expect the capacity utilization rate to decrease as we adjust inventories in the fourth quarter. This impact has been factored into our fourth-quarter earnings projection.
Q18. Can I assume that the impact from the lower capacity utilization rate is one of the biggest reasons for projected lower earnings? Also, what is your stance on inventory levels at the end of the current fiscal year?
A18. Inventories have certainly increased in quantitative terms. However, inventories also include a component for materials, so in-process inventory has not necessarily increased dramatically. Even so, because we hold large inventories of electronic parts, we plan to reduce these inventories to an appropriate level in the fourth quarter.
Q19. What is your projection for total shipment volume in the HDD market in the fiscal year ending March 2013? Also, you noted earlier that TDK’s HDD head shipment index is projected to surpass 120 in the first quarter of next fiscal year. Can I assume that TDK will be at full production given its current production capacity?
A19. At present, we are projecting total shipment volume in the HDD market of just under 700 million units for the fiscal year ending March 2013. This equates to growth of around 15% compared with the projected shipment volume of 600 million units for the fiscal year ending March 2012. In regard to TDK’s production capacity, we are not currently stretched to the limits of full production, although we expect a change in generation of various models starting from the latter half of the fiscal year ending March 2013. We believe that we can adequately handle the aforementioned growth in the HDD head shipment index to more than 120 with our current production capacity.
Q20. I believe that supply conditions for HDD heads as a whole will remain tight next fiscal year. What is your take on the supply-demand situation?
A20. We expect supplies to remain tight in the first half of next fiscal year. In the second half, we should have a better picture of how the situation will develop given overall market conditions and TDK’s competitiveness. The key points will be how and to what extent our customers are able to restore their HDD head production capacity, and for TDK, whether we can maintain orders at the current level, or boost them further.
Q21. How will the projected benefits of structural reforms materialize next fiscal year? Can I assume that the benefits will materialize from the April-June quarter? Or will the benefits gradually accrue with each passing quarter? Please give us a timeline for the projected benefits on earnings? If possible, could you comment on how certain management is about the projected benefits of ¥22.0 billion from structural reforms? To what extent do you expect to incorporate the projected benefits into your initial forecasts for next fiscal year?
A21. We expect the projected benefits to start appearing in the April-June quarter and gradually increase thereafter. This is because TDK will incur a considerable portion of the structural reform expenses before the current fiscal year-end. We are currently forecasting total projected benefits of ¥22.0 billion. At this time, we expect to realize almost all of the projected benefits.
Q22. In regard to HDD heads, TDK suggested at its business strategy meeting in December 2011 that its HDD head shipments may decline slightly as HDD head production by HDD manufacturers started to recover around the July-September quarter. However, today you said that the HDD head shipment index could top 120 in the April-June and July-September quarters. How will TDK’s HDD head shipments change as the production of HDD manufacturers recovers?
A22. TDK cannot comment fully on this issue because it involves our customers’ circumstances. As we support the HDD head shipment volume projected for next fiscal year, there is some uncertainty regarding the extent of growth in demand in the second half of next fiscal year depending on overall market conditions. However, if possible we aim to maintain the first-half HDD head shipment volume in the second half of next fiscal year. Market conditions permitting, we intend to lift HDD head shipment volume even higher.
Q23. By what percentage do you expect to reduce inventories in the fourth quarter?
A23. We expect to reduce inventories by around 20% from the level on December 31, 2011. However, as we said before, inventories include a component for materials, so it is difficult to put a percentage figure on the overall inventory reduction for individual products. Roughly speaking, we aim to reduce inventories by focusing mainly on electronic parts.

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