Investor Relations | IR Events | Performance Briefing

[ Financial Results for Fiscal 2013 Performance Briefing ]Q&A

Q1. Operating income is projected to increase from ¥21.6 billion in the fiscal year ended March 31, 2013 to ¥30.0 billion in the fiscal year ending March 31, 2014. Could you please break down the reasons for this change?
A1. Let’s first look at the ¥30.0 billion operating income forecast for fiscal 2014. We are projecting restructuring costs of ¥10.0 billion, so operating income before these costs would be ¥40.0 billion. This ¥40.0 billion operating income consists of slightly higher-than-normal earnings from Head Office divisions, and nearly ¥20.0 billion in operating losses from other divisions. Excluding those losses, we are projecting operating income of about ¥60.0 billion from our three core segments. In fiscal 2013, the passive components segment posted an operating loss of ¥11.1 billion. Thanks to improvements, however, we expect passive components to account for just under 30% of the ¥60.0 billion operating income projection for fiscal 2014. Magnetic application products should account for just over 40%, while film application products should account for just under 30%.
Q2. You incurred ¥7.5 billion in restructuring costs in fiscal 2013. What monetary benefits do you expect to reap in fiscal 2014?
A2. Our past restructuring efforts have already led to improved profitability centered on capacitors. We expect to reap about ¥4.0 billion in restructuring benefits in fiscal 2014 against the restructuring costs of ¥7.5 billion in fiscal 2013.
Q3. On the slide titled “Establishment of strong business base for growth” on page 9 of the presentation materials, you are estimating restructuring costs of ¥10.0 billion. How will you allocate these costs?
A3. The restructuring costs of ¥10.0 billion will be broadly split between two priorities: promote business portfolio review and optimize production bases. We are earmarking around ¥5.0 billion for each of these priorities.
Q4. Can I correctly assume that restructuring costs will be much lower by the fiscal year ending March 31, 2015, although certain restructuring may continue?
A4. Yes. That is correct.
Q5. Your exchange rate assumptions seem conservative. If your assumptions approach the current exchange rate, can I assume that operating income will increase by the additional earnings that can be calculated based on your exchange rate sensitivities? Or will you use this gain as a buffer to drive more growth, such as by providing slightly more strategic discounts and so forth?
A5. We are projecting operating income of ¥40.0 billion, excluding restructuring costs, assuming an exchange rate of ¥90 to the U.S. dollar. In this context, we have adopted a fairly conservative outlook on prices and other factors. If the yen-U.S. dollar exchange rate moves from ¥90 to ¥95, this will have a positive impact on operating income. However, we do not intend to use this gain to provide discounts. Therefore, if the yen’s depreciation continues at the current pace, operating income will be boosted by the additional earnings that can be calculated based on our exchange rate sensitivities.
Q6. I’d like to look at the fourth quarter that just ended in a little more detail. In the fourth quarter, there was a mix of positive and negative factors relative to your initial plan, such as insurance income and larger-than-anticipated restructuring costs. However, even after excluding the insurance income and restructuring costs, I believe that fourth-quarter operating profitability was about ¥3.0 billion better than initially forecast. What were the main factors behind this performance? Also, inventories decreased by around ¥8.5 billion from the third quarter to the fourth quarter. What impact did reducing inventories have on earnings in terms of the loss from lower capacity utilization? Please clarify the factors behind your stronger-than-expected fourth-quarter performance, and the special factors.
A6. First, forex factors lifted operating profitability by ¥1.6 billion above our initial forecast. However, restructuring costs were ¥1.5 billion higher than initially forecast. As a result, the foreign exchange gains were mostly offset by the restructuring costs. Operating profitability also increased by around ¥2.0 billion, mainly due to a slight improvement in capacity utilization due to a slight increase in sales volume of passive components, etc., which we had expected to decline, along with changes in the product mix. The impact from the loss from lower capacity utilization was largely in line with our plans.
Q7. What was the actual monetary loss from lower capacity utilization?
A7. It was around ¥2.0 billion.
Q8. Looking primarily at passive components, I can understand why multilayer ceramic chip capacitor (MLCC) earnings are improving. In this regard, how should I view passive components other than MLCCs, such as inductive devices and high-frequency components?
A8. As you point out, MLCC profitability has improved due to restructuring. However, given that high-frequency components still offer much more room for improvement, we believe that we must concentrate resources on this area going forward. In inductive devices, we have put a system in place for new products, and qualification is proceeding steadily. In addition, we are now seeing a recovery in orders received for aluminum electrolytic capacitors and film capacitor-related components.

In regard to high-frequency components, which I touched on at the beginning, we plan to remedy systems problems, while stepping up the allocation of resources. Furthermore, we will assign a considerable number of Japanese process engineers to high-frequency components, with the aim of bolstering the manufacturing system. Since we will be revamping all of our systems on both the sales and manufacturing fronts, we expect profitability to improve going forward.
Q9. The slide on page 16 shows the planned change in sales for each segment in fiscal 2014. For example, the passive components segment is projecting a fairly large increase in sales. When will high-frequency components, in particular, start to see sales grow, and how will sales perform from quarter to quarter?
A9. As you can see from the presentation materials, passive components segment sales are projected to increase by 15-20% in fiscal 2014, compared with the previous fiscal year. We are assuming a forex rate of ¥90 for fiscal 2014, compared with the actual rate of ¥83 in the previous fiscal year. Accordingly, forex rates will push sales up by about 9%. The remaining growth will come from discounts and higher sales volume. Let’s now take a look at your question about high-frequency components within the passive components segment. High-frequency component sales will be boosted considerably by the weaker yen. In fact, we believe that these sales will grow by around 5 percentage points faster than the passive components segment as a whole as a result of forex rates alone. Of course, sales volume is also projected to increase.
Q10. Passive components encompass capacitors, inductive devices and other passive components including high-frequency components. Could you please give sales growth rates for each product?
A10. Sales of capacitors and inductive devices are forecast to increase by nearly 10%. On the other hand, sales of other passive components, which includes high-frequency components, piezoelectric material products, and circuit protection components, are tipped to grow by around 30%. Notably, high-frequency components should see increased sales of modular products. We are currently executing this strategy, so we should see considerable growth from the third quarter onward.
Q11. You just explained that high-frequency component sales will increase from around the third quarter. In which regions will you be selling more of these products? I also have a related question. Recently, a major U.S. manufacturer made headlines in newspapers on account of its weak sales. Will this sort of factor have an impact on TDK or not? Please go over these two points.
A11. First, in regard to sales by region, we believe that sales to South Korea will increase. Both discrete and modular products should see higher sales in South Korea. Moreover, we believe that sales of discrete products to China will increase, including sales to local Chinese companies. Currently, we are seeing an impact on sales in North America. However, it is unlikely that sales will be impacted any more than they are now.
Q12. You said that earnings structure reforms have started to contribute positively to MLCCs. How did MLCCs perform in terms of earnings in the fourth quarter? Could you please give us current capacity utilization rate levels and your earnings outlook for fiscal 2014?
A12. MLCCs returned to profitability in March as planned. Also, the capacity utilization rate currently stands at about 70%. In the previous fiscal year, we took various restructuring actions, including reorganizing production sites. In fiscal 2014, we will continue working to stabilize earnings.
Q13. Does the 70% capacity utilization rate reflect a smaller denominator as a result of integrating production sites? Or is it relative to the same production capacity in the denominator?
A13. There has been no change in production capacity. The capacity utilization rate is 70% under the same production capacity.
Q14. As you alluded to earlier when discussing inductive devices and high-frequency components, TDK, unlike other companies, manufactures these products using thin films. What is the greatest aim of using this production method?
A14. The thin film production method is most competitive in achieving smaller and thinner profiles. To take coil-related products as an example, we are able to manufacture considerably smaller products in massive quantities compared with the coil production method. Therefore, if smaller components are needed, we believe that TDK can demonstrate its competitiveness. In addition, the thin film production method can process components on wafers. This enables TDK to use a production method where it forms certain electrodes directly on wafers, rather than forming electrodes after making discrete products. We are starting to see stronger needs for such production methods from the standpoint of high-density circuit mounting, although this depends on how customers will use the components. For this reason, we believe that demand for thin film products will only increase further.
Q15. Can you capture synergies with the HDD head business?
A15. Absolutely.
Q16. What is your projection for HDD head shipment volume for fiscal 2014? Please assume an indexed value of 100 for HDD head shipment volume in fiscal 2013. HDD manufacturers could increase their internal production ratio in the medium term. In this context, could you please explain your outlook for TDK’s share of the HDD head market?
A16. We are projecting mostly flat growth, or a slight decline, in annual HDD head sales volume in fiscal 2014, compared with the previous fiscal year. This projection partly reflects our slightly downbeat view of the HDD market. Your second question raised concerns about the possibility that HDD manufacturers could raise their internal production ratio. Traditionally, one of TDK’s well-established business models in HDD heads has been to supply new HDD head products as soon as possible to HDD manufacturers. The goal was to increase sales volume by having HDD manufacturers sell products incorporating TDK’s HDD heads in the HDD market. However, at this juncture, new products with a higher recording density have become few and far between. As a result, HDD products that have already been launched are being used for longer periods of time, and this has made it easy for HDD manufacturers to produce HDD heads internally. I suspect that your concerns lie along these lines. In response, TDK will do more than merely providing so-called new products. We will supply a variety of technologies and services to new markets, and cooperate with customers on the development of new technologies for the next generation of HDD heads. Furthermore, we are seeing a web of interdependent relationships take shape in the industry through cooperation and other means, in order to avoid redundant and excessive development investment across the industry as a whole. Based on these foundations, we expect that HDD manufacturers will place a certain volume of HDD head orders with us, as we seek to create a HDD market where we can grow together with our customers.
Q17. Can I correctly assume that you will be able to maintain the same market share as in fiscal 2013 over the medium term? Or should I assume that your share will increase further? Please explain.
A17. We aim to increase our current market share further, or maintain it at the current level at the very least.
Q18. I fully understand that the HDD industry as a whole is trying to avoid redundant investment. However, is the provision of technologies and services you alluded to before a strategy that is targeted mainly at specific customers? Or is it your approach for the entire market?
A18. The HDD industry must raise its competitiveness, so we plan to make optimal proposals from an industry-wide standpoint.
Q19. I have a question concerning HDD heads. Could you update us on the current status of heat-assisted heads? Are there problems with both HDD heads and media? Also, given the current situation, when will shipments begin?
A19. TDK does not manufacture the media for heat-assisted recording, so we would prefer not to make specific comments regarding media. Where HDD heads are concerned, however, the biggest issue at present is reliability. We see this as one of the hurdles to surmount in order to commercialize this technology. That said, we have begun to see two major breakthroughs in reliability. One involves materials and the other circuits. I cannot go into the details, but we expect to be able to quicken the pace of development as a result of these breakthroughs. Our roadmap is for customers to evaluate our heads and to begin supplying heat assist-based HDD heads for HDDs before the end of fiscal 2014.
Q20. What is your outlook for magnets in fiscal 2014?
A20. In fiscal 2013, we received insurance income related to the floods in Thailand, but also booked restructuring costs for integrating two overseas sites as part of structural reforms; these costs represented around ¥1.0 billion of the ¥7.5 billion in total restructuring costs for fiscal 2013. Furthermore, we recognized expenses of around ¥1.5 billion for liquidating a European joint venture as a non-operating loss. So we took charges of about ¥2.5 billion in our magnet operations in fiscal 2013. Since the benefits of these structural reforms should show through from fiscal 2014, we expect magnet earnings to improve.
Q21. My question concerns batteries. Before when you were talking about changing your business structure, vertical integration was mentioned. Could you explain that in a little more detail? It seems that you are already integrating business quite a lot through to packaging at present. Have you seen a change in your share as a result? And what benefits have you seen in terms of profitability?
A21. In the past, we mostly sold cells. However, we believe that engaging in everything through to packaging adds value to the product as a whole. Rather than higher sales and earnings, we see this as being advantageous in terms of strengthening our business proposal capabilities and competitiveness.