Investor Relations | IR Events | Performance Briefing

[ 1st Quarter of fiscal 2014 Performance Briefing ]Q&A

Q1. At the beginning of today’s presentation you explained changes in the scope of responsibilities of executive vice presidents. You also explained the background that led to this decision and gave several examples. However, I wonder if you could give some more specific individual examples?
A1. Thank you for your question about the change in the scope of responsibilities. TDK has an extremely broad portfolio of product and business lines, and we have improved and reformed many individually thus far. As we explained earlier, the executive vice presidents will look across business divisions, working to correct differences in progress with improvements and reforms to optimize the entire TDK Group’s performance. This has been done under the president Takehiro Kamigama up to now, but the intention behind the change in the scope of responsibilities is for the executive vice presidents, who are closer to operations, to look even more thoroughly across divisions. In combination with Mr. Uemura, who is responsible for passive components, Mr. Kobayashi, who is in charge of other businesses, will look across divisions, working to improve and reform the TDK Group as a whole in various ways. That is the essence of the change in the scope of responsibilities we explained.
Q2. Is the focus here mainly on capturing synergies in terms of technologies? Can you comment in a little more detail about this?
A2. Naturally, we are hoping to capture technological synergies. However, there is a more basic aspect to this move in that Mr. Kobayashi is back in charge of HDD head operations and will push ahead with a sense of urgency after having surveyed various businesses of the company as whole from a management planning perspective last year. We believe that there are various areas where more improvement can be made. So beyond technologies, we intend to bring about change to produce results in terms of speed and mindset transformation in a variety of businesses.
Q3. For example, are you saying that you plan to leverage technologies like in your stronghold of HDD heads in other areas, and use strengths in other areas in different businesses to capture more synergies internally?
A3. Yes, we will work to tear down barriers between business divisions. We gave the example of high-frequency components. Here, improvements to front-end processes in Germany are the result of various improvements in wafer production processes in Japan and the U.S. in the HDD head business. And the knowledge we acquire as a result is being shared across the company. Looking at another example related to HDD heads, we are utilizing the know-how of EPCOS’ sensing group in regards to magnetic sensing and other technologies to target new markets. We believe that we can derive various synergies in this way.
Q4. I’d just like to confirm some figures. In the first quarter of fiscal 2014, research and development expenses were ¥15,573 million. If you multiple this by 4, you get around ¥62.0 billion for the year. Looking at your plan for fiscal 2014, it seems that you are running quite a bit over budget as of the end of the first quarter. Before, you commented that R&D had increased in batteries and certain other areas. Were there some one-time reasons for this? Since you haven’t changed your plan for the full year, could you give us your thoughts on R&D thus far and for the year?
A4. As you point out, research and development expenditures increased in the first quarter. However, of the ¥15,573 million, foreign exchange rate fluctuations caused an increase of around ¥1.6 billion year on year. Our initial projection of ¥57.0 billion was based on an exchange rate of ¥90 to the U.S. dollar. So we plan to add that exchange rate impact from our assumed rate of ¥90 to our planned amount. The first quarter also included research and development expenses related to batteries.
Q5. Can we assume that the battery-related research and development expenses increased only temporarily? Or will they go on increasing?
A5. Those expenses relate to some advance research, so they will continue to increase a little.
Q6. I’d like to confirm the tax rate. To return to the low tax rate of the past, you have to increase earnings in countries with low tax rates. Doesn’t this basically mean that the biggest key to doing so is improving earnings in the HDD heads division? Or are there other factors to consider? Please explain.
A6. There are several factors to consider. An earnings recovery in HDD heads is one of them. The tax rate is based on the tax rate calculation for each individual company. This means that the overall tax rate is a mixture of countries with high tax rates and countries with low tax rates. We also perform some calculations using the estimated tax rate for each country on quarterly basis. There were some additional factors that pushed up the tax rate in the first quarter, but these will disappear in the second quarter onwards.
Q7. Close to five years have passed since TDK acquired EPCOS AG in 2008. How would you sum up the benefits of that ¥170 billion acquisition as of now? What benefits have you derived that you would not have if you had not acquired EPCOS? What issues are there going forward? And how do you plan to address them?
A7. Let me answer your questions about the benefits of acquiring EPCOS and the issues ahead. The objective of acquiring EPCOS was to strengthen and expand our passive components business, particularly the high-frequency components business. Initially, we were developing business strongly, most notably in Europe, but we struggled in the previous fiscal year. While profitability is improving, we are still not satisfied with the level. An issue going forward relates to modules for high-frequency components. What we are trying to do is to develop modules and then develop capacitors, coils and other passive components for them. We therefore see a major theme being to step up the development of modules and deliver results in this area.
In terms of other products, we have successfully increased our market share for automotive electronics applications, including magnetics products. With European carmakers seeing their brand power increase, we think we can conduct activities that lead to results for the company going forward.
Regarding film and aluminum electrolytic capacitors, which are mainstays of EPCOS, we believe that we have had a measure of success in sales to the industrial equipment market. There are still issues to deal with however. By making improvements in those respects, we think there is sufficient room to expand sales in the future.
Q8. Operating income improved markedly in passive components in the first quarter of fiscal 2014 compared with the fourth quarter of fiscal 2013. Could you tell us what products improved and by how much? Also, in what areas did you incur structural reform expenses?
A8. All passive components products saw improved earnings from the fourth quarter to the first quarter. The biggest improvers were inductive devices and piezoelectric materials products such as voice coil motors (VCMs). Aluminum electrolytic and film capacitors were also big improvers, and ceramic capacitors improved as well. The passive components segment incurred structural reform expenses of ¥0.7 billion in the first quarter of fiscal 2014.
Q9. Could you comment on the first-quarter profitability of ceramic capacitors? Also, what was the capacity utilization rate like in the April-June period?
A9. Ceramic capacitors were profitable on a single-month basis in March 2013 in the previous fiscal year and remained profitable in the first quarter. And we expect to continue to generate profits in the second quarter as well. Capacity utilization was between 65% and 70%, which wasn’t that much different from the fourth quarter of fiscal 2013.
Q10. You have taken many steps to make ceramic capacitors profitable. How do you plan to develop this business now that it is profitable? If you are able to generate profits even with the current low capacity utilization rate as a result of consolidating production sites, I would expect that earnings will increase due to a higher capacity utilization rate because demand for automotive applications will surely rise. In this context, please explain the current level of profitability, and capacity utilization, and how you plan to develop the ceramic capacitor business having made it profitable.
A10. As you say, engine control unit (ECU) demand should increase along with increased demand for control systems and hybrid vehicles in the automotive electronics sector, and the number of components should increase as well going forward. Furthermore, with new products being launched for smartphones, we should also derive some benefits in this field too. We have completed structural reforms, including base consolidations, but there are areas in terms of improving manufacturing that we must tend to in fiscal 2014. Looking ahead, a major strategy theme is to make further improvements and convert them into growth. At this stage, we are pursuing a strategy of generating earnings by raising our market share, particularly in automotive electronics applications.
Q11. There are three divisions in the passive components segment. What is the direction of each in the second quarter? For instance, assuming forex impacts are neutral, because you didn’t change the forex assumption in your plan, I don’t think the plan is indicative of the actual figures you are expecting. But what is your current feeling for growth going forward?
A11. Our full-year forecast still assumes an exchange rate of ¥90 to the US dollar. But looking at July and the trend in the second quarter, we think the exchange rate will be in line with the first quarter. Therefore, let me answer your question with projected figures based on the actual first-quarter rate. Firstly, we see growth of 3% to 5% compared with the first quarter for passive components on increases particularly in high-frequency components for smartphones. For magnetic application products, we are projecting growth of 6% to 8% as a whole, including increased demand for HDD heads for data centers and 2.5-inch HDDs for game consoles. In film application products, we expect to see higher sales to major rechargeable battery customers. Because we have also been successful at expanding business to other customers, including new customers, we project 30% or more growth in this segment compared with the first quarter. As a whole, therefore, we project growth of 8% to 10% compared with the first quarter.
Q12. Sales of high-frequency components have increased while you have strengthened the capacity of this business. Have sales of SAW filters increased in line with your plans? I would expect sales to continue rising in the second and third quarters, but do you expect them to increase in line with your plans? By how much do you expect sales of high-frequency components alone to increase in the second quarter? Please also comment on profitability here.
A12. Sales of individual products, including SAW filters, have increased sharply. However, we haven’t generated satisfactory results yet in respect of modules. Profitability is improving, but we will continue to work on improving profits by generating results with modules and other products.
Q13. Do you expect second-quarter sales of high-frequency components to increase on the same basis as your forecast increase for the passive components segment as a whole of 3% to 5% that you mentioned before?
A13. We think they will increase a little more than that.
Q14. My question concerns HDD heads. How did TDK’s HDD head inventories change from the end of March to the end of June 2013? At the same time, if you assume that future HDD demand will not increase that much, what is the possibility of having to reduce current production capacity?
A14. The HDD industry is seeing all companies adjust inventories at the end of each quarter. We look at the outlook for demand to a certain extent. In the first quarter of fiscal 2014 in particular, because demand dropped in June, we saw a slight increase from normal inventory levels on a single-month basis. That said, with demand increasing for HDD heads for high-end servers and 2.5-inch HDDs for new game consoles since the beginning of the second quarter, we believe we can adjust inventories to the right level.
Your second question was about the assumption that HDD volumes won’t increase going forward. Certainly, demand for 2.5-inch HDDs, in other words, HDDs for notebook PCs has changed because of the impact of tablet PCs and smartphones. However, demand should continue to grow strongly in the market for data centers and servers according to market watchers. Moreover, amid the trend toward higher recording capacity per drive, with the pace of increase in the recording density of HDD heads dropping a little, there should be a steady increase in the number of disks and HDD heads per HDD.
Against this business environment backdrop, by ensuring higher reliability and production yield as a specialist HDD head manufacturer than customers that are producing heads internally, we think we can secure a fair share of sales of HDD heads even though HDD sales are under a certain degree of pressure.
Q15. What was the capacity utilization rate for HDD heads in the first quarter? And what is your projection for how it will change in the second quarter?
A15. It was a little low in the first quarter, but we expect it to improve in the second quarter.
Q16. I didn’t think the HDD market had collapsed that much, but TDK’s first-quarter HDD head shipments were a little lower than planned. Could you give us your outlook for the second quarter, including your response to the nearline drive field?
A16. As you point out, our first-quarter shipments were lower than we had planned. However, we think we can achieve a 10% increase in the second quarter. This positive outlook is based on the nearline field, as well as our good positioning with regards to various clients’ new 2.5-inch products, even though that market sector is experiencing tough times.
Q17. What is your estimate of your market share in HDD heads in the first quarter of fiscal 2014? And how do you expect your market share to rise with the pace of increase in recording density expected to continue slowing for the time being? I would expect that thermal assist head technology will become important, but what is your view in this regard?
A17. To answer your question about market share, we think our share is just under 30% at this time. There are some changes in the product mix overall, but we think we can maintain this sort of market share for this fiscal year. As you say, the next new technologies will hold the key to achieving a jump in growth.
As an overall trend and as we said before, if the number of disks and heads increases per HDD in nearline and other fields, distinguishing TDK’s heads in terms of quality stability and features will be extremely important. For the production yield of HDDs that use many heads, these sorts of aspects will be crucial. So while the speed of increase in recording density has slowed, there are still areas where we think we can increase our market share.
Q18. I think there is little incentive for HDD manufacturers to increase their production capacity of HDD heads. Conversely, when the number of HDD heads increases, won’t orders flow to TDK if HDD manufacturers near the limits of their production capacity?
A18. We believe that is a distinct possibility.
Q19. Hasn’t that happened yet?
A19. No, that hasn’t happened yet in the HDD market. For sure, the number of HDD heads and disks for nearline drives has increased, but HDD manufacturers have struggled somewhat with the launch of HDDs that use many heads. As we said before, if they launch such HDDs, we think there will naturally be an opportunity to expand our business by demonstrating the quality and distinctiveness of our products.
Q20. My question concerns some figures. You said that magnet earnings declined between the fourth quarter of fiscal 2013 and the first quarter of fiscal 2014 as a result of expenses associated with plant consolidations and getting new facilities up and running. Could you quantify that in monetary terms?
A20. Costs increased by close to ¥1.0 billion.
Q21. What is your outlook for magnet earnings in the second quarter?
A21. There are two main points here. The first is that inventory built up at the end of the previous fiscal year resulted in a high cost, but inventory was reduced quite considerably in the first quarter, so earnings should improve. The second point is that the launch of products transferred to the new manufacturing facilities didn’t go as well as we would have liked in the first quarter, which resulted in higher-than-expected launch costs. But these were extraordinary expenses, and we expect the sorts of expenses we talked about to be non-existent in the second quarter.
Q22. Based on your first-quarter results, how do you think you performed against your plan? Should we assume that you were able to derive the benefits of structural reforms as planned? Or are you not seeing those benefits as quickly as you expected? Also, if possible, could you tell us if you have reflected the current exchange rate in your plan, given that there have been large foreign currency fluctuations? Or will your plan be somewhat challenging if you take away the forex factor?
A22. On the first point about whether our first-quarter performance was steady, our results in passive components were in line with expectations, and the recovery was due in part to structural reforms. So, yes the performance in passive components was steady. Regarding magnetic application products, we incurred some extraordinary expenses in our magnet operations, so we expect to see a recovery going forward. In terms of progress in the first half against our plan, compared to the level of operating income before the inclusion of ¥10.0 billion in structural reform expenses, we hope to achieve at least 40% of our target. If the exchange rate stays as it was in the first quarter, this will naturally add to our results.
Q23. Not including the ¥10.0 billion in structural reform expenses gives a projected operating income figure of ¥40.0 billion. So would it be correct therefore to say that you hope to achieve operating income of ¥16.0 billion in the first half of fiscal 2014 based on the 40% achievement rate you mentioned? If so, that means you are hoping to generate operating income of ¥12.0 billion in the second quarter given you recorded ¥4.0 billion in the first quarter doesn’t it?
A23. Yes, that’s about right based on an achievement rate of around 40%.
Q24. So that means that you are on track with your plan then doesn’t it?
A24. Yes.