Investor Relations | IR Events | Performance Briefing

[ 2nd Quarter of fiscal 2014 Performance Briefing ]Q&A

Q1. TDK’s second-quarter earnings were strong, considering that it incurred restructuring costs, and it might outperform in the second half as well. But TDK’s performance was aided by a weaker-than-expected yen. What was the situation with earnings if you strip out the forex impact? Also, please comment on the pace of improvement in earnings. For example, TDK is making progress at the planned pace improving the earnings of high-frequency components, magnets and certain other businesses, but is the internal change taking place at the assumed speed in light of next year’s targets? Or will it differ by business?
A1. Even stripping out the forex impact, we feel we have accelerated the pace of improvement in the high-frequency components business. This is partly to do with system changes. We have also dispatched around 20 Japanese engineers, who have pooled their expertise with that of overseas bases to make improvements in a cooperative manner. This has yielded various changes. We have seen changes in processes in mass-produced products that are currently our mainstream product line, as well as in products under development. For example, inventories have been halved and lead times have been shortened considerably, while samples have been produced quicker. And we have also seen actual benefits in terms of sales of individual products. Compared to individual products, there are still issues with modules. We must think differently from the past if we are to create a structure that can reliably generate earnings.
There are definitely differences in the speed of improvement from one business to another. Rather than one business division thinking what it should do, we believe that the pace of improvement can be quickened by promoting reforms in a way that transcends organizational barriers and draws on the accumulated know-how of various business divisions. One example is in sales of voice coil motors (VCM) for HDDs. Executive Vice Presidents Atsuo Kobayashi and Hiroyuki Uemura are thinking outside the box and considering such matters as whether the HDD head team can be deployed to this end. Areas that have been slow to bring about improvements have poor profitability, so we must make some drastic system changes in those areas.
Q2. My question concerns the high-frequency components business. You are continuing to conduct market-oriented design activities for next year’s models and I suspect that you are really entering the stage where you are starting to see results begin to emerge. This business line returned to profitability in September this year, with profitability improving considerably. In light of this improvement, what operating income margin are you envisaging for the fiscal year ending March 2015? Assuming sales for the fiscal year ending March 2014 are around ¥100.0 billion, what level of sales and operating income margin are you targeting in the fiscal year ending March 2015? Please tell us the way you see it at this stage.
A2. We are indeed working hard at present on market-oriented design activities. We are working actively at the moment with IC manufacturers and others. With individual products, we are seeing definite expansion. With modules, we think we will see results emerge going forward. As was mentioned before, we returned to profitability in September. While keeping on this trajectory, we want to convert various results into more growth. Because of uncertainties, it is difficult to give you specific figures at this time, such as for profit margins, but we feel that we will see benefits emerge in line with sales. We are making sufficient investments and taking other steps, including system changes, and plan to make sure the results follow.
Q3. In today’s presentation, you said that the major structural reforms would be completed in this fiscal year. Looking at the passive components segment, the product makeup by application has certainly changed, and it does seem as though there’s more stability than before. At the same time, however, I get the impression that there are still businesses where you haven’t yet secured sufficient competitiveness, such as high-frequency components. From that perspective, could you recap what is necessary if there are areas where you need to make more improvements?
A3. Regarding the passive components segment, as you point out, there is still room for improvement in high-frequency components. With individual products, we intend to continue stepping up the pace of new product sales. With modules, we are aware of issues that we must address going forward. We can’t be specific at this time, but we are implementing measures in this respect. Beyond high-frequency components, in passive components as a whole we will continue to look for ways to improve efficiency through further integration of activities in Japan and Germany, which we hope will translate into improved profitability.
Q4. In passive components, net sales increased ¥2.4 billion from the first quarter to the second quarter. But the improvement in operating income was greater than the net sales growth. What were the reasons for this?
A4. We saw an improvement in earnings of ceramic capacitors and high-frequency components, but the main reason was an improved product mix in inductive devices. Sales of high-margin products grew, while those of products with poor margins dropped considerably.
Q5. Could you explain the relationship between net sales and operating income in regard to capacitors and high-frequency components in other passive components in the passive components segment?
A5. Capacitor net sales grew 4% from the first quarter to the second quarter. Regarding earnings, ceramic capacitors posted slight earnings in the first quarter, but second-quarter earnings were higher. Aluminum electrolytic capacitors and film capacitors also saw earnings increase from the first quarter to the second quarter. In high-frequency components, net sales increased slightly from the first quarter to the second quarter, and the operating loss decreased considerably. Earnings of piezoelectric material products increased from the first quarter to the second quarter.
Q6. I have a question about LTE in the context of high-frequency components. My understanding is that highly efficient filters are required for LTE and that there is a heated battle in the industry at present to develop such filters. Could you please comment on TDK’s high-efficiency filters and the status of their development?
A6. Regarding high-frequency components, TDK has both SAW filters and thin-film BAW filters. BAW filters are used in both high-frequency bands and narrow frequency bands. We also provide products that are a hybrid of BAW filters and SAW filters. We are continuing to develop products with various enhanced features as well as miniaturizing products. In addition, by improving production processes, we are making progress on reducing costs.
Q7. On the presentation slide about magnetic application products, there was a medium-term projection regarding the number of heads in the HDD head market. Could you please explain the relationship between HDD head sales and the HDD market for data centers?
A7. We expect the sales volume of HDD heads to increase because sales of HDDs to data centers are increasing. The number of HDD heads per HDD is also expected to increase gradually from the current fiscal year to the next fiscal year. At present, 2TB HDDs with 3 discs are the mainstream products for data centers. But market observers expect the number of discs used to increase from 4 to 5 and then 6 going forward. Our projections are therefore based on increases in HDD head sales because sales of HDDs with 4 or more discs is expected to increase.
Q8. In this market environment, what is your outlook for sales of TDK nearline and other products for data centers?
A8. TDK has been strong in products for 2.5-inch HDDs in the past, but we expect sales to grow for products for 3.5-inch nearline HDDs.
Q9. Please comment on your projected market share going forward.
A9. Given the decline in special demand since last year after the floods in Thailand, our market share is probably just under 30% at this time as we are making progress with nearline products and other products as mentioned earlier. Going forward, we are aiming to increase our market share in step with the provision of new technologies, because our new technologies will probably be ready around the time that demand for HDD heads turns upward.
Q10. About when do you expect thermal assist heads to make a contribution?
A10. The first shipments of mass-produced products should start in the latter half of the fiscal year ending March 2015, so we expect steady expansion after that as they are accepted by the market. Thermal assist heads utilize TDK’s various know-how, including HDD head technologies and HDD assembly technologies. We are working hard at present on developing these products so that they become the defacto standard in the industry.
Q11. Could you tell us about businesses with low profitability in the other magnetic application products category?
A11. This category includes the magnet business. The current situation is that we have struggled a lot to recover the sales lost due to the Thai floods in respect to metal magnets related to VCMs for HDDs. Also, we haven’t seen significant results from growing sales of products for use in industrial equipment. In particular, in sales expansion of newly developed dysprosium-free neodymium magnets, it is taking some time to have these products qualified for industrial equipment in target markets. Furthermore, while we have seen some early results from consolidation in respect to ferrite magnets, it has taken a little more time than expected. We plan to quickly remedy this situation and hope to break even before the end of the current fiscal year. Naturally, we are aiming to step up the pace of improvement, but conditions are tough at present.
Q12. My question concerns film application products. The growth in earnings seemed a little weak in comparison to the considerable growth in sales. I think that rechargeable batteries are driving this segment and expect sales to grow from the second quarter to the third quarter. Could you comment on this?
A12. In film application products, net sales have grown in the rechargeable battery business and at the same time earnings have increased considerably, as expected. However, the film application products segment includes another business, applied films. Losses have increased in this business as sales have fallen, making for difficult circumstances. This is the reason that segment earnings growth appears low.
Q13. TDK recorded ¥2.8 billion in restructuring costs in the second quarter in the data tape business, which is classified as a discontinued operation. Is my understanding correct that this ¥2.8 billion isn’t included in the operating income of continuing operations?
A13. The restructuring costs are not included in the operating income of continuing operations.
Q14. How do you expect net sales for the four segments to change from the second quarter to the third quarter?
A14. We are projecting net sales growth of between 1% and 3% for the passive components segment versus the ¥119.4 billion recorded in the second quarter, on expectations for higher sales of high-frequency products for smartphones. For the magnetic application products segment, our forecast is for net sales of around the same level as the ¥92.9 billion recorded in the second quarter, as we expect head sales volumes to be largely unchanged. In film application products, we project net sales growth of 20% or more over the ¥33.1 billion recorded in the second quarter, as we expect to see strong sales of rechargeable batteries continue. As a whole, we are forecasting net sales growth of between 3% and 4% in the third quarter, compared with the net sales result of ¥249.8 billion in the second quarter.
Q15. Could you explain the projected third-quarter operating income in a little more detail? The graph on slide 6 of the presentation materials shows around ¥15.0 billion…
A15. We have left our projection for consolidated operating income for the fiscal year ending March 2014 unchanged at ¥30.0 billion. As we explained at the beginning of the fiscal year, this is premised on subtracting an estimated ¥10.0 billion for restructuring costs from a projected ¥40.0 billion. Our projection assumes an exchange rate of ¥90 against the U.S. dollar for the third quarter. The graph shows 75% of that ¥40.0 billion at the end of the third quarter based on that assumed exchange rate. If the average yen exchange rate against the U.S. dollar is higher than the assumed exchange rate?in other words, the yen depreciates?we would expect operating income to increase.
Q16. What is your outlook for restructuring costs?
A16. We expect normal restructuring costs of ¥0.2 billion to ¥0.3 billion in the third quarter. Restructuring costs for data tape operations in the third quarter will probably be ¥0.6 billion to ¥0.7 billion, but these are included in discontinued operations.
Q17. Will the Blu-ray Disc business be classified as a discontinued operation when you announce your next results?
A17. We plan to withdraw from the Blu-ray Disc business in the latter half of the fiscal year ending March 2014. That will most likely take place in the fourth quarter. We need to look at it closely from an accounting perspective to say whether it will be classified as a discontinued operation like the data tape business, but at this stage we expect to classify it as such.
Q18. Assuming that is the case, how much of the ¥10.0 billion in projected restructuring costs for the current fiscal year will relate to the Blu-ray Disc business?
A18. We estimate just over ¥1.0 billion of the projected ¥10.0 billion.