Investor Relations | IR Events | Performance Briefing

[ 3rd Quarter of fiscal 2014 Performance Briefing ]Q&A

Q1. You have raised your full-year operating income projection for the year ending March 31, 2014 by ¥7.0 billion from ¥30.0 billion previously to ¥37.0 billion. Could you explain the reasons for this ¥7.0 billion upward revision?
A1. Our initial projection was for operating income of ¥30.0 billion, on the assumption that we would incur restructuring costs of ¥10.0 billion, meaning we were actually projecting operating income before those costs of ¥40.0 billion. So we planned to incur restructuring costs of ¥10.0 billion, but this amount includes approximately ¥3.7 billion as was mentioned in the presentation before for discontinued operations. This ¥3.7 billion is one of the reasons for the ¥7.0 billion increase in our operating income projection. One of the reasons for the remainder of approximately ¥3.0 billion is the yen’s depreciation. A weaker yen generally has a positive effect on each of our businesses, but it also has some negative consequences. Overall, however, the yen’s depreciation is serving as a fillip to our results. Organic business growth is another reason for the higher projected operating income. HDD head demand is higher than we initially expected. PC market demand didn’t grow that much, but we achieved a high level of profitability thanks to considerable progress made in-house in improving productivity. Moreover, while we expected to see substantial growth in batteries from the start of the year, demand exceeded our expectations. These were the main reasons for the ¥7.0 billion increase in our operating income projection.
Q2. Your initial projection was premised on a yen-U.S. dollar exchange rate of ¥90, so I believe the weaker yen boosted your results. Combining the ¥15.0 billion beneficial effect of the weaker yen, and the lower restructuring costs of ¥3.7 billion due to the classification of certain operations as discontinued operations, I believe the total boost to earnings was just under ¥20.0 billion. However, you have only raised your operating income projection by ¥7.0 billion. What negative factors have you incorporated into your calculations for this sort of estimate?
A2. Yes, we have indeed added ¥15.0 billion to our calculations due to the weaker yen. However, our high-frequency component and magnet businesses posted higher losses than we initially expected, which partly negated the benefits we talked about earlier.
Q3. So is it correct then that the combined negative impact of the high-frequency components and magnet operations was around ¥20.0 billion?
A3. Not exactly, as besides the two businesses you mention, the applied films business also recorded a loss. In total, the losses were approximately ¥15.0 billion, negating the forex boost.
Q4. I believe that TDK’s free cash flows have improved sharply due to the improved operating income. As a result, could you tell us your financial strategy and debt-equity ratio based on present free cash flows?
A4. Free cash flows for the 9 months ended December 2013 exceeded ¥40.0 billion. Regarding capital expenditures in particular, in recent times we have been trying to procure facilities at a cheaper cost. Previously, we only sourced Japanese-made facilities. However, we have been able to keep facility costs down quite a bit by reforming and using various facilities. We are also controlling inventories well. These are the reasons we have improved free cash flows more than earnings. If we can raise the level of earnings next fiscal year, we believe that we can also raise free cash flows more as well. With respect to liabilities, we redeemed ¥48.0 billion in corporate bonds in January 2014, so net cash was just under negative ¥30.0 billion at the end of December. Our target, however, is to have at least positive net cash flows before the end of next fiscal year.

As we mentioned before, we will complete major structural reforms before the end of March 2014. As we chart a course for growth, we will invest the cash that has been generated in areas that lead to growth. Naturally, if we raise our earnings, we hope to return some of this to shareholders in the form of higher dividends.
Q5. You are projecting higher R&D expenses than before. What is behind this higher forecast?
A5. Yes, we have raised our R&D expense forecast by ¥6.0 billion from ¥57.0 billion to ¥63.0 billion. One reason is that our previous forecast assumed a yen-U.S. dollar exchange rate of ¥90, but this has been changed by ¥10 to ¥100, leading to higher costs when overseas R&D expenses are converted into yen. Another factor, as was mentioned earlier, is ongoing rechargeable battery R&D.
Q6. On slide 11 of the presentation, it says that fourth-quarter restructuring costs for continuing operations are projected at ¥4.8 billion. Please tell us what segments these relate to. Furthermore, what segments do you expect to see the ¥4.0 billion expected benefits you are projecting for the year ending March 2015?
A6. Regarding the ¥4.8 billion projected restructuring costs for the fourth quarter in continuing operations, these are split almost evenly between three segments: passive components, magnetic application products, and film application products. In terms of the benefits expected in the fiscal year ending March 31, 2015, the film application products segment should benefit from approximately half of this, while the passive components and magnetic application products segments will split the rest.
Q7. Could you explain in specific terms how the one-third in restructuring costs earmarked for the passive components, magnetic application products and film application products segments will be used?
A7. Starting with passive components, our plan is mainly to consolidate bases, especially overseas. Regarding magnetic application products and film application products, we will review the capacity of our production facilities in these businesses, among other measures.
Q8. The ratio of selling, general and administrative expenses to net sales in the third quarter fell to 17.4%, I suspect because of the higher sales. Profitability has increased as gross profit has risen and SG&A expenses have declined. Thinking about your earnings structure next fiscal year, what level of gross profit margin and ratio of SG&A expenses to net sales are you projecting?
A8. The ratio of selling, general and administrative expenses to net sales in the third quarter was 17.4% of fiscal 2014. These expenses included ¥2.0 billion in gains on the sale of overseas assets, so the figure was over 18% if that is excluded. The ratio in the second quarter was also 18%, and is currently around 18%. Of course, we are aiming to get the ratio below 17%, so our goal heading toward next year is to improve the ratio by more than 1 percentage point.
Q9. So, does this mean that you will implement some sort of program? For example, are you aiming to improve R&D efficiency?
A9. We will continue of course to reduce expenses and to improve efficiency. At the same time, looking at things from a slightly longer-term perspective, we are actively pushing ahead with various measures, including integrating IT on a global basis. Consequently, while we will incur some one-time IT-related costs going forward, this should yield benefits over the medium to long terms, enabling us to lower selling, general and administrative expenses as a whole.
Q10. It sounds like your high-frequency component and magnet operations are struggling. What is the situation as regards profitability at present?
A10. Let me start with high-frequency components. One issue is that up to now we haven’t been able to sell our products sufficiently to major manufacturers. Looking at smartphones, we had problems with the qualification rate, from high-volume models to modules of some derivative models. Additionally, the volume of products for which we obtained qualification was small. However, we are making progress with IC collaboration activities, an area we are strengthening at present, and expect to see the results of those activities next fiscal year. We see raising the number of references we obtain and creating a robust framework so that production is in tune with orders as our most pressing issues.

Turning to the magnet business, metal magnet operations continue to face challenging circumstances. After the floods in Thailand, sales of metal magnets for use in HDDs, which were the mainstay product, have still to recover to pre-flood levels. With the HDD market itself not growing steadily, conditions are difficult. And while sales of magnets to the automotive industry are growing, competition has escalated. Moving forward, we intend to continue focusing on expanding sales of magnets that use less or no rare earths, because our cost competitiveness is slowly increasing in respect of these products. That said, the target markets for metal magnets, namely the industrial equipment and automotive markets, require a comparatively long time to gain qualification. That being the case, to be honest I think it will be very difficult to obtain qualification soon to expand sales and improve earnings in the short term. With regard to metal magnets, we want these products to break even somehow during the fiscal year ending March 2015. On this point, we are already seeing gradual improvements. Regarding ferrite magnets, we had a slight problem with productivity in China, but we are seeing improvements as a result of introducing a new process and facilities. Therefore, we think that we will see these efforts yield results at an early stage in ferrite magnets.
Q11. In your answer before about high-frequency components, you talked about actively increasing the number of IC references. In that context, could you tell us the extent to which you expect to increase references next fiscal year compared with this fiscal year? Also, what improvement in profitability do you expect?
A11. On the number of references, at present we think we can at least double the number from this year. We will aim to improve profitability next fiscal year, assuming that we can further increase the number of references.
Q12. My question concerns the degree of certainty to which you can improve earnings next fiscal year in high-frequency components. Is my understanding correct that you think you can at least break even in terms of earnings in high-frequency components, without any particular structural reforms?
A12. We aren’t planning any major structural reforms in particular in high-frequency components. However, since the beginning of this fiscal year, we have been reviewing our structures, including our overseas setup. These efforts have translated into results in terms of references and other areas. Going forward, therefore, our performance will depend on how well we manage production to fill the orders we receive.
Q13. It seems that TDK is aggressively stepping up reference design activities in the area of high-frequency components. Are you therefore seeing an increase in projects in the growing Chinese market?
A13. Over the last six months, we have accelerated efforts considerably to expand our lineup by commercializing BAW filters, which use TDK’s thin-film process technologies. Taking that also into account, we think we have enhanced our reputation in IC references.
Q14. My question also concerns high-frequency components. Is my understanding correct that fourth-quarter sales tend to decline for seasonal reasons, but rise in the first or second quarters?
A14. Having bolstered our product lineup, we are steadily obtaining references. And we intend to reap the benefits of our efforts going forward. Indeed, we think we will start seeing the fruits of our labors from around the latter part of the fourth quarter of fiscal 2014.
Q15. Slide 27 of the presentation shows passive component sales broken down by the type of application. Looking at the graphs, sales for use in industrial equipment and others dropped by about ¥2.0 billion in the third quarter compared with the second quarter. Some seasonal factors may be at play, so how should we interpret the situation in respect to industrial equipment and others in the third quarter and thereafter. Also, could you tell us the situation at present with the former EPCOS operations other than high-frequency components? And what sort of progress do you plan to make toward next fiscal year?
A15. Regarding industrial equipment applications, sales declined in the third quarter for aluminum electrolytic capacitors for energy-related applications, particularly large aluminum electrolytic capacitors. Looking toward next fiscal year, we expect demand to increase for use in wind power generation and other areas. Regarding the former EPCOS business other than high-frequency components, sales are strong for inductive devices for automotive applications. In fact, third- and fourth-quarter orders are higher than expected. Furthermore, we are seeing stable orders, as planned, for piezoelectric materials for automotive applications.
Q16. What is the situation with thin-film metal power inductors?
A16. TDK was quick to launch thin-film metal power inductors on the market to meet demand spurred by needs to make products more compact and handle higher rated currents. However, we had some quality issues with some products. Because we applied new technologies to these products, we needed to take our time with these technologies to solve the issues. Looking ahead, we believe that we will have a real competitive edge as products become more compact and handle higher rate currents. Additionally, with power coils for power supplies, we have a full lineup now, including for automotive and home appliance applications. Our aim is to respond to demand while maintaining our price competitiveness.
Q17. What is the situation with VCMs?
A17. TDK has carved out quite a high share, centered on Taiwan and China. We believe that our advantage in this business lies in our design speed and our flexible production because it is semi-automated. At present, competition is increasing with Chinese manufacturers in low-pixel VCMs and in the low price range. Regarding optical image stabilizers (OIS) and other high-end needs, we are producing some components in-house and already working to commercialize products using TDK’s core technologies. Going forward, we want to sharpen our competitive edge further while maintaining our competitiveness.
Q18. How does TDK intend to counter competition from Chinese VCM manufacturers?
A18. We are reviewing production bases for low-end products, including consolidating bases, with the view to making our operations more competitive. In order to maintain a high share, we intend to ensure optimal operations in these and other areas, as we continue to work to widely address market needs.
Q19. You are assuming a more than 10 point decrease in the HDD head shipment index from the third quarter to the fourth quarter. What is your assumption for HDD shipments from the third quarter to the fourth quarter? Furthermore, could you explain how you see HDD shipments trending in the fiscal year ending March 31, 2015 at this time?
A19. HDD shipments in the third quarter were 142 million units, and in the fourth quarter are estimated to be between 134 million and 135 million units. TDK’s HDD heads quickly captured demand for use in next-generation game consoles, and replacement demand for PCs spurred by the end of support for Windows XP in the third quarter. On the whole, we don’t see a major change from the third quarter to the fourth quarter. Rather we foresee a normal change, including seasonal factors.

Regarding the outlook for HDD shipments in the fiscal year ending March 31, 2015, at this time we see them remaining about the same as in the fiscal year ending March 31, 2014. (550 million units)
Q20. So does that mean you think HDD head shipments will be about the same also next fiscal year?
A20. Our preparations are based on that line of thinking at present.

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