Investor Relations | IR Events | Performance Briefing

[ 2nd Quarter of fiscal 2015 Performance Briefing ]Q&A

Q1. Passive components sales are projected to increase 3-4% from the second to the third quarter. How will this projected change in sales break down in terms of core products such as capacitors, inductors, high frequency components and other products?
A1. We expect to see sales growth of 3-4% in capacitors, 4-5% in inductors and just over 15% for high frequency components, which is higher than the sales growth rate for the segment as a whole. Sales of other products are projected to remain mostly unchanged.
Q2. The actual second-quarter HDD head shipment volume was higher than your projection as of the end of July. Does this reflect an increase in TDK’s market share, or higher overall demand? In the third quarter, you are projecting a higher HDD shipment volume, despite an anticipated decline in overall HDD demand. I suspect that this might be based on higher sales of new-generation products. Could you please elaborate?
A2. One reason why actual second-quarter HDD shipment volume was higher than projected at the end of July was that there was solid demand for 2.5-inch HDD heads, for which TDK has a large market share. And as you pointed out, growth in new products has lifted our results above projections. Building on this momentum, we intend to continue driving growth in our shipment volume in the third quarter, which coincides with a peak in demand for the full year.
Q3. Are you also assuming that demand in the HDD market will be stronger in the third quarter than in the second quarter?
A3. We anticipate that demand in the HDD market will remain mostly unchanged.
Q4. I would like to confirm your full-year forecasts for the fiscal year ending March 2015. You have raised your full-year operating income forecast to ¥63.0 billion, from ¥57.0 billion initially. Could you please break down this change in terms of your segments?
A4. Looking at changes in each segment, excluding foreign exchange effects, earnings from passive components are increasing faster than initially anticipated. In magnetic application products, earnings from HDD heads are largely tracking initial forecasts, but magnets other than HDD heads and power supplies are lower than initial forecasts due to a slight delay in initially projected earnings improvements. Earnings from film application products (mainly rechargeable batteries) started off slower than originally expected in the first quarter due to a slight delay in demand caused by the impact of production adjustments at core customers. However, we expect to regain lost ground in the second and third quarters, and to generate higher year-on-year earnings in the fourth quarter. For this reason, although sales might fall slightly below forecast excluding foreign exchange effects, we expect earnings to be largely in line with our initial forecast.
In other products (the Other segment), we expect that the initially projected loss will be reduced considerably based on progress with improvements on new products.
Q5. What is your outlook for earnings next year, and what will drive earnings growth?
A5. As we explained earlier, we do not expect earnings in the fourth quarter of the fiscal year ending March 2015 to decrease as much as usual. Naturally, this means that we have taken steps to stem the decline in earnings. Because fourth-quarter earnings will not drop as much as usual, we will have a significant head start in the first quarter of the fiscal year ending March 2016. Given that earnings will continue to increase in the second and subsequent quarters, we believe that this will be the largest difference between the fiscal year ending March 2016 and ordinary years. Earnings growth should be driven by inductors and high-frequency components. Inductors should grow considerably, particularly thin-film products. Considering that we have developed quite an extensive lineup of metal inductors, we believe that these products should start growing significantly in the fiscal year ending March 2016. In high-frequency products, we have taken steps focused on modules, as well as discrete products such as SAW filters and BAW filters, so we believe that this will start to have a positive impact in the fiscal year ending March 2016 by lifting earnings higher. Overall, we expect earnings to be driven in large part by passive components.
Q6. Will passive components serve as a stronger earnings driver than magnetic application products or film application products?
A6. Yes. Looking at the fiscal year ending March 2016, we believe that passive components will be the core earnings driver. From a medium-term perspective, we believe that there will be two core product categories other than passive components that will also emerge as earnings drivers.
Q7. The business environment in the U.S. and China has been favorable in the fiscal year ending March 2015. What is your take on the outlook for the smartphone industry and TDK’s related businesses?
A7. We believe that the smartphone industry should see an increase in the number of high-end models, but that smartphone shipment volumes will not decline as a whole. Fourth generation (4G) smartphones will inevitably evolve as they advance to the next generation, so we see an overall trend in which the number of filters will undoubtedly increase and the filters will shift to ever higher frequencies. We therefore expect this trend to spur higher demand for these components. As far as industry trends are concerned, no single company can be relied upon as the sole supplier, so we are confident that TDK’s sales will also steadily increase. That is precisely why we must increase our competitiveness in terms of technological capabilities. Looking at batteries, quick recharging is now becoming mainstream. Our strategy is to hone these sorts of peripheral technologies in order to capture a greater market share. We intend to grow our sales of rechargeable batteries for smartphones by marketing thin, quick recharging batteries. Besides capitalizing on changes in industry conditions, we will shift our approach to capturing market share by harnessing unique technologies that address changes within the industry.
Q8. TDK unveiled a heat-assisted head at CEATEC. You have said that you would commercialize the technology in two years, and I feel that your preparations are coming together. How far has this technology matured, and how does the technology stand at present? Also, the development of heat-assisted heads involves not just the head itself, but also something closer to overall HDD development. In this respect, I believe that TDK is making remarkable progress. How will you strategically harness your position, and what is your approach to doing so?
A8. TDK has succeeded in building an HDD with an operating lifetime of around 1,000 hours. Although much more improvement is still needed, we feel that we are now on track to achieving our targeted operating lifetime. We have also far surpassed existing products in terms of recording density. We are currently pushing ahead with development with the view to achieving mass production of heat-assisted heads within 2016. As you point out, we have built and are promoting a collaboration framework with HDD and recording media manufacturers. Meanwhile, we will build various mechanical components into heat-assisted heads in the backstage mass manufacturing phase. To achieve an optimal product in terms of cost and quality, we are also pursuing various priorities including developing in-house production equipment.
Q9. I have the impression that profitability improvements in magnets and power supplies are falling behind compared with passive components. What is the current situation and what measures are you taking to address this issue?
A9. First, let me explain how we stand in terms of magnets. Improvements in metal magnets are falling behind our initial schedule due to the impact of lower than anticipated sales of VCM for HDDs, which was our core product in this area until now. This can be put down in large part to a change in our customers’ procurement policies toward their suppliers, rather than to the impact of the HDD market itself. We are making progress with improvements on ferrite magnets, but are falling slightly behind our initial schedule in switching over to new products and improving the product mix. At this time, we have completed the development of metal products that are favored by customers for their features. Therefore, we are now focusing on boosting cost competitiveness through new products. We will continue to improve our existing products, including ferrite, without limiting ourselves to metal products, as we strive to speed up our business activities.
Next, let me explain how we stand in terms of power supplies. Earnings are improving for switching power supplies for industrial equipment. However, EV power supplies for automobiles have fallen drastically below forecast due to recalls and other issues facing a major customer. Meanwhile, we have delivered a significant volume of EV power supplies to North American automakers. However, stable gas prices in the U.S. have impaired demand for EVs. Consequently, sales of TDK’s EV power supplies have not grown as much as initially anticipated. Turning to switching power supplies, we expect to continue making solid progress with business as we head into the fiscal year ending March 2016. As for EV power supplies, we are actively approaching major customers by rolling out new products, and we are now able to answer the demands of our customers in this manner. By steadily expanding sales of new products, we will strive to rapidly improve earnings.
Q10. TDK has BAW filters for high-frequency bandwidths, in addition to conventional SAW filters. How do BAW filters stand at present?
A10. We are currently receiving extremely strong sales inquiries for BAW filters made using TDK’s thin-film production method. Therefore, we intend to vigorously ramp up production to increase our market share. Furthermore, we will launch new compact products made using our proprietary packaging production method in order to expand our market share.
Q11. You have raised your initial capital expenditure projection by ¥10.0 billion. Could you go over the main details of this increase?
A11. The increase consists of a ¥10.0 billion investment in increasing production mainly of high-frequency components, OIS and batteries.
Q12. Earlier, you explained that earnings in the fourth quarter would not decrease as much as usual. Can this be put down to market conditions, or to conditions specific to TDK?
A12. Looking at factors related to market conditions, we believe that the smartphone sales of our major North American customers in the fourth quarter will not decrease rapidly, and we expect this to serve as one of the major drivers behind sales. In terms of factors specific to TDK, we intend to build up strategic inventories in the fourth quarter of the fiscal year ending March 2015 to drive sales in the first quarter of the fiscal year ending March 2016. Naturally, we will proceed by starting to adjust production from the third quarter, taking into account the need to maintain optimal inventory levels to address demand in the first quarter and beyond.

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