Investor Relations | IR Events | Performance Briefing

[ 1st Quarter of fiscal 2017 Performance Briefing ]Q&A

Q1. TDK has not revised its full-year forecasts. However, I think TDK’s first-quarter results were fairly strong compared to initial forecasts for the year ending March 31, 2017. Looking at each core product, what are the differences between your outlook when you made the initial forecasts and how you see things now? TDK has not revised its forecasts despite the yen’s appreciation. Does this mean that TDK has effectively outperformed its forecasts?
A1. Looking at exchange rates, the actual exchange rate in the first quarter was slightly stronger than 108 yen to the dollar, compared with our initial assumption of 110 yen to the dollar. Therefore, the forex impact is not very pronounced at the individual segment level. However, in the year ending March 31, 2017, TDK has so far performed better than initially planned. In passive components, high-frequency components have been the main outperformers against initial forecasts.
Q2. If so, based on the fact that TDK has kept its forecasts unchanged from the second quarter onward, can I assume that TDK expects this momentum to continue going forward?
A2. Yes. We are basically assuming that the level of HDD head shipments seen in the first quarter will not change significantly throughout the rest of the current fiscal year. Although sales prices may be reduced to a certain extent, we can still expect to outperform our initial forecasts.
Q3. My question is about recording devices. HDD head shipment volume increased dramatically from the fourth quarter of the previous fiscal year to the first quarter of the current fiscal year. Meanwhile, earnings in recording devices declined, excluding one-time costs incurred in the fourth quarter. Don’t you think there is a lot about this decline that cannot be explained by the yen’s appreciation? How should I view the factors behind this result?
A3. The forex impact was not that large in the Magnetic Application Products segment alone. Although earnings were lifted by the increase in head shipment volume, changes in the product mix in terms of HDD assembly and other factors pushed down earnings.
Q4. Should I assume that the current conditions will persist in the second quarter and beyond?
A4. We don’t think the product mix in terms of HDD assembly will change drastically. However, the profitability of the assemblies that are increasing will naturally benefit from a slight increase in shipments as well as from higher efficiency and volume effects. We believe those factors will drive higher earnings. In terms of plant utilization, we should be able to absorb the impact to a certain extent because we have been taking steps in line with the utilization levels.
Q5. Can I assume that the stronger-than-expected sales to Chinese smartphone customers have had a positive impact on rechargeable batteries, and high-frequency components in the Passive Components segment?
A5. That would be basically correct.
Q6. I believe that this stronger-than-expected performance will continue in the July-September period. What is your outlook for sales of passive components and rechargeable batteries in the second quarter?
A6. Although sales trends are slightly different for passive components and rechargeable batteries, we expect sales of passive components to grow substantially in the second quarter as product sales, particularly modules, come online in the second quarter in North America. Rechargeable batteries will naturally grow in line with volume increases in North America, but we also expect fairly strong growth in China, so we are expecting sales growth of just over 30% overall.
Q7. Could you please comment a little more on conditions for rechargeable batteries? Has the adoption of polymer batteries been proceeding in South Korea and China?
A7. Yes. We have seen progress on adoption particularly in China.
Q8. When it comes to polymer batteries, there are quite a few Chinese manufacturers. Can I conclude that TDK’s market share has increased among these manufacturers?
A8. Yes. That would be correct.
Q9. TDK has already explained how it will use the proceeds from the business divestiture to Qualcomm in clear, broad terms. However, could you please update us on any specific ideas that have been finalized since then?
A9. Let’s begin with the timing for the payments. If the deal is completed during the current fiscal year, TDK will receive around half of the total US$3.0 billion payment in the current fiscal year, and the remaining half 2.5 years later. TDK plans to use around half of the total US$3.0 billion payment, representing about US$1.5 billion expected to be received in the current fiscal year, for acquisitions under way since the previous fiscal year, capital investment, and other purposes. As for the remaining half of the payment expected 2.5 years later, we plan to allocate the proceeds to strategic products upon the execution of actual measures related to those products, as explained at the beginning of the current fiscal year. However, we cannot yet comment on the details of this matter.
Q10. How have TDK’s thin film technologies contributed to the manufacturing of BAW filters? What kinds of products will TDK’s core thin film technologies be applied to, and what will be the process for applying those technologies?
A10. In regard to BAW filters, which are high-frequency components, and thin film products, TDK’s technologies and experience in HDD heads and inductive devices have been used effectively to stay on top of the increase in wafer inch size. We see the resulting productivity gains, encompassing the assignment of personnel from the HDD heads division to high-frequency components, as a highly significant accomplishment. Next, looking at the broader topic of synergies with Qualcomm, we have seen a firm market response in terms of the substantial growth of thin film power coils, including those for automotive use. Modularization is advancing in the ICT field. In this environment, we expect to continue leveraging the thin film technologies we have amassed to date in developing smaller electronic components to address ongoing modularization, particularly in smartphones.
Q11. Could you please also comment on thin film sensors and MEMS sensors?
A11. We are currently in the stage of launching MEMS products after steadily obtaining qualification. Therefore, we expect volume to increase significantly sometime next fiscal year.
Q12. You said that rechargeable battery sales are growing in applications other than consumer electronics, such as drones. Could you please discuss your outlook for rechargeable batteries?
A12. Rechargeable batteries for drones do not yet account for a very large share of sales. In fact, while battery sales have been increasing at a pace of over 20% a year, rechargeable battery sales for drones have been increasingly only slightly as a percentage of overall sales.
Q13. Looking at TDK’s segment results for the first quarter, I have the impression that the earnings decreases in the Other segment and Corporate and Eliminations have grown larger than before. Is this because TDK is spending a fairly large amount of expenses on process innovation, manufacturing and so forth? Could you please go over the level of expenditures that TDK will need to budget for, or on what improvements it expects to make, in the second quarter onward?
A13. Let’s first look at the components of the increase in Corporate and Eliminations. Development expenses and manufacturing are included in corporate R&D expenses, and these expenses have been increasing. Moreover, the project expenses mentioned earlier are included in corporate expenses, so these types of expenses will continue to be incurred. That said, these expenses are expected to decline slightly from the second quarter onward. In Other segment, we recognized sales and earnings upon the completion of a large anechoic chamber project in the fourth quarter of the previous fiscal year. Also, we are currently in the process of launching certain products. The recording of these expenses on an upfront basis was a major factor behind the changes.
Q14. Would I be correct in assuming that those product launch expenses and other costs will begin to subside in the Other segment from the second quarter onward?
A14. We believe that these expenses will decrease slightly, although it will also depend on sales.

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