Investor Relations

[ 1st Quarter of fiscal 2006 Performance Briefing ]Q&A

Q1. How much did you budget for restructuring expenses in the first quarter? And how much have you budgeted for the second quarter and thereafter? I believe that you estimated restructuring expenses of 4.5 billion yen for all of fiscal 2006. Please explain how things stand at present.
A1. We are still estimating restructuring expenses of 4.5 billion yen for the full year. For the first quarter, we projected 1.6 billion yen. Actual expenses were 0.5 billion yen. We plan to record restructuring expenses of 3.5 billion yen in the second quarter.
Q2. If first-quarter capacitor sales are 100, what are your estimates for the second, third and fourth quarters of fiscal 2006? What improvement do you expect in the profitability of capacitors compared with the fourth quarter of fiscal 2005, when profitability was adversely affected by problems concerning production yields and other factors? Please give us forecasts for the second quarter onwards.
A2. As Mr. Enami reported earlier, first-quarter capacitor sales dropped 14% compared with the first quarter of fiscal 2005. However, orders have been recovering considerably since the beginning of July. This gives us confidence that sales will recover to around 90% of the previous year's level in the second quarter. We believe that capacitor sales will grow by some percentage points year on year beginning in the third quarter. We were concerned, but we have seen both production yields and orders improve. We believe this will translate into an improvement in earnings, too.
Q3. So we should interpret this as meaning that the profitability of capacitors in the first quarter was about the same as in the fourth quarter of the previous fiscal year.
A3. The profitability of capacitors improved slightly compared with the fourth quarter of fiscal 2005.
Q4. Please provide shipment numbers for HDD heads on an HGA basis. At the previous earnings conference, it was stated that actual shipments were 155 in the fourth quarter of fiscal 2005 and that shipments of 145 and 160 were forecast for the first and second quarters of fiscal 2006. This was based on sales of 100 in last fiscal year's first quarter. Please provide actual shipments for the first quarter and current forecasts for the second quarter.
A4. Using sales in last fiscal year's first quarter as 100, actual shipments in the first quarter were 154 and we are projecting 163 in the second quarter. We have not yet reviewed our forecasts for the third and fourth quarters, so our forecasts are unchanged from last time at 174 and 167, respectively.
Q5. I understand that TDK's joint venture with Fujitsu was to be consolidated effective from the current fiscal year. Could you provide figures for the contribution of this joint venture to consolidated results, specifically net sales and operating income?
A5. I'm sorry, but I don't have that information with me.
Q6. My question concerns earnings in the fourth quarter of fiscal 2005 and the first quarter of fiscal 2006. In the fourth quarter of fiscal 2005 there were several special factors. But, eliminating those special factors, how do you compare the 1Q with the 4Q of FY 2005? How did actual earnings change between the two quarters? If there was a change, what was the change in each segment and what factors had a positive and negative impact on earnings?
A6. In the fourth quarter of the past fiscal year, we recorded a gain on the return of the substitutional portion of employees' pension fund of \6.2 billion. If this is excluded, fourth-quarter earnings declined. Using this net figure as the basis for comparison, first-quarter earnings improved considerably. There was little change in the recording media segment, but the electronic materials and components segment, which includes HDD heads, saw earnings improve.
Q7. Regarding the recording media segment, how are earnings improving verses your initial plans, if at all? If you are behind plan, what are the reasons? Furthermore, if it appears that you will remain behind plan, please comment on whether you will consider additional measures to improve earnings in this segment.
A7. The recording media segment posted an operating loss of \2.5 billion in the first quarter of fiscal 2006. This was about the same as the losses we have posted in this segment since the second quarter fiscal 2005. While the third-quarter loss was particularly bad, losses generally remained at about the same level. You asked whether we are behind schedule with our efforts to improve earnings. Well, because we have only just begun structural reforms, this loss is largely in line with our plan at the start of the fiscal year. We are therefore progressing in accordance with our plan.
Q8. You have stated that you plan to return the recording media segment to profitability in the fourth quarter of fiscal 2006? Would it be right to assume that you are on course to achieving that?
A8. Yes.
Q9. You've explained that the profit margin in the fourth quarter of fiscal 2005 was relatively low. Is that the case even excluding TSC, the semiconductor design subsidiary you sold?
A9. Yes.
Q10. Please provide information on the profitability of the HDD head business. In the fourth quarter last year, you recorded a gain on the return of the substitutional portion of employees' pension fund. How does profitability compare on a year-on-year basis? Your plan at the start of the fiscal year called for sales to increase considerably on a full-year basis but for earnings to be flat in the head business, meaning that you expect the profit margin to decline. How did the profit margin in the first quarter compare with the previous fiscal year's first quarter?
A10. The profit margin was down slightly on the previous fiscal year. Volumes are increasing but sales prices are falling, bringing down the profit margin a little. Profits in absolute monetary terms are increasing considerably.
Q11. Would it be correct to assume that the sum of first-quarter earnings from HDD heads and capacitors has risen compared with a year ago?
A11. Combined earnings were about the same.
Q12. Head prices were given as a negative factor for earnings. I understand that head prices fell considerably in the second half of fiscal 2005 along with the drop in HDD prices because of inventory cutbacks in the first half of last year. But how did HDD head prices in the first quarter compare with the fourth quarter of fiscal 2005?
A12. The average discount was 5%. The main reasons are the longevity of 80GB/P products and that prices for 40GB/P heads for 2.5-inch drives continue to decline.
Q13. How do you see TDK's operating income trending through the end of the second quarter? Your initial first-half forecast calls for operating income of \25.6 billion. First-quarter operating income of \12.9 billion was about half of this figure. Based on current conditions in each segment, how do you think TDK will perform against its current plan?
A13. In the second quarter, we don't think earnings will change that much in heads from the first quarter, but we expect a slight recovery in capacitor earnings. We also believe earnings will improve slightly in other electronic components sectors. This would result in higher earnings, but we are also expecting to incur restructuring expenses in the second quarter. In that sense, first-half earnings should be at least on a par with forecasts announced at the start of the fiscal year, if not above them.
Q14. You have said in the past that you are attempting to win more orders from captive head makers, that is, HDD manufacturers producing their own heads. Are you stepping up efforts to sell heads to these manufacturers? Are things going according to plan? Or are you behind schedule? Please comment.
A14. Actions to win orders from captive head makers are ongoing and we are making steady progress. We expect sales of heads to these manufacturers to account for 24% of head sales volume in the first half and 27% in the second half.
Q15. TDK has acquired two companies in the past couple of months. From an outside perspective, both acquisitions involve companies in difficult industries. You must have considered withdrawing from or downsizing your operations in these industries. But having invested tens of billions of yen in businesses that have faced difficult market conditions for many years, you obviously believe that you can be successful and profitable in these businesses. Still, from an outside perspective, it seems you have acquired businesses that face challenges. TDK probably still has unprofitable businesses. Please comment on how you plan to deal with these businesses in the future. For example, do you plan to try to turn around other unprofitable businesses through acquisitions? With respect to the power supplies business in particular, your acquisition still doesn't give you a world share of 30-40%. There are many competitors. Even so, is power supplies an attractive business for TDK?
A15. Yes, both acquisitions are in difficult business areas. The company we acquired in May is involved in the polymer lithium battery business. In the past, TDK tried to develop an energy-related business but subsequently suspended operations. This acquisition represents another attempt to gain a foothold in this business.

Regarding the second acquisition, TDK is to join forces with the Lambda Power Division in the power supplies field. The power supplies business itself is challenging, but with the market expanding we feel this is a business where we must expand rather than shrink. We are determined to re-establish our power supplies business by drawing on the strengths of Densei-Lambda KK, which has been successful with its restructuring program.

The power supplies market is estimated to be worth \1.2 trillion per year. Within this huge market, the power supplies for industrial segment is estimated at around \150.0 billion. While TDK only has a 5% share in this market, the Lambda Power Division commands an approximate 20% share, giving us a combined share of 25%. We believe that this market segment will continue to grow and that there is room to improve operations in terms of costs and sales. We decided to invest for these reasons. We believe we will be successful.
Q16. Why do capacitor prices continue falling? Won't some companies start dropping out of the market at some point? For example, will it be possible for market survivors to continue to generate earnings from this business one year from now? Or will it be difficult to generate profits because capacitors are general-purpose products? What is your view?
A16. Price discounting has certainly been more severe than we would have liked. To be honest, it would be great if someone decided to withdraw from the capacitor market. However, it's not a business that we can give up on that easily. As the capacitor business is so important for TDK, quitting the multilayer capacitor business would involve a decision of the same magnitude as withdrawing from the ceramic-related business altogether. Naturally, that decision wouldn't be an easy one to make. In reality, competition is likely to continue to be severe.

That said, prices of general-purpose capacitors are already low in absolute terms, so we don't think they can fall that much farther. On the other hand, with high- and large-capacitance and special types of capacitors, products that TDK is focused on, there is still room for prices to fall as competition continues. We are taking a close look at the level of profits we can generate in this area, assuming that our products will be subject to a certain degree of discounting pressure. The share of the market that a company can command will hinge on its sales activities. We will continue to operate this business while taking these factors into account.
Q17. The handout shows the forecasts for sales by segment for the full year. Could you provide the same information for the interim period?
A17. Compared with our plan at the beginning of the fiscal year, we are projecting a fall in sales in the electronic materials sector, but an increase in sales in the recording devices sector for the full year. Basically, we expect an increase in recording devices to offset an expected decrease in electronic materials and electronic devices for the full year. I cannot supply you with these figures for the first half.
Q18. Could you provide a breakdown of HDD heads by form factor for the first quarter, namely enterprise, 3.5-inch HDDs and 2.5-inch HDDs, as well as the composition of products for 3.5-inch drives in terms of capacity? Please also provide forecasts.
A18. In the first quarter, HDD heads for desktop applications accounted for 48% of sales, enterprise for 15%, 2.5-inch HDDs for 34% and under 2.5-inch HDDs for 3%. We expect these shares in the second quarter to be 45%, 16%, 36% and 3%, respectively.

Regarding the composition of products for 3.5-inch drives, in the first quarter, 80GB/P products accounted for 65% of sales, 100GB/P products for 26%, 120GB/P products for 8% and 130GB/P products for 1%. In the second quarter, we expect 80GB/P products to account for 50%, 100GB/P products 24%, 120GB/P products 20% and 130GB/P products 6%.