TDK Corporation F2Q08 (Qtr End 9/30/07) Earnings Call Transcript

TDK Corporation (TDK)

F2Q08 Earnings Call

October 31, 2007, 3:30 AM ET

Executives

Takehiro Kamigama - President and COO

Seiji Enami - Sr. VP, General Manager, Finance & Accounting Department

Atsuo Kobayashi - General Manager, Data Storage & Thin Film Technology Components Business Group

Analysts

Eisaku Ohmori - Mizuho Securities Co., Ltd

Daiki Takayama - Goldman Sachs

Shoji Sato - JP Morgan Securities Japan Co., Ltd

Tomohiro Murata - Morgan Stanley Japan Limited

Manabu Akizuki - Nomura Securities Co., Ltd.

Fumihide Goto - UBS Securities Japan Ltd.

Presentation

Operator

Now it is time to begin the meeting. We would like to begin this presentation for the earnings release of first half of fiscal year March 2008. I would like to thank you very much for gathering here despite your very busy schedule. First of all, I would like to introduce to you the people who are present here. First, the President Mr. Mr. Takehiro Kamigama; next Senior Vice President Mr. Mr. Seiji Enami; and the Senior Vice President Mr. Takaya Ishigaki; next Senior Vice President Mr. Shinichi Araya; next the General Manager of the Head Business Mr. Atsuo Kobayashi.

Now I would like to briefly explain to you today's schedule. First, President will give us an overview of the interim report. And then that will be followed by Mr. Enami with detailed explanation. And that will be followed by the overview of the business of the Head to be explained by Mr. Kobayashi. And lastly we would like to entertain questions from the floor. We are scheduled to end this meeting by 6.

Now let us begin. I would like to call upon the President of the company.

Takehiro Kamigama - President and Chief Operating Officer

My name is Kamigama. I would like to express my appreciation to you for coming by taking the time out of your very busy business schedule today. Let me report to our consolidated results for the first half of fiscal year March 2008.

First about the profit and loss summary. Net sales went up 2% year-on-year, standing at 433.1 billion yen. Operating income surged 23% year-on-year, standing at 47.1 billion yen. Income before income tax increased 17% year-on-year at 48.8 billion yen. Net income grows 17% year-on-year standing at 34.6 billion yen. In this period, reflecting as in the precious period, real demand for passive components for digital home electronic appliances, net sales posted a record high for any first half year period of the year. Also, incomes increased dramatically year-on-year, posting a sixth consecutive term increase in income. As far as the first half is concerned, this included 14.9 billion yen income from assignment that was recognized in the books that came about as a result of assignment of the recording media sales business. So income per share was 223.89 yen in the previous period, but it's now 266.16 yen. Net assets per share was 5479.15 yen, which became 5768.87 yen.

Next I would like to explain to you net sales by segment. First, I would like to explain to you the situation of electronic materials and components segment. Net sales increased by 5.8% year-on-year standing at 398.4 billion yen. In the first half of the fiscal year March 2008, the electronics market saw a continued smooth growth in the digital consumer electronics products. Production of flat panel TV, digital cameras, and game consoles grew steadily. Production of cellular phones was also on the increase. Also notebook PCs were produced at rapid paces. Our business environment was favorable to us all in all.

At TDK, shipment of passive components for digital consumer electronics products was good overall. Sales of the electronic materials and... electronic materials rose year-on-year. Also, we were able to secure increased sales of recoding devices on a year-on-year basis.

Regarding our mainstay HDD head business, demand for HDDs went up sharply in the second quarter along with shipment of our HDD heads boosting sales of the products.

Let me give you now an overview of each of product categories further. First about electronic materials, the sales of the electronics materials increased by the 102.8 billion, up 4.1%. The sales stood at 102.8 billion. Sales of capacitors increased. Sales of those for PCs and flat panel TVs were good. Products for large and high-capacitance products saw increased sales.

Sales of ferrite cores and magnets declined slightly. Sales of magnets for magnets for automobiles increased, but sales of ferrite cores dropped because sales of some of the products was discontinued.

Next about electronic devices. Net sales stood at 104.7 billion yen, up 8.1% year-on-year. Sales of inductive devices rose mainly due to increased sales of coils for power supplies of flat panel TVs, game consoles and portable audio equipment in addition to increasing multi-layer products. Sales of high frequency components rose due to volume increase in module products. Sales of power supplies and others increased. Orders for sensor and actuators declined due to production adjustment of some customers, but this was offset by power supply products.

Next on recording devices, sales stood at 156.9 billion yen, up 1.9% year-on-year. Sales of HDD heads rose. Based on increase in production volume of HDDs, we were able to increase sales volume of our HDD heads. At the same time, demand for heads is shifting to high density products, leading to improvement in product mix.

Next about other electronic components, sales reached 34.3 billion yen, up 25.4% year-on-year. This was due to increased sales of mechatronics, anechoic chambers-related products and other new products.

Next break down of electronic materials by market segment is as follows. First, IT Home Electronic appliances. 1% up year-on-year, 63% is the share of this segment. Next, High-Speed, Large Capacity networks, 13% up year-on-year, accounting for 10%. Car Electronics, 12% up year-on-year, accounting for 8%. Others up 6% year-on-year, 19%.

Increasing IT home electronic appliances was because of increase in products for audio visual products, game consoles and computers. Regarding high-speed large capacity networks, increasing parts for mobile phones was the main reason. As to the car electronics, this was attributable to steady increase in automotive electronics. As for others, increasing parts for industrial machinery was the reason mainly.

Next I would like to go onto to explain recording media product segment. Sales of recording media product segment went down 28%, standing at 34.7 billion. As was announced already, on August 1, 2007, TDK brand recording media product sales business was assigned to Imation Corporation of the United States. At the same time, right to use TDK brand only for recording media product was licensed to Imation Corporation. In other words, going forward, during the period of licensing, Imation Corporation has the right to serve recording media products of TDK brand. As a result, TDK is left with the business of development, production and sales to OEMs of magnetic tapes and blue laser discs used in consumer electronics and for business purposes.

Because of this fundamental change of business structure of recording media products, sales dropped sharply year-on-year by 28%. This is a scheduled structural reform of the recording media business. We completed this business assignment two months ahead of the schedule, which is incorporated in our plan for this fiscal year.

Next sales by region. As for the sales, first of all, Japan year-on-year down 8% at 76.3 billion yen; the Americas down 0.7%, 50.9 billion yen; and Europe down 15.4% and 32.9 billion yen; and Asia... other Asian countries 8.5% increase and 273 billion yen; and in total 1.9% increase, 433.1 billion yen. And as for the recording media segment, due to the TDK brand recording media business transfer, they reduced revenue in every region.

And as for the electronic materials and components, in Japan we posted reduction in revenue, but in other regions due to the robust digital consumer products demand, they regained revenue. As a result as for the overseas sales, it was up 4.4% year-on-year and 356.8 billion yen. And the ratio of overseas sales was 82.4%, up 1.9% year-on-year.

And I am going to talk about the earnings breakdown. First of all, electronic materials and component segment. First, the first half of fiscal year 2008, all the four product segments posted higher revenue. And the operating income for the first half, down 4.5 billion yen to 36 billion yen. And out of that, the structural reform expense was 1.5 billion yen.

And as for recording media product, because of their posting of the temporary profit due to the transfer of its sales business, they reposted significantly higher income and as for operating income, they had a rise of 13.4 billion yen on the same period, was 11.1 billion yen and 1.9 billion yen was for the structural reform expense.

The General Manager of Finance and Account Department will talk about the breakdown of the temporary profit. And as for recording media business, as a result of the structural reforms in the second half of previous fiscal year, we were able to turn a profit and in their first half of this fiscal year, we... for example, we transferred the sales business and we also transferred the license to use the TDK brand name in order to promote the business structure and we have almost came to the completion stage of the structural reform. And from the second half, we will focus on their best of the business.

Next, the forecast of the full fiscal year. The sales up 0.3%. And as for operating income up 13.1% year-on-year at 90 billion. And the net income before income tax up 8.3% at 96 billion yen, and net income 2.7% increase at 72 billion yen. That's our projection and in the fiscal year 2008, almost according to our projection, we have been showing higher level production of the digital appliances and our main customers finished products manufacturers are continuing the production in order to meet the year-end high demand season.

And I think the latest component order reflect this production basis. But in August, in the stock market, the global excess liquidity issue emerged [ph] such as the US prime loan problem, and not only stock investment market, but also they gave the global economy a cause for anxiety. And the US consumption should affect the... considerably affect the electronics component business for us. And we have to... considering the correlations between the current components order and finished products, and we have the year-end sales battle in Japan, US, and Europe, and [indiscernible] Asian countries and Beijing Olympics [ph]. And in second half, the business environment will be a mix of expectation and anxiety. And as for the forecast of the sales of the electronics materials, the final demand will be in the... within the seasonal variation. That's the assumption and we will review the sales plan for the main passive products. And as for the second half we have to further prepare for the expansion of the HDD heads business. The latest demand is favorable and also, we will increase the production of capacitor and expand sales of inductive device and magnetic products, and also strengthen power supply business.

And as for recording media, we have almost completed the major structural reform and after the second half, the high priority issue will be to improve the profitability for the rest of the business and the after August, for the recoding media we will develop our own products with specializing our developing and producing our own products. And we estimate the revenue will decrease over 50% year-on-year an annual basis. And we assume average exchange rate of 110 yen to the US dollar.

We will also strengthen the HDD head business, which is our core business. And we agreed on receiving the tangible and intangible related assets from the Alps Electric Company and we have implemented acquisition of suspension maker and we will incorporate them. And in the HDD industry, we will cement our position of mid-term reliable and stable parts maker and we will also take measures in order to improve our business which have been designed to low revenue and also strengthen the inductor business position. Thank you very much.

Now a detailed explanation will be given by Mr. Enami.

Seiji Enami - Senior Vice President, General Manager, Finance & Accounting Department

My name is Enami. Now earlier on the President reported about the financial results, it's this one. I would like to make some supplementary explanation. First, I would like to go along with the financial summary.

Please turn to page 13, consolidated statements of income. Here, if I could draw attention to the operating income, it was 38.3 billion yen in the previous term, but that increased by 8.9 billion to this term. And I would like to explain to you some of the factors that contributed to this increase. First, the sales increase due to increased utilization rate and [indiscernible] that accounted for 10.3 billion yen. And the reduction of raw materials accounted for 2.1 billion yen, the streamlining and cost reduction 7.8 billion yen.

And also, as seen on the profit and loss statement, there is a gain of transfer on the books of the recording media business sales, 14.9 billion yen currency fluctuation, currency gain 4.9 billion yen. These are positive factors. There are also negative factors. Discounts, 30.6 billion yen. SG&A increased by 500 million yen. So if you net these all, then the income increased by 8.9 billion yen.

With respect to the impact of the ForEx in the first half of the year, the dollar was 115.38 yen to the dollar and 146.01 yen in the previous year, but then the 119.4 yen to the dollar and 162.33 yen to the euro. So the yen became weaker by 4.02 yen to the dollar and 16.32 yen to the euro, and the sales increased by 15.2 billion yen. And that pushed up the operating income by 4.9 billion yen.

With respect to the restructuring cost, it was 3.1 billion yen in the previous term, but in this interim period, it was 4.4 billion yen. And we had in total... while this is included in the calculation of the media sales gain. So this is additional and of this 3.4 billion yen, the 1.5 billion came from the electronic products and, the remainder, 1.9 billion that was explained by the President earlier on, media restructuring cost.

Now with respect to the depreciation and also the development cost, between them compared with the previous term, the expenses increased by 5.5 billion yen. We believe this is a negative factor that the show our positive stance, but there is some time lag, so this doesn't generate results immediately.

That's the status. So this relates to a major reduction in comparison to the previous term of the increased sales, including the utilization ratio increase and the product mix. And well, this accounted for 33.9 billion yen in the previous term, but the number for this interim period was 10.3 billion yen. So this is one of the factors that contributed not so much increase in profit.

Now with respect to raw material price reduction, because of increasing material prices, there was a positive factor of 6.7 billion yen in the previous term, but it was just 2.1 billion. So there was some price increases and well, we were not able to decrease the purchase... the purchasing prices of products.

Now, with respect to discounts overall in the company, across the company, the number was 6.6%. In the previous term, it was 5.9%. So compared with the previous term, the discount rate increased. This included media. So if you just look at the electronic materials and component segment, in this interim period, the discount was 5.9% as opposed to 5.3% in the previous term. So again, there was an expansion increase. However, well, something that is included in this, if you just look at the recording devices and heads, in the first quarter in the previous year, it was 4.9%, but it was 9% discount in this interim period. In Q2, it was 6.6% in the previous year, but it became 6.3%. So we explained this when we announced the Q1 results, but this impact of discounts are now becoming more normalized as product mix changed.

Now towards the bottom of the profit and loss, there is other income. If I could draw attention to that, in comparison to the previous term, it worsened by 1.8 billion yen. One of the factor is the interest income, because of increase in dollar interest rates, this positively affected us by 1.7 billion, but the ForEx, the yen became stronger at the end of September. So there was a ForEx loss of about 1.7 billion yen. So that offset the increase in interest income.

In addition, there was a valuation loss of securities of about 1.5 billion yen that was posted. So in this other income compared with the previous term, the number worsened by 1.8 billion yen.

So all told, the results were at the same level as the forecast level in terms of the sales and the income before income taxes. But when it comes to net income, this was lower than our outlook. Well, the assignment gain, which wasn't decided so quickly or basically this would belong to Japan... this belongs to Japan because of a higher tax rate. So, the effect of tax rate is a bit higher than our anticipation. And so when it comes to after tax income, our forecast was not entirely correct.

Now in addition, if I may add, if I could take or draw your attention to page 34. There is non-consolidated statement of income here. Here at the bottom of the page, there is extraordinary loss. If you look at the change section, it increased, the extraordinary loss increased by 24.1 billion yen. This is a result of the elimination and markdown of investment accounts of subsidiaries, affiliated companies related to assignment of the media business. This affiliated company is no longer ours. This is a result of that. And so this doesn't affect the consolidated results. This is just on the non-consolidated basis.

On page 18, there is segment information, please take a look at it. First, electronic materials and components. The operating income here was 36 billion yen, down 4.5 billion yen year-on-year. This was reported by the President as well. One of the factors for this is the sales... net sales increased by 21.7 billion yen. However, if you exclude this ForEx impact about electronic materials, which was 13.4 billion, then in effect real increase was only 2.2%. This impact of discounts and increased fixed expenses wasn't fully absorbed by profit attributable to increased utilization rate.

And another factor, as I mentioned before, was skyrocketing material prices. And so, well, I think if you do analysis, I think you can see that if the electronic materials are divided into Q1 and Q2, sales in Q1 of 1.85 billion (sic) [185 billion] increased to 213 billion in Q2. So the sales increased by 27.6 billion yen from Q1 to Q2. Still operating income of Q1 of 17.6 billion increased to 18.4 billion, it only went up by 800 million yen. Well, this is because between Q1 and Q2 if you analyze the expenses, if you look at major items, the bonus variance, in Q1, there was a provision for that. But in reality, in Q2, the real amount was decided and so there was a variance of 2.6 billion. The burden increased by 2.6 billion from Q1.

And another one is a quicker disposal of inventory. If it exceeds 12 months, provision has to be made in our practice, but if it's... we've changed the standard to 6 months instead of 12 months. So it's just 500 million yen and increased depreciation, there was 800 million yen factor and increased development cost 900 million yen, and increased restructuring cost of 1.1 billion yen. So if you add them all, 5.9 billion yen, there was such an amount of increase in fixed expenses from Q1 to Q2. And of this increase from Q1 to Q2 of 27.6 billion yen, of this 16.1 billion yen was... came from HDD heads and the operating income of HDD heads absorbed the increased costs. And so we had some income, but increase in the remaining electronic component related items couldn't absorb these increases in costs fully.

Next, in the same segment, the recording media segment, the operating income is 11.1 billion yen. That means that the... I talked about 14.9 billion yen as for the accounting profit from transfers. If, for example, 1.9 billion yen structural reform expense related to transfers not included in the accounting capital gain calculation, that's... if 1.9 billion yen is deducted that will be 13 billion yen. I think this is a direct and real gain from transfer and 1.9 billion yen is the deficit. That means that is the difference between 13 billion yen and 11.1 billion yen. And from the deficit, the 1.1 billion yen is related to the subject for transfer. And this situation happened and I think that upset or confused the employees of the company and the agencies or the suppliers. And I think that is the negative factor caused by that. On the... rest of the deficit is 800 million yen. And from the second half period, I think we'll be able to secure the profit.

Next page 13, please have a look in the balance sheet. According to this, the total assets amount are 987.7 billion yen, down 1.6 billion yen. And dollar depreciated 2.2% to the yen and as for euro 3.8% depreciated to the yen. And the yen equivalent of the overseas assets are more affected by dollar. There is a... that's a factor of the reduction of the total assets of 8.2 billion yen. And cash and cash equivalents is down 59.7 billion yen.

First let's... 39.2 billion yen for shares acquired, reacquired or retired, and 12.9 billion yen for a change to short-term investment, and 9.9 billion yen for the increase in the inventory, accounts receivable, business property, and 5.1 billion yen for the capital expenditure, about amortization, and 7.9 billion yen for dividend. And in inventory the level is almost the same as the previous peak period, but because of the transfer of the media business, there is reduction of stocks. So if you consider that, the virtual inventory of HDD heads increased to deal with the year-end selling season. The capital... the total capital, there is decreasing... 18.8 billion yen.

And on page 15, in the middle of the page, there is consolidated statement of shareholders investment and please refer to that later and go back to page 4, there is breakdown of operating income changes by business segment.

The share of the product and growth of sales have been discussed. I am going to further talk about that. First of all, electronic materials product sector out of the electronic materials and components, the capacitor accounts for 70%, a 7% increase, and ferrite and magnets account for 30%, down 1%. On the electronic device product sector, the inductive device accounts for 47%, up 10%, and high frequency products account for 66% of the total, up 42%, and others, power, sensors and others, that's 47% with an increased of 3%.

Next, the recording device products sector, the HDD heads account for 97%, up 2% and other application heads 3%, down 8%. Now recording media segment. At the end of the July, this segment was transferred and there is no such segment for the two past months, but just for your reference, the audio tape accounts for 6%, down 16%, and video tape accounts for 14%, and down 43%, and optical disk 47%, a decrease of 33%, and data tape and others account for 33% of the total products, down 11%.

Finally, page 7, we have consolidated earnings forecast for the full business year. As the President said, there is no change in forecast from the beginning of the year... fiscal year. That means it is necessary to increase operating income for electronic components 6.8 billion yen from 36 billion yen in the first half to 42.8 billion yen with a sales growth of 19.8%... 19.8 billion yen. And as for heads, the fourth quarter is uncertain. So basically is the same... sales and profits are almost the same level of the first half and the price discounts with a change of product mix, the influence will be less. And in the third and fourth quarter, the situation will be better. In other words, the influence will be less and less; on the electronics materials and device of components, in order to... we will realize the size reduction and substitution of materials in order to deal with the surging material costs. Also we will also promote the sales. And we will shrink degree of deficit of our money-losing business products. Thank you very much.

Next Mr. Kobayashi will explain to you the HDD head business outlook.

Atsuo Kobayashi - General Manager, Data Storage & Thin Film Technology Components Business Group

I am Mr. Kobayashi from head business. Now I would like to give you our outlook for our HDD head business. Now, the previous one was 146.4 billion, that was forecasted, but as was mentioned before, we think that 156.9 billion yen will be the number, and for the second half as opposed to 152.6 billion, 159 billion is the current number, total 299 billion, now comes to 315.9 billion. So 2% in first half and 5 % in second half and 4 % increase in the total full year.

Next HDD head demand and share will be explained. Our forecast up till now was 500 million would be the demand, but we say now that it's less than that, 494 million would be the demand. However, the large capacitance products are increasing. So the heads per piece were increased from 2.3 to 3. So we believe that the total demand for HGA will increase. And as for TDK sales, our customers have been performing well. So as opposed to 31%, we now say 33%, we have revised this number upward.

Now with respect to the HDD head launching schedule, 3.5, 2.5, 1.8 inches, for each of these; as for 3.5 inch 334 giga, and 2.5 160 giga, and 1.8 inch 80 giga, we will start the mass production by the end of this year. As for 3.5 inch 500 giga, for 2.5 inch 250 giga, 1.8 inch 120 giga, new products, we would like to get approval for these new products. Now there is one point about our hard disk head business. There are two dealers that I would like to make some comments on.

First, the first point is the HDD related assets transfer from Alps. Now Alps, the downstream business has been carried out by Alps in Japan. So they have accumulated production technology. They have a lot of know-how about the production technology, the facilities and know-how; at the same time will be purchased by us. And to the extent possible, we will be able to capitalize on what they have. And in reality, with select facilities in various downstream area, as we enlarge production compared with the new investment that we have to make, we can acquire the necessary facilities at more advantageous situation. And by utilizing know-how, I think we can improve our yield and also reduce the materials and consumables. So with respect to the existing production line of TDK, I think we can enhance our productivity further.

And in the assembly lines, the concepts, they are unlike TDK. We can... well, the different concept from ours are used for production line and in also Chinese operations, the labor costs have been on the increase in recent months. So we believe that we can take advantage of the technology that Alps has.

Next I would like to talk about suspension business. Traditionally, for head manufacturers, the raw materials, the main components, the suspensions [ph], we were not able to decrease the procurement costs. This was a major challenge for us. So how we should lose... reduce the waste of suspension has been our challenge. We have had a lot of difficulties, but on the other hand, on the part of the suspension manufacturers, the demand for suspension and also they have to boost ability, capability, but there was no good matching between the two. So, they have been in a very difficult situation.

Now, this time TDK and Magnecomp will be one, will join hands. And so I think I will turn over company's issues and also the Magnecomp's major customers as well as TDK will increase our portion, so Magnecomp's suspension can increase. So I think both of us will be in a very good position. So the suspension business is going to be a major pillar for TDK in terms of business. Thank you.

Takehiro Kamigama - President and Chief Operating Officer

Now we would like to go onto the question-and-answer session. Please raise your hands and give your name and your affiliate and first of all, two questions per person.

Question And Answer

Eisaku Ohmori - Mizuho Securities Co., Ltd

I am Ohmori of Mizuho Securities. Two questions. First, on the capacitor business in the second quarter, probably 8% increase in the sales year-on-year, that, the competitor increased by 20% I think. What is the problem currently? And in your forecast, obviously you expected that you will increase further, but what's the reason of less increase? And from April to June period next year, new factories will be established and what are you going to try with them and what are you going to change with the factories or the plants? My second question is profit and loss. In the first half, with a deduction of 15 billion on the... I think considering the second half, probably the 11 billion increase [indiscernible] will increase... increase of 2 billion yen. I think in total billions of yen increase, and with the breakdowns of each product how are you going to organize in the second half?

Unidentified Company Representative

As for the capacitor-related question, year-on-year there is 8% revenue increase, actually 7% revenue increase. And compared with the previous quarter, a 10% increase, and in the original plan from the previous quarter, we expected the increase of 15%. Actually we were not able to achieve that and the main reasons are because of the production capacity, we had a problem of delivery and we were not able to achieve the delivery and we lost some share. And in particular, the large capacity segment, we lost market share.

And the next is the second quarter plant plan. As for the new factories, they will produce the capacity of the production, that's one thing. The other aim is to in the mid-plan... in mid-term, considering the roadmap of new products in order to deal with the demand for the future, we will establish new factories and also the multi-layer capacity. And considering that, we will establish new production lines.

Eisaku Ohmori - Mizuho Securities Co., Ltd

Let me add that the page 26, the electronic materials for the full year forecast, a 16 billion yen decrease from the original forecast is that the most... are they mostly about capacitors? Yes, mostly the capacitors and in the second quarter, the profitability of the capacitors, what's the profitability of the capacitor?

Unidentified Company Representative

Frankly speaking, we will not be able to meet our expectations.

The second question was the comparison the first and seconds half. Yes, we will have to increase considerably in order to achieve the target. That's our understanding. As I explained, 36 billon yen in the first half for the electronic components, in order to achieve our target, we have to achieve the 42.8 billion yen, but as for the media business, probably breaking point. So we have to gain most of the 42.8 billion yen from the electronic components. So we have to increase from the... to the 6.8 billion yen from the 42.8. In the second half, the electronic device is the most important. Yesterday probably I think Gen Seng [ph] gave results on the... they are mostly focused on the second half because of their business and high frequency gained 43%. I think that's unusual for us. But in the second half we hope that we will increase further and in the inductive device as well. I will expect those products sectors and capacitors, in the first half, I said that we couldn't meet our expectations. Nevertheless, in the second half, we hope we will be better and electronic materials earnings will be increased and the other electronic components will also post better results and hence the fourth quarter is uncertain. So, currently sales and profits are almost at same level in the first and second half, that's our forecast.

If you break down by figure, that's the improvement of 6.8 billion yen, [indiscernible] 2 billion yen. So, almost even. The electronic device is the largest and the... secondly, the electronic components, materials and followed by the components and heads are even.

Daiki Takayama - Goldman Sachs

Takayama from Goldman Sachs. Firstly, I would like to ask this question to the President. You announced in the mid-term business strategy a 15% increase and you are going to look at the coming 10%, you are making preparations and you're going to leap next year. Now against this background, with respect to profitability of next year, how far can you go on to go up and if you're going to see an upper trend, what would be the sources, what would be the business that would contribute the greatest? So I would like to learn about that. And then you are a bit late in terms your plan, what should you speed-up and what are the challenges that you have to work on sooner rather than later? I would like to have a clear account of these issues. In other words, toward the next term, you are making preparations to do a leap, what can you do now? So this is my first question.

Takehiro Kamigama - President and Chief Operating Officer

Okay. 15% in mid-term, 1 trillion yen, 15% the numbers that we have committed to. Now as you say, the next year is going to be a moment of the truth. What are we going to increase? Now, capacitors rather than capacitors heads, heads will be on the par we will lever off as we see it. Perhaps at the same level as this year's, the suspension, we have purchased suspension and so what kind of gain can we see, that's something we can expect on. That's point number one. And secondly, regarding capacitors, as was mentioned before, we are going to establish a new plant and of course we are considering a possible boost of production, but we would like to improve profitability. That's one major aim we are working on. Needless to say that results in production increased, but first we would like to work on improvement of profitability. And now others, well, I really can't say clearly at this point in time, but there are other factors. Our other products are now on the increase in terms of production and so two years later, in the mid year, I think we can make a major leap. We can benefit from that in a major way and power supplies can also be increased smoothly.

In addition, what we are expecting on is ferrite products, transformers. We have some expectation on our transformers. We are taking various measures so that next year we will see what will happen. Of course, this is related to power supplies, but we have high expectations on transformers. Have I answered your question?

Daiki Takayama - Goldman Sachs

If I may supplement. Now regard the heads, this year you acquired Alps, and more efficiently maybe there will be some increased depreciation, but I think you can...

Unidentified Company Representative

Well, that's exactly our aim. But we have to just to get to the capitals. And our selling price, we have to contend on this basis. And I think this will be quite beneficial in these terms. Of course volume will increase. However, perhaps selling prices need to be decreased further strategically. We have to be strategic in reducing our prices. Well is that going to be the same as this year, no, we won't expect on suspensions. Well frankly speaking, we are not making profit from suspensions.

Daiki Takayama - Goldman Sachs

How far can you go next year?

Unidentified Company Representative

Well, so let me answer the question. Now, the suspensions of Magnecomp, we are not using that at this moment. We use Hutchinson and Nippon Hatsujo. I think you can see what will happen. Have I answered the question?

Daiki Takayama - Goldman Sachs

So yes, we can benefit a great deal next year. And also with respect to power supplies, well, single digit was in the first half. Well, so you are going to reduce fixed cost and can we aim at the 10% next year?

Unidentified Company Representative

Yes, we would like to aim at 10% two years later. Yes we can aim at that.

Daiki Takayama - Goldman Sachs

With the respect to the capacitors, how... why do you say you can increase profitability? Efficient production line will be established in the plant. So, what's the point?

Unidentified Company Representative

Well, from raw materials to the very end of the product, we are going to be able to have integrated production line. That's exactly the situation at Kitakami, but not so in other plants. But we are going to establish an integrated line. In fact, at the Kitakami, we have seen results and we are going to make it more efficient. So I think we will be successful. But this will start in spring next year, and then it will take three additional months before you launch the product. So, two years later in the mid-term, I think we are going to see a lot of benefits in the mid-range.

Daiki Takayama - Goldman Sachs

The second question, I would like to have some clarification on some numbers. First, with respect to the electronic devices, you talked about a bonus and the one-time expenses including depreciation. In Q2, 5.9 billion q-on-q the fixed expenses increased. What can be called one-time expenses? What's the value? And in the second half, 6.2 billion restructuring expenses were expected. Is this remaining the same in Q3 and Q4? Regarding the electronic components business, are there any one-time expenses?

Unidentified Company Representative

Well, we reviewed the standard for the inventory. This is one-time. If there is no increase, there would be no increase. Regarding depreciation and development costs, well I think this is the amount that we are going to spend because we are aggressive. So this is not a one-time expense. So this is going to be the level of increase. With respect to your bonus, it just so happens that if you compare our Q1 and Q2, value-wise, if you look at Q1, and Q2, they were not that different. No, in first and second half, they shouldn't be different.

And with respect to restructuring, 6.2 billion number was mentioned. Basically, the electronic components and media, please understand that they are the same. If you only talk about the electronic components, please correct yourself. 4.4 billion has already been spent. In this respect, the remainder is 1.8 billion. Perhaps 1.8 billion is fixed, so the number would increase somewhat than that. But in the second half, this is the kind of value we are going to see.

Then the electronic components section, well, if you just exclude the one-time expenses, 17.6 billion was the number for Q1 and Q2 against our 18.4, the 500 million of depreciation and restructuring expense. If you add them, they are about a little less than 20 billion, that's the effective number. And in Q3, Q4 in the second half, 43 billion was mentioned. That's the service [ph] profit and centering around the electronic components, 1.8 billion or plus would arise. So that's 45 billion, and that's going to be our number in Q3 and Q4. Is this correct? Yes. Thank you.

Any question?

Shoji Sato - JP Morgan Securities Japan Co., Ltd

Shoji Sato of JP Morgan Securities. Thank you for today. From Alps Electric, have your head assets and what's the actual cost of the [indiscernible]? And how are you going to... I mean, how much are you going to reduce the costs?

Unidentified Company Representative

And that is acquisition of assets, not business itself. So as for the facilities, we have confirmed one by one and as for know-how to company entered, so basically there is no goodwill... there is no goodwill. And that is the assets divestiture, and as for the patent, patent can be used for 16 to 17 years. And it will be written off in accordance with that. And as for know-how they are almost... are mostly about facilities and equipment as Kobayashi mentioned. They have strength that we don't have and that may lead to the personnel reduction and reduction of the depreciation. And know-how can be utilized for other parts, not only what we have bought. And probably in 5 to 7 years, they will be sold out... sold off, and we will be able to reduce the capital investment and with know-how, we can deal with that. And as for the patents, that may increase our cost, but if you write off in 16 to 17 years, the cost will be not be so high. And it is significant to have patents, so it doesn't... it's not really a much of a cost.

Shoji Sato - JP Morgan Securities Japan Co., Ltd

And how much are you going to reduce the capital investment?

Unidentified Company Representative

Probably 10 billion yen saving, yes, 10 million yen saving.

Shoji Sato - JP Morgan Securities Japan Co., Ltd

My second question is on the capacity... production capacity. In the first half you said you will increase the output or capacity by 20%. Has that been realized? And in the second half or later on, what is your plan to deal with the production increase including next financial year... fiscal year?

Unidentified Company Representative

Well, capacity of the capacitors, we increased 20% of the capacity in the first half. We achieved that and in the second half, the capacity will be kept and in the second year, when the new factories are established basically we will further increase 20%. That's our plan.

Shoji Sato - JP Morgan Securities Japan Co., Ltd

So in the first half, there was 20% increase and has that contributed to the sales in the second quarter?

Unidentified Company Representative

Yes.

Shoji Sato - JP Morgan Securities Japan Co., Ltd

Thank you.

Unidentified Company Representative

That person, yes.

Tomohiro Murata - Morgan Stanley Japan Limited

Murata from Morgan Stanley. The first question about inductor business. In the past, last year, I think you transferred the business and now as was mentioned by the President, it's going to be integrated with power supplies. It lowers the competitiveness, but now it's much better. What kind of level of profitability are you going to see? And particularly transformers, you said they are interesting stories. So, about the inductor business, I think that's a large business at 90 billion yen. What would be the outlook for the inductor business? That's my first question.

And secondly, regarding head business, you buy or sell various businesses and there are also some businesses that are on the block. Now over the three... several year period, what kind of changes will happen in the industry? And against this background, how are you going to behave? Can you really change this difficult environment or is this really difficult? Will the environment stay the same way and you just have to get the acceptance [ph], is that the kind of stop gap measures you can take? In the coming several year period in the HDD business, what kind of changes are you anticipating? How are you going to act? And so that's my second question. Thank you.

Unidentified Company Representative

Let me explain to you about inductor business. Regarding inductors, at this moment, the orders received have been quite good. 10% increase has been continuing year-on-year and in the second half, the same level will be expected. I think the things are quite good at this moment. Now in the future or in the mid-term, 5.7% will be the growth rate in industry. So just like this year, we're going to plan for the next fiscal year. Inductors, transformers, ferrites, and other than that we also have anechoic chamber business, they are now in the same business segment.

With respect to the effect of this, particularly transformer coils and audio transformers, the raw materials are skyrocketing in prices. And so with respect to large product, the costs are now going up. So in the integration of this, the raw material development has been worked on right now. In the second half perhaps, this will lead to some emergence of products. And another point is regarding the... with the integration of transformers and inductors. Well, I just talked about raw materials, but there is also a elementary technology, and the same coils or the same connecting wires, these are commonalities between transformers and inductors. And we would like to apply this to the transformer segment. The small transformers with different structures are being developed. Perhaps in the second half we're going to be able to show these to our customers. We're getting ready for that and so against this background, in terms of inductors as we always say, in the society we have about 20% of the share. We have about 20% of the market. So we would like to certainly work toward increasing this market share further. And that's my explanation about the inductor business.

Tomohiro Murata - Morgan Stanley Japan Limited

As the President mentioned, you have interesting products and this is... these products that you mentioned that are going to be launched in the second half of the year.

Unidentified Company Representative

Yes, now, inductors, you have seen increasing profitability, but not so in the case our transformers.

Tomohiro Murata - Morgan Stanley Japan Limited

In two to three-year period, what would be the optimal profitability level of these two products?

Unidentified Company Representative

That's difficult to say.

Tomohiro Murata - Morgan Stanley Japan Limited

10% to 15% in average, in total?

Unidentified Company Representative

Well so-so.

Tomohiro Murata - Morgan Stanley Japan Limited

Inductor 15% should be maintained and for transformers it will get close to 10%. Is that the anticipation?

Unidentified Company Representative

Well, I don't want to mention. I don't want to mention any specific numbers.

Tomohiro Murata - Morgan Stanley Japan Limited

Okay.

Unidentified Company Representative

Now, unlike our capacitors, I don't think this is a new role. Lots of people make active investment changing the situation of demand. Well, as for transformers, just like capacitors, everybody makes investment and you don't know what will happen in the future with respect to demand. You don't have such concern. Whereas, I mentioned before with respect to transformers, depending on the manufacturer, because of increasing raw material prices, some have abandoned this business. Because of this situation I think we can seize opportunities.

Tomohiro Murata - Morgan Stanley Japan Limited

Thank you. So about the head please?

Unidentified Company Representative

That is a very difficult question indeed. It is true that this hard disk business, there are lots of changes and this is a very exciting industry, I believe.

Tomohiro Murata - Morgan Stanley Japan Limited

With respect to heads, as I mentioned before, going forward to survive what we have to do?

Unidentified Company Representative

Well, what shouldn't we do internally, now one, technological prowess is something that we have to hone well. Someone talked about the price trend, particularly when it comes to new products, the perpendicular head, in place of that, if you have technological power, then the prices can be maintained somehow. So here, to adapters [ph] we should be able to maintain our competitiveness. So we would like to further boost our competitiveness and this is something that we have to continuously work on.

Tomohiro Murata - Morgan Stanley Japan Limited

Another point is as was mentioned by the President to contend with the competitors, we have to be good in cost and competitiveness. How can we maintain this effort?

Unidentified Company Representative

Now, as I said before, Alps assets should be utilized and we are going to launch a new product and strengthen this business. And in a way, well, I don't know if this is a right expression, but the vertical integration of the heads, the suspension and the head should be integrated. And there I think we can take advantage of the strengths, while we maintain our competitiveness, we will continue with this business.

Tomohiro Murata - Morgan Stanley Japan Limited

This is very difficult. But, well, you have acquired some business and you are enhancing your business technology. So, this generation where you have thought that you can be a bit better, but in July to September overseas companies are also doing very well with just kind of a steady effort. I don't think you can change the situation of business outlook very drastically, or may be you should just continue with this kind of steady effort?

Unidentified Company Representative

Yes, that will lead to a major effect.

Tomohiro Murata - Morgan Stanley Japan Limited

Well, thank you.

Manabu Akizuki - Nomura Securities Co., Ltd.

I am with Nomura Securities. Possibly to President Kamigama. Two questions, first, regarding heads, what's the... I wonder if there is a market share that you want to have. If you... that's a fixed cost and if you can have share, I think that would be competitive to others and it's a characteristic in that way and market share is... can be... if that can be strategically strategic parameter.

Takehiro Kamigama - President and Chief Operating Officer

Yes, that can be... very much can be a parameter and yes, we hope to gain 36% in terms of the market share.

Manabu Akizuki - Nomura Securities Co., Ltd.

And what do you think is the trigger to achieve that?

Takehiro Kamigama - President and Chief Operating Officer

I think cost is the most important, but the performance should always be good. So cost is the most important. And these... as for suspension, in a sense I think it could be earned [ph].

Manabu Akizuki - Nomura Securities Co., Ltd.

My second question is related to high frequency business. You have sales increase and my question is related to revenue with the... in terms of module, how do you increase sales and what's the strategy for the high frequency products?

Unidentified Company Representative

The concentration and selection, and we will focus on our strength. And in terms of module, we don't think module itself will be able to give much profit. Actually with modules production, we can develop our business into individual products and the packaging technology can be gained, I think. And in the future, the thin film business we deal with can [indiscernible] and we can talk with our customers in the stage of development. And in terms of selling and developing components, I think it would be an advantage. In other words, because of the sales increase, of course, it is certain that the profitability has become better, but wouldn't think that we can be bought [ph] in that business.

Unidentified Company Representative

Any other person, yes?

Fumihide Goto - UBS Securities Japan Ltd.

Goto from UBS. I am sorry. This is a rather detailed question. The breakdown by quarter of restructuring expenses. I would like to know the results of Q1, Q2 for components and media; that is my first question. And second question is, now the profit increased or decreased, or you made a profit in heads, but as for other products although sales increased, but you were not able to offset that increase. Although you were able to increase sales, but the profit didn't grow as much as you anticipated. Why?

Unidentified Company Representative

Now regarding restructuring expenses, in Q1, 200 million, Q2 4.2 billion, so that's 4.4 billion. And electronic components in Q1 200 million, in Q2 1.3 billion. Media Q1 zero, Q2 2.9 billion, and of this 1 billion is included in the gain from a sale, so 1.9 billion. These are the negative factors. Now in Q3, 1.6 billion is anticipated and of this 1.5 billion is for components, and 100 million, that's the media that is lagging, and in Q4 6.2 billion. We said at the beginning of the year. Well, I will just do... so 200 million for electronic components. So what we have to do is already decided. So, I think the number will increase somewhat. So that's point number one.

And secondly, comparing Q1 and Q2, head sales were in line with the sales. We had some sort of a profit, but when it comes to component... electronic components, although we had sales, the profitability was not so good. Now we talked about our fixed cost of 5.9 billion. Of this, heads account for about 1 billion and the remainder, the balance is about the electronic components and sales increased by 10 billion only. So given the profitability, we were not able to absorb that. That's the reality.

Fumihide Goto - UBS Securities Japan Ltd.

Now, the head, 16 billion... increased by 16 billion, then profit should have been here. So you said 5 billion plus, maybe that was more than offset. And well the... was ahead.

Unidentified Company Representative

Well, I think that depends on your understanding of that, but as I said before, in Q1, there was a lot of discount for heads. It's getting better. But still, there are still a lot of discounts for heads and that was the situation of Q2. So maybe the profit is not as large as you think, but in Q3 and Q4 the product mix were changed, so the situation would change, we think.

Unidentified Company Representative

Any other question?

Unidentified Analyst

First of all, figure or numbers regarding heads, the Alps situation is clear. The quarterly index and the quarter-on-quarter price change that was discussed year- on-year on the forecast. On the profitability, the change between first and second quarters, has there been any improvement? Secondly, as the President said, basically the head business is cash cow. In other words, they need cash and they can't expect... always expect gain in profits and revenues.

The hard disk is 10% in terms of volume and the per unit cost will be reduced by 10% or sold. So you have to gain share or add value in order to gain new profits. And as for share, we've just talked about... I mean, you said cost important and on the other hand, you think you have a roadmap for the next-generation products and in that regard you need cash on cost, but eventually is there any room or possibility of leading to the gain of profits or revenue? And is it possible, is there a strategy they have deal with that or to achieve that?

Unidentified Company Representative

In terms of the numbers, we haven't completed the deal with Alps. So as for the forecast, this is the... the first quarter, if... 100 first quarter... 116 for the first quarter and 141 for the second quarter and in the third quarter I think number will further increase.

On the price discount, as I reported last time, we talked about 19%. This time for the first quarter, 9%, you may be confused about the two members. Let me explain that. Last time we said 19% year-on-year. That is the average price per unit for the HDD heads on the average. HDD and head stock are all included. And in that regard, the first and the second quarters, previous first and second quarters, there was a customer who delivered large head stock and in terms of average selling price in the first and second quarter of this term it's decreased. That's why there is 19%, but 9% year-on-year and 6% in the second half. That is... when you look at the same model and that is the discount of the selling price. I think that is... by that, we can recognize more appropriately. And as for the quarterly basis, in that first and second quarter of this fiscal year, with the improvement of product mix, the selling price is almost stable, no change. And in the second half relatively this price will be steady and with the higher percentage of the new products on the... in terms of the discount of price, selling price, we are I think in the better direction in this period. Yes, but we shouldn't too much rely on heads. So the same company-wide.

Unidentified Analyst

And as for media, in the second half, you need some cost with the continuation of the first half. But today, I think according to your today's presentation, is almost the same?

Unidentified Company Representative

Yes, 50 to 60% of the costs should have been second half, but probably 100 million yen will be transferred from the first half to second half, and I think with our capability we will be able to... I mean, we are aiming at gaining profits in the second half.

Unidentified Analyst

And to the President, in order to achieve this mid-term plan, you've been the President for over a year, and what do you think you have to change about TDK in terms of the characters of TDK and others' capacitors?

Takehiro Kamigama - President and Chief Operating Officer

Yes, but for example, the character of the company.

Takehiro Kamigama - President and Chief Operating Officer

Well, less speedy. How we can raise the speed? I think that should start from the factories. In the production unit, we have to raise the speed and then the staff will follow.

Unidentified Analyst

Thank you.

Unidentified Company Representative

We are running out of time, but we can entertain just one last person or questions. No? If not we would like to conclude today's meeting. Thank you very much for your participation.

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