Investor Relations | IR Events | Performance Briefing

[ Financial Results for Fiscal 2011 Performance Briefing ]Q&A

Q1. Regarding realignment in the hard disk sector, what is TDK's stance in confronting this issue?
A1. As you know, two major realignments have already happened?Western Digital's acquisition of HGST, followed by Seagate's purchase of Samsung's HDD business. Accordingly, it is expected that the market share of each company will continue to change from now onward. As for TDK, we have the production framework in place to cope with those changes.

Looking at the market down the road, data centers and cloud computing have captured a good deal of attention, which should translate into robust growth in hard disks in those fields. Even further ahead, we should see the emergence of products with added value, such as hybrids containing both hard disks and flash memory. The key point is quickly becoming the extent to which one can deliver products that boost recording capacity, and are faster, more efficient, and use less energy. This situation is predicted to push technological demands to a fairly high level. The outcome will be an environment where TDK can take greater advantage of its own proprietary technological capabilities. So going forward, we intend to strategically launch the sale of products that respond to these market trends.
Q2. On page 21 of the handout materials, you show sales of passive components by application. Can you discuss profitability in the passive components business by highlighting the situation for each product?
A2. From a profitability standpoint, the product with the highest contribution is inductive devices. In fiscal 2012, we plan to increase production by more than 30% in the capacitors business, which includes aluminum electrolytic and film capacitors. As for other passive components, profitability is constantly increasing in piezoelectric material components. But the product that grew most this term was high-frequency components, and we expect this category to continue evolving into a major earnings pillar in the current term.
Q3. Looking ahead, what products do you anticipate will become more profitable?
A3. That would be high-frequency components. In terms of remaining highly profitable, I would say inductive devices. As for capacitors, I think profitability will increase mostly in film and aluminum electrolytic capacitors.
Q4. Heat-assisted HDD heads are slated to debut in the fiscal year ending March 31, 2013. In terms of equivalent 2.5-inch drives, from what capacities will heat-assisted heads replace conventional ones? Also, what advantages does TDK possess in this area?
A4. In terms of 2.5-inch drives, heat-assisted heads will enter the mix from 1TB/P products. Essentially, preparations are being made to use these heads starting at double the drive capacity seen today. TDK's advantages lie in the ability to integrate thermal sources with conventional heads, and to propose ways to combine these as HGA, just as we have in the past. We want to leverage this technology to promote HGA as the de facto standard.
Q5. What level of capital investment can we assume TDK has made in heat-assisted heads?
A5. I'm afraid I cannot give you a monetary figure. What I can say is that in light of prevailing conditions, our investment strategy for the entire head business in fiscal 2012 is to focus on investments to upgrade our technology and enable TDK to emerge as a leader in cutting-edge technology. This includes in areas such as heat-assisted heads and the next future technology, which, if we're talking suspension, would be DSA (Dual Stage Actuator)-mounted HDD heads.
Q6. What impact did the recent disaster in Japan have on ceramic capacitors in the fiscal year ended March 31, 2011?
A6. For the fiscal year under review, the impact of blackouts caused by the earthquake was substantial. The power outage not only caused capacity utilization to drop, but forced us to scrap many items that were in the process of being produced. Regrettably, another blackout occurred on April 7. The scrapping of in-process items from that event too will have an impact.
Q7. Are we to understand that orders remain strong? Or have you begun to notice changes?
A7. Orders in March were quite brisk, and April is shaping up to be about the same level. We have, however, begun noticing modest effects among some customers over the last several days. While it's hard to predict what the future holds, as of now our best guess is that orders will be around the same as before the disaster.
Q8. Generally speaking, after the disaster, many businesses experienced an unexpected rise in orders as customers sought to restock inventories. However, from around mid-April, others have seen orders suddenly vanish due to supply chain bottlenecks. Do you expect orders to fall or rebound going into late April, May and June? Also, what does TDK's earnings picture look like for April?
A8. With effects still lingering from the March 11 disaster, plus the April 7 blackout, the situation in April will probably be worse in terms of earnings than March. With that said, the effects of the disaster on orders will be completely gone in May. So if we assume the usual level of orders, earnings should improve substantially from May. Nonetheless, we want to closely monitor trends unfolding among finished product manufacturers, who have seen their material procurement efforts affected. There is view that orders will be slightly lower in May, June, July and August, will bottom out in August, and are then likely to pick up again from September. But given how restoration efforts are proceeding, it is possible that orders may recover at a faster pace. So a key point to watch will be how far levels fall in May and June. On a different note, European orders are healthy at the moment, so we anticipate that these may cancel out any declines in the Japanese market.
Q9. In heads, I imagine that TDK's strategy to date was to capture market share based on the distinctiveness of its technology. Should we assume TDK will pursue a radically different course than TDK has to date?
A9. As for market trends, my take is that the recent disaster will trigger a change in thinking around drives serving merely as storage. In other words, I suspect that the shift to data centers will gain momentum going forward. The development of energy-saving, high-speed products, hard disks combined with solid state drives (SSDs), and hybrid hard disks will rapidly gain ground in the coming years. Similarly for data centers, instead of concentrating everything on a single data center, multiple facilities will need to be used in order to mitigate risk. This trend will require increasingly large capacity, so we anticipate substantial hard disk demand to emerge from the enterprise sector. Some think that larger capacity simply means increasing the number of disk platters or the number of heads. But that approach will undermine energy efficiency, which inevitably means new technology will likely be required. Given that general direction, our mission is to quickly make TDK's heat-assisted heads the de facto standard, then go after the enterprise sector, where future growth is expected.
Q10. This question is about items TDK produces in the Tohoku region, which suffered the most damage from the disaster. What does the current inventory situation look like? Also, what impact on earnings should we expect in the first quarter (April to June) and second quarter (July to September)?
A10. At present, inventories are very close to normal levels. This is probably true for other manufacturers as well, but we had inventory left from January and February, then carried out production in March together with partial inventory cutbacks. The same action was taken in April, so inventories will be tight, but the situation is not one that will adversely affect orders in May. So in terms of significant impacts on earnings, while there may be a slight effect in April, there should be none in May or June.
Q11. I take it then that situations in which TDK has been unable to supply or ship products, or to answer customer requests in other ways, have been limited?
A11. There are probably a few areas in which TDK has not been able to assist customers fully. In April, organic EL will certainly be one that will cause problems for our customers.
Q12. Is it possible that this impact that some customers are experiencing could lead to changes in TDK's share, its relationships with customers, or other risks?
A12. There is no risk of that in passive components, but just as you've said, we have lost some of our share in organic EL.
Q13. This question is about electric power. TDK has said it expects to cover half of its need through conservation, and to cover the rest through its own generating capacity. Does this mean, for example, that if power availability falls by 25% that TDK expects to maintain capacity utilization rates at 100%, or does it mean that power availability will fall by 25%, so production will be at 75%?
A13. Our estimate is that if electric power is reduced by 25%, our capacity utilization will remain at 100%.
Q14. Inventories have continued to decline across the industry over the past decade. With the disaster, we have seen cases in which companies that cut inventories too deeply had, in a sense, no backup inventory to fall back on, and also had their production efforts hindered with substitutes not available in time. Have you seen any changes in customers' supply chain management, or their approach to inventories, after being impacted by the disaster?
A14. My impression is that customers have changed their approach in the wake of the disaster. Until recently, the general trend among customers was to narrow down suppliers as much as possible and build partnerships with them, as well as to carry as little inventory as feasible. Since this approach has completely backfired, those with multiple suppliers have been able to take action with active suppliers, and manufacturers will likely be asked to carry more inventory going forward. My guess is that the debate in the future will be about where exactly to carry that inventory.
Q15. How are customers likely to view the cuts into TDK's share?
A15. Over the years, TDK has probably delivered products to companies it previously had not served, and, by the same token, other companies have made inroads among companies where TDK has had a fairly commanding share. While our share may have fallen slightly in certain products, there have been no huge changes overall.
Q16. What approach will you take with respect to structural reform costs this year? What costs do you expect to see, especially in light of the disaster?
A16. Structural reform costs have no specific endpoint; fundamentally, we book charges when needed as part of an ongoing effort to enhance corporate structure. As such, we expect to book structural reform costs in the fiscal year ending March 31, 2012 as well. But since the disaster has affected the scale and timing of these costs, they are currently under review along with full-year forecasts.
Q17. To the extent possible, could you give an outlook for the head business in the first and second quarters?
A17. If the first quarter of fiscal year ended March 31, 2010 was 100, then the first quarter of the current term will likely be around 120. I cannot comment on the second quarter right now, except to say that a rough picture of what to expect should emerge in about a month's time.
Q18. Shipment volume in the first quarter of fiscal year ending March 31, 2012 is projected to surpass the fourth quarter of fiscal 2011. How certain is that estimate?
A18. Highly certain. Shipment volume will be higher.
Q19. You mentioned that TDK is adopting its own power-generating capacity to cover capacity utilization. Can you elaborate on this? Is this a temporary and likely quite costly step? Or is it a permanent measure that TDK is taking to counter risk?
A19. Our stance is to ensure that TDK's firing furnaces in the Tohoku region, used for multilayer ceramic capacitors, multilayer inductors, and other products, can operate problem-free even amid power shortages. For other processes, our goal is to mitigate impact should blackouts occur, or to make it possible to cope by changing production shifts. We want to focus especially on backing up bases that operate 24 hours a day and those with firing furnaces. Two locations within the Tokyo Electric Power Company's service area have responded by adding their own power-generating capacity. The Kofu Plant, which produces thin-film components, has taken a "100% complete backup" stance to its own power needs. The other, the Narita Plant, which makes magnets, also has a firing furnace, and so is starting to introduce its own generating capacity. The issue of electric power is one of constant concern for TDK.
Q20. What trends do you see in electronic components for automotive applications, which account for a substantial proportion of TDK sales? It was stated earlier about automobiles that TDK had seen disaster effects quickly become acute. But looking at electronic components for automobiles?for example, crystals?orders conversely appear to be strong in April. In TDK's case, multilayer ceramic capacitors are heavily weighted toward automobiles, so what trends have you seen following the disaster? Also, could you tell us what impacts, if any, TDK is forecasting for the near future?
A20. The picture we are seeing in Japan versus outside of the country is quite different. First, in Japan, there is talk on the news and elsewhere that production is falling, or predicted to fall, among domestic manufacturers. But for TDK, at least for March and April, there have been no major changes. From what I've been hearing, there appears to be a great deal of variation by base among Tier 1 customers. The situation differs according to whether the manufacturer is in eastern, central, or western Japan. Put differently, some of the increase has come from orders shifting to central and western Japan when bases in eastern Japan were out of commission. The result is that there were no huge declines overall in March and April. Looking ahead, though, production volumes in Japan at least are decreasing, which will lead to adverse effects of some kind. In fact, outside of electronic components, other products used in hybrid vehicles, such as magnets and DC-DC converters, are declining. This is proof that inquiries from domestic manufacturers are falling.
Q21. This question is about capital investment in the fiscal year ending March 31, 2012. You spoke before about a substantial increase in production for aluminum electrolytic and film capacitors. What direction is this trend likely to take? And do you have an idea of what to expect in terms of depreciation?
A21. Investment will happen within the scope of depreciation, so we expect to make investments that slightly exceed those carried out in fiscal 2011.
Q22. In HDD heads, can you offer any hints about the HDD market or product strategies? Also, how will TDK's share change?
A22. In the fiscal year ended March 31, 2011, TDK's full-year share was 31%. Turning to business development for products, in drives for data centers, particularly 3.5-inch, high-rpm products, superior performance under a variety of circumstances is emerging as a key element setting products apart. So just as for the 500GB/P products for 2.5-inch drives that are the focal point of the fiscal year ending March 31, 2012, we expect TDK heads to be the main choice among customers alike, and are seeing concrete plans being established along this line. Based on this, we intend to take steps to boost TDK's share.
Q23. Is it possible that the recent realignment drama will spark changes of some kind in demands made with respect to head price or other areas?
A23. Price pressure is always present, so TDK too will have to make a greater effort with respect to price.
Q24. My question is about trends in head-related technology. Earlier, you suggested that TDK will introduce heat-assisted technology as the next head technology. Before that, though, where do you consider the limits of perpendicular magnetic recording (or PMR) to lie in terms of surface density? I also assume that TDK is exploring shingle-write technology as an option. What is your outlook for progress in this area?
A24. I would say that the defining point for existing PMR technology is the use of a shingle-write approach. Accordingly, TDK will use this technology in HDD sizes up to 750GB. For shingle write-compatible heads, TDK will develop products that bring an extra element to conventional PMR.
Q25. What do you consider to be the maximum surface recording limit for PMR technology? One theory I've heard suggests that it could be as high as 1 Tbpsi.
A25. In this industry, the limits of conventional technology have been pushed again and again, so it's hard to really say, but my guess is that going beyond 1 Tbpsi would likely require a completely new technology.

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