Investor Relations | IR Events | Performance Briefing

[ Financial Results for Fiscal 2012 Performance Briefing ]Q&A

Q1. What is your view on supply and demand conditions for HDD heads? At the previous briefing at the end of January, TDK projected an HDD head shipment index of 104 for the fourth quarter of the fiscal year ended March 31, 2012 (January-March period) and more than 120 for the first quarter of the fiscal year ending March 31, 2013 (April-June period). What is the reason for the slightly lower HDD head shipment index projections? What is the projection for the second quarter of the fiscal year ending March 31, 2013 (July-September period)?
A1. Looking at overall market conditions, when we gave the previous briefing, we had received strong sales inquiries for both the fourth and the first quarters, mainly as supply had tightened considerably in the wake of the Thailand floods. However, we are now revising our projections down slightly from the previous forecast. As a whole, HDDs are still in short supply. In fact, we have heard that some distributors have been unable to receive sufficient HDD shipments. However, production of 2.5-inch low-capacity HDDs was very large in the January-March quarter, so we think there is some easing in the tight supplies now taking place with respect to these drives. On the other hand, high-capacity type 3.5-inch and nearline HDDs continue to experience tight supplies. Based on this, we expect to see the HDD head shipment index exceed 120 in the second quarter of the fiscal year ending March 31, 2013.
Q2. I have a question about the ceramic capacitor business. How do you expect performance to change from the fiscal year ended March 31, 2012 to the fiscal year ending March 31, 2013?
A2. Regarding structural reforms, TDK has made progress on various measures, including the reorganization of sites, as planned. In terms of earnings, we are trying to create profitable operations by strengthening our manufacturing capabilities through structural reforms. We therefore expect to see a marked improvement in profitability. We are aiming to break even in the fourth quarter.
Q3. What was TDK's share of the HDD head market in fiscal 2012 and what is your outlook going forward?
A3. TDK's market share was around 27-28% in the first half, and rose to around 34% in the second half following the flooding in Thailand. As you know, TDK is currently assisting with a considerable portion of the HDD head production of HDD manufacturers that suffered damage as a result of the Thailand floods. In regard to our outlook for market share, we will naturally factor in the positive impact of capturing demand related to increased HDD head shipments in the nearline HDD and other fields. However, while keeping an eye on the extent of recovery in production in the HDD market, we must also take into account a small decline in our market share as the temporary boost in demand from the floods tapers off in the second half of fiscal 2013.
Q4. TDK is forecasting operating income of ¥57.0 billion for the fiscal year ending March 31, 2013. Of this amount, how much operating income does TDK expect to generate in the first quarter?
A4. First-quarter operating income is projected to account for just under 20% of the full-year operating income forecast. This forecast is premised on two factors. First, the Magnetic Application Products Segment should continue to post a high level of operating income in the first quarter, as in the fourth quarter of the previous fiscal year, due to the recovery in the HDD head business. Second, from the first quarter, we will no longer incur the structural reform expenses that were recorded in the fourth quarter of fiscal 2012.
Q5. Are you assuming only a marginal improvement in first-quarter earnings in the Passive Components Segment, excluding restructuring costs?
A5. Actually, we are expecting a considerable improvement compared with the fourth quarter as the operating loss in this segment will decrease.
Q6. What is your current earnings outlook for the fiscal year ending March 31, 2013?
A6. In the Passive Components Segment, we do not expect the benefits of structural reforms, such as the reorganization of sites and job cuts, to become apparent right away. We expect those benefits to start appearing from the second half of the fiscal year. Therefore, as we said earlier, we expect earnings to improve considerably in the first quarter relative to the fourth quarter, and then improve a little more in the second quarter, followed by further improvement in the third quarter. For the second half, we have a cautious earnings outlook for the recording devices business. However, we expect the Passive Components Segment to start improving in the second half due to the positive impact of higher sales from new orders for the smartphone market.
Q7. Regarding HDD heads, what percentage of total shipments did next-generation products, such as 500 GB/P heads for 2.5-inch HDDs and 1 TB/P heads for 3.5-inch HDDs, represent in the fourth quarter of the previous fiscal year? How will this percentage increase in the first and second quarters? What is your outlook for products across the entire industry?
A7. Starting with 2.5-inch HDD heads, we estimate that the percentage of 500 GB/P heads was around 33% in the fourth quarter, and around 60% for 320 GB/P heads in the same quarter. For 3.5-inch HDD heads, the percentage was just under 20% for 1 TB/P heads in the fourth quarter, and around 70% for mainstream 500 GB/P heads.
Q8. In the context of these changes, how do you expect TDK's next-generation product mix to develop?
A8. We expect the transition to 500 GB/P heads for 2.5-inch HDDs to be largely complete in the fourth quarter of fiscal 2013. We expect the shift to 1 TB/P heads for 3.5-inch HDDs to be around 70% complete in the fourth quarter. TDK's product mix should develop in line with these trends.
Q9. How is TDK dealing with unprofitable products in the course of structural reforms? In the Other Segment, the operating loss for the fiscal year ended March 31, 2012 was a large ¥4.8 billion, although this might include structural reforms. Could you please share your thoughts on how TDK plans to improve unprofitable products in the fiscal year ending March 31, 2013?
A9. In the fiscal year ended March 31, 2012, we recorded an operating loss on certain products due to such factors as new product launches. However, as a result of profitability improvement measures, including structural reforms, we aim to improve profitability to the breakeven point in the fiscal year ending March 31, 2013.
Q10. Are there any other unprofitable products whose profitability should improve?
A10. Yes. In the Passive Components Segment and the Magnetic Application Products Segment, we are managing unprofitable products at the individual product level. We intend to improve and restore the profitability of around half of all currently unprofitable products. The recording media business is an area where TDK has struggled. However, we expect profitability to improve in this business as we specialize in professional disks, which are high value-added products, and focus on products for the industrial equipment field going forward. Another positive factor is that amortization in this business has become considerably smaller than before.
Q11. Based on current technology, 500 GB/P heads were believed to be the limit for 2.5-inch HDD heads. Am I correct in assuming that a separate product will be rolled out before thermal assist heads are launched?
A11. 2.5-inch HDD heads will not end with 500 GB/P heads. In fact, various companies are working to develop 640 GB/P products for 2.5-inch HDDs using current technology. Thermal assist head technology will be the next step after that. Also, a product called "shingled write recording" might be rolled out as a bridge between current technology and thermal assist head technology, although there may be various constraints on applications. In response, TDK is steadily preparing to properly address all technologies by pursuing development of various HDD heads.
Q12. If possible, could you provide a breakdown of the factors behind changes in operating income for the fiscal year ending March 31, 2013, as you did for the fiscal year ended March 31, 2012?
A12. In the fiscal year ended March 31, 2012, a variety of factors weighed on earnings, such as the negative impacts of the Great East Japan Earthquake and the flooding in Thailand, as well as structural reform expenses. Taking these abnormal costs into consideration, we believe that costs should improve by around ¥13 billion in the fiscal year ending March 31, 2013. This projected improvement includes gains on sale of land. TDK also projects structural reform benefits of approximately ¥16.5 billion. We are assuming an exchange rate for the U.S. dollar of ¥77 for the fiscal year ending March 31, 2013, ¥2 lower than ¥79 for the fiscal year ended March 31, 2012. Previously, we said that a ¥1 change in the exchange rate would have a roughly ¥2.0 billion impact on operating income. However, as a result of various initiatives, TDK's current exchange rate sensitivity is such that a ¥1 change in the exchange rate would have an approximate ¥1.7 billion impact on operating income. Therefore, we are projecting a negative impact of around ¥3.4-3.5 billion due to foreign exchange effects for the fiscal year ending March 31, 2013. We expect the impact of increased volumes and falls in selling prices to be largely the same as in the fiscal year ended March 31, 2012. Meanwhile, we are projecting roughly ¥10-15 billion in cost improvements.
Q13. By around how much do you expect sales of rechargeable batteries to grow in the fiscal year ending March 31, 2013? I believe that lithium polymer batteries may have an opportunity for growth in new Ultrabook products. How does TDK view the prospects for this type of battery?
A13. We expect rechargeable battery sales to increase by around 20%. That said, it is still unclear whether Ultrabooks will grow to that extent. At the moment, we believe that demand for tablets will probably remain larger.
Q14. What can we expect in terms of capacity increases for rechargeable batteries?
A14. Capacity should increase by around 20-30%.
Q15. TDK is projecting capital expenditures of ¥85.0 billion for the fiscal year ending March 31, 2013. How will these projected capital expenditures break down in terms of the head business, passive components, rechargeable batteries and other areas?
A15. We anticipate that the head business will account for just under 30%, passive components around 40% and rechargeable batteries around 10% of the total capital expenditures of ¥85.0 billion.

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