Investor Relations | IR Events | Performance Briefing

[ 1st Quarter of fiscal 2013 Performance Briefing ]Q&A

Q1. What was the capacity utilization rate for HDD heads from the fourth quarter (January to March 2012) of fiscal 2012 to the first quarter (April to June 2012) of fiscal 2013? How do you expect the capacity utilization rate to change in the second quarter (July to September 2012) of fiscal 2013? Also, around which month do you expect it to bottom out?
A1. Let me briefly explain the HDD head capacity utilization rate. The rate dropped in the first quarter of fiscal 2013 due to production cutbacks at customers in June in particular. On average, the capacity utilization rate was slightly lower in the first quarter of fiscal 2013 than in the fourth quarter of fiscal 2012. The rate bottomed out between June and July, and we expect it to gradually recover in the second quarter.
Q2. What was the capacity utilization rate for front-end and back-end processes?
A2. Because the production lead time is longer for front-end processes, TDK lowered the capacity utilization rate gradually in front-end processes from around the middle of May 2012, when adjustments on an investment base began relatively early. With back-end processes, because the lead time is relatively short, we are able to adjust production in a way that matches customer demand. Capacity utilization dropped mainly in June and July and we properly adjusted inventories in response.
Q3. How did ceramic capacitor sales change between the fourth quarter of fiscal 2012 and the first quarter of fiscal 2013? I believe that you plan to complete base restructuring in the first half of fiscal 2013. How is that restructuring going? And what is your forecast for ceramic capacitor sales for the second quarter and thereafter?
A3. First-quarter ceramic capacitor sales were slightly higher than fourth-quarter sales. We expected a slight decline because we are limiting orders for unprofitable products as part of structural reforms. However, first-quarter sales turned out to be slightly higher than in the fourth quarter. Regarding structural reforms, base restructuring is proceeding largely as planned. We expect to complete base restructuring by the latter half of the second quarter, in other words, by the end of the first half. We will make a new start after that. In terms of sales for the second quarter and thereafter, sales will probably decline slightly due to ongoing efforts to curb orders of unprofitable products.
Q4. Is there a possibility that larger restructuring costs will be incurred in the second quarter?
A4. No. We will move some facilities and take other actions as part of base restructuring, but this was factored into our plans at the beginning of the fiscal year.
Q5. How do you expect sales and profits for each segment to trend from the first quarter to the second quarter?
A5. Basically, we expect earnings to be higher in the second quarter than the first quarter. With the Passive Components Segment, we expect sales as a whole to increase by between 5% and 7% in the second quarter from the first quarter. While ceramic capacitor sales are likely to decline slightly, sales of other passive components should rise from the second quarter. We estimate restructuring costs in the Passive Components Segment will be just under ¥3.0 billion. Including those costs, the segment will probably record an operating loss. Excluding those costs, there should be a considerable improvement in profitability.

In the Magnetic Application Products Segment, we expect flat sales volume of HDD heads. Sales will probably decline slightly, as we are assuming that the yen will strengthen from ¥80 to ¥77 against the U.S. dollar. Earnings will be affected by this.

In the Film Application Products Segment, we expect sales to rise by 30% or more in the second quarter from the first quarter, as rechargeable batteries in particular continue to post impressive sales. Earnings should also improve from the first quarter to the second quarter.
Q6. How much did TDK incur in restructuring costs in the first quarter?
A6. We incurred ¥0.2 billion.
Q7. Will you incur ¥3.0 billion in restructuring costs in the second quarter?
A7. Yes. We expect to incur restructuring costs of just under ¥3.0 billion.
Q8. What was your market share in HDD heads in the first quarter? Also, has there been any change in your initial market share projections for the second quarter and thereafter?
A8. Our market share in the first quarter was just over 30%. We expect our market share to remain at just over 30% in the second quarter because we don’t expect TDK’s HDD head shipments to change much from the first quarter and demand in the HDD market is basically flat.
Q9. I think you said at the beginning of the fiscal year that you were aiming for a market share in the mid or upper 30% range after the floods in Thailand. Do you expect your market share to increase or decrease from just over 30% at present?
A9. We will continue to execute a strategy for achieving a market share of 35% over the medium and long terms.
Q10. Could you comment on current technological trends in respect of HDDs? In particular, what changes are occurring now with high-capacity products? What is the plan at present for next fiscal year and thereafter with thermal-assisted HDD heads?
A10. Let me start with HDD technological trends. As you know, at present, the latest products are 500GB/P products for 2.5-inch HDDs. The next-generation products will be 640GB/P. These products are based on PMR (Perpendicular Magnetic Recording) and TMR (Tunneling GMR) technologies. Development is proceeding toward the commencement of mass production around the end of this year or the beginning of next year. The next generation of products, 750GB/P products, will probably initially employ shingled-write recording. TDK is already working on incorporating shingled write recording in its HDD heads, and is currently fine-tuning these HDD heads. We are also in the middle of developing HDD heads using thermal-assisted technology. We have already demonstrated a product with an areal recording density of approximately 1 terabit per square inch. We are working on refining this technology with the aim of commercializing this product in 2014.
Q11. Can 640GB/P and 750GB/P HDDs actually be produced as planned technologically speaking? This no doubt also involves finished product manufacturers, but are there still issues to be overcome? Please comment on this.
A11. Naturally, these products cannot be created with HDD heads alone. But we believe that all issues that we must surmount have been clarified. Whether or not these products can be achieved hinges on how much the pace of development can be quickened. Whatever the case, this is not simple technology.
Q12. What is your outlook for passive components from the second quarter?
A12. We are forecasting a rise of between 8% and 10% compared with the second quarter on average for second-half sales of passive components. High-frequency components will be a big mover. This is because we expect to begin sales to a customer with a strong market presence this fiscal year. From second quarter, we expect sales to increase mainly in high-frequency components and inductive devices to customers.
Q13. What are the market trends in HDD heads for the mission critical and nearline storage for servers in data centers? What is TDK’s position?
A13. Let me briefly explain the mission critical and nearline server markets as well as TDK’s position. TDK’s sales of HDD heads for mission critical servers account for approximately 7% of TDK’s HDD head sales volume. This is several points higher than in the past. We believe therefore that we have staked out a market position to a certain degree in the mission critical market. Regarding the nearline market, we see this as a field with considerable growth potential going forward. We have secured a solid position in this market by ensuring that we develop highly reliable products with high transfer rates that match the market.
Q14. Corporate and eliminations, a line item in calculating operating income, was minus ¥4.2 billion in the first quarter. I believe that you incurred more expenses than in previous years. What is the reason for this? Were these one-off expenses? Or do you expect the same level to be incurred throughout the fiscal year?
A14. Corporate and eliminations were approximately ¥3.6 billion to ¥3.7 billion a quarter in the previous fiscal year. In the current period, costs as a whole have actually decreased, but in allocating costs the amount allocated to head office was around ¥0.2 billion to ¥0.3 billion more in the first quarter causing the increase. We expect corporate and eliminations to be just under ¥4.0 billion for the second and subsequent quarters.
Q15. I have one question about HDD heads. I have heard from a components manufacturer affiliated with a finished products manufacturer that the design margin is shrinking, making design a tough business to be in. With HDD heads, historically in the past we have seen repeated examples of technologies being brought in from outside so that production is performed internally. What impact has this shrinking design margin issue had on HDD heads? Also, will more HDD heads be produced in-house and will it be harder to configure all the elements to commercialize products as a result?
A15. That’s a very difficult question. As you point out, along with areal recording density increasing, the design margin, including drives, is rapidly shrinking. In regard to HDD heads and HDD media in particular, the structure of write heads and read heads is becoming more complex, since detailed control is required of things like flying height. The fact is that the structure is extremely difficult to produce. What’s more, the function for controlling the spacing between HDD heads and media and other functions are being incorporated into HDD heads. As a specialist HDD head manufacturer, TDK aims to provide the latest technologies by closely collaborating with media and drive manufacturers. TDK recognizes that drive manufacturers also draw up future roadmaps based on collaboration with parts and materials manufacturers. We want to develop a business that can contribute to this development process.

Turning to your question about the impact on HDD heads of the manufacturer’s design margin, let me give you the example of dual stage actuator (DSA) suspensions. TDK produces suspensions internally, and earns a margin as a manufacturer on this technology. At present, TDK has the leading share of the market for DSA suspensions. We intend to continue leveraging our competitive edge in this field.
Q16. How much do you expect the HDD head shipment index to rise in the second half of fiscal 2013 from the 109 level projected for the first half? Calculating backwards from the 660 million HDD units forecast for fiscal 2013, assuming second-quarter volumes are flat compared with the first quarter, then the index should be around 120 in the second half of fiscal 2013. Is that calculation correct?
A16. Yes, it should be around 120 as you surmise.
Q17. How will the profitability of batteries change between the first and second quarters, with volumes increasing in the second quarter? Furthermore, I think production capacity has increased around 20%. But with volumes increasing, by how much will you increase production capacity toward next fiscal year?
A17. We expect to see a slight improvement in rechargeable battery profitability in the second quarter compared with the first quarter. We will ramp up production capacity by 20% to 30% toward next fiscal year.

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