Investor Relations | IR Events | Performance Briefing

[ 2nd Quarter of fiscal 2013 Performance Briefing ]Q&A

Q1. My question concerns the HDD market forecast. TDK has lowered its forecast of about 660 million units at the end of July to about 575 million units at the end of October. What are your forecasts for the third and fourth quarters of fiscal 2013, the fiscal year ending March 31, 2013? Also, if possible, please comment on next year. Furthermore, how do you expect the HDD head capacity utilization rate to change from the July-September quarter to the October-December quarter?
A1. We project 140 million units for both the third and fourth quarters in the HDD market. Regarding next year, one positive development for the market is that there should be a certain level of demand before support ends for Windows XP in 2014. The market should grow around 2% to 5%, since there are no factors for dramatic growth at present.
To answer your second question about the HDD head capacity utilization rate, we have adjusted the back-end rate so that it is roughly matched to sales. Consequently, production has been adjusted to just under 80% of TDK's maximum production volume. Turning to front-end wafer production, the third-quarter capacity utilization rate is expected to be a little low, reflecting the increased inventory resulting from projecting high demand in the first half, because the lead time is very long. We project a rate of less than 60%. The fourth-quarter rate should improve as inventory levels come down.
Q2. What was the front-end capacity utilization rate in the second quarter?
A2. The second-quarter rate was somewhere in the range of 65% and 70%.
Q3. My question concerns ceramic capacitors. Were structural reforms, such as restructuring of production bases, finished at the end of the second quarter? Also, do you expect to incur restructuring costs in the second half of fiscal 2013?
A3. Production base restructuring and other structural reforms are progressing largely as planned. Since it continues to be challenging to generate earnings in ceramic capacitors, we will continue to improve earnings through the fourth quarter. We project restructuring costs of ¥1.4 billion for ceramic capacitors in the second half of fiscal 2013.
Q4. TDK incurred restructuring costs of ¥0.2 billion and ¥1.0 billion in the first and second quarters, respectively, in passive components. Were these costs mostly accounted for by ceramic capacitors?
A4. Restructuring costs for ceramic capacitors in the second quarter were ¥0.6 billion.
Q5. My question concerns changes in HDD head earnings and overall composition. From the first quarter to the second quarter, sales in recording devices as a whole dropped ¥4.1 billion, yet earnings in magnetic application products dropped around ¥5.1 billion, excluding structural reforms and insurance payouts. Besides lower volumes, what other factors contributed to the large earnings drop? Furthermore, do you expect earnings minus insurance payouts to drop further again in the third and fourth quarters?
Excluding insurance payouts, second-quarter earnings were pretty low. You are projecting earnings of ¥20.6 billion for the second half, meaning you must generate earnings of around ¥10.0 billion in the third and fourth quarters. Please comment on projected changes in earnings by segment from the second quarter through the third and fourth quarters.
A5. As you mentioned, we received an insurance payout of ¥4.5 billion in the second quarter in the magnetic application products segment. This segment's results also include ¥0.8 billion in restructuring costs. Stripping out these factors, earnings were lower from the first to the second quarter. HDD heads' earnings dropped because of the fall in sales volume and monetary sales. In magnets, which are included in magnetic application products, second-quarter earnings were slightly lower compared with the first quarter, with changes in rare-earth prices having a temporary negative impact.
Q6. I'd just like to confirm something. Am I correct in assuming that changes in areas other than HDD heads have led to decreased earnings for magnetic application products, and earnings for HDD heads were lower because of falls in monetary sales and sales volumes in HDD heads?
A6. Yes. Falls in areas other than HDD heads, including power supplies, were large.
Q7. What changes in earnings do you expect in the third and fourth quarters from the second-quarter level for each segment?
A7. With passive components, at present we expect to incur restructuring expenses of around ¥2.0 billion in the second half, with around ¥1.0 billion in each of the third and fourth quarters. That means we are projecting restructuring costs for the full year of upwards of ¥3.2 billion. Earnings are projected to improve in the third and fourth quarters.
In magnetic application products, while the index suggests a slight increase in volumes in the third quarter in HDD head volumes, we expect sales in monetary terms to fall 1% to 2%, due to price discounting and price pressures. Meanwhile, we expect film application products to remain strong, as they were in the second quarter.
Q8. Stripping out insurance payouts, what extent do you expect earnings in magnetic application products to fall in the third and fourth quarters?
A8. While sales shouldn't change in HDD heads, we expect to encounter some pricing pressure. Earnings should return in other products.
Q9. So as a whole you're saying there shouldn't be much of a change, excluding insurance payouts?
A9. Yes
Q10. TDK is tightening costs again, but what benefits do you expect to derive from this cost management in fiscal 2014? You have been engaged in extensive structural reforms for more than a year now. But what are the issues TDK must still address in the current operating environment?
A10. Regarding costs, we have been looking closely at overseas facilities in particular. We are analyzing each facility with a low return on investment. We plan to actively use facilities that can be reused, including idle assets. Our approach is to try to expand our production capacity a little, while holding down investments as much as possible. This includes facilities that can be used if reformed. So this is what we are doing overseas in particular with facilities. Cost management also extends to purchased products in each business. Heretofore, management practices have not been the same at each plant. We plan to remedy this. Looking ahead, we plan to rigorously manage costs, including areas untouched thus far. We expect capital expenditures in fiscal 2014 to be lower than the fiscal 2013 level as a result of our actions. We will work to ensure there is no drop in our production capacity, while improving cash flows.
Q11. Do you believe that the structural reform initiatives you are implementing at present will put in place the right management environment for prevailing in the ceramic capacitor market going forward?
A11. Yes, that's what we believe. In product development, our plan is to continue to grow in ceramic capacitors for industrial machinery, automotive applications and power applications. We are determined to bring new products to market to this end. We are concentrating on developing 0402 and smaller ceramic capacitors, so we will continue to channel development resources into this field going forward. After the completion of the current structural reform initiatives bring better balance to our earnings, we believe that this field of ceramic capacitors will be a major driving force behind business growth.
Q12. To what extent do you expect component proposals at the design stage to improve earnings in the second half of fiscal 2013 and fiscal 2014 in high-frequency components? Also, what risks do you see in the second half of fiscal 2013?
A12. As you suggest, it continues to be challenging to generate earnings in high-frequency components. Essentially, we don't think we have seen sufficient benefits yet from our market-oriented efforts, partly because of customer schedules in the first and second quarters. However, we think we will see benefits begin to emerge in the second half of fiscal 2013 because there's a lot we've worked on. In fiscal 2014, there will of course be individual products, but there'll be modules as well. One product is power inductors. An important factor for products in this area is that IC manufacturers are gradually approving products. We think this is a field where we can demonstrate our strengths going forward.
Q13. TDK has announced products made from new materials with high capacitance like 0402 in ceramic capacitors. But what are you doing in terms of market-oriented design in this area? And how important is this product for breaking even in ceramic capacitors? Please comment on fiscal 2013 and fiscal 2014.
A13. We announced a new 0402 product after a long time the other day in multilayer ceramic chip capacitors. We announced a product with a rated voltage of 6.3 V, meaning it is suitable for applications that have used 4V products to now. We continue to make improvements in earnings through structural reforms this fiscal year, but we are hopeful that these distinctive new products, including the newly developed materials, will generate earnings in a growth phase ahead. As we have said before, we aim to expand business in particular in the automotive electronics field and fields with distinctive cutting-edge products.
Q14. Slide 14 shows your outlook for the third and fourth quarters. I'm particularly interested in changes in the fourth quarter in passive components and film application products. Typically, sales drop in the January-March quarter for seasonal reasons. But the projected increase in passive components must be because of moves by a specific customer mustn't it? Or is this because of seasonal changes? Recently, sales have increased more in the January-March quarter than the October-December quarter.
A14. Both factors are relevant. We don't expect much of a drop in the fourth quarter (January to March 2013).
Q15. What is your outlook for HDD heads next year, with HDD manufacturers operating at a lower level in an HDD market that is flat or growing only slightly?
A15. HDD manufacturers will probably enter a difficult period next year. Looking ahead, TDK will of course work on breakthroughs in heat-assisted heads and other areas. By quickly developing these technologies, we will promote our strength and value to the market. With volumes of current products not growing, we plan to step up efforts to have our products used in models that use more heads, by providing customers with products such as high data transfer rate products, which we believe will grow going forward.
Q16. In the past, new PC models have been released every six months, and HDD capacity has continued to increase as has memory capacity. However, memory capacity hasn't increased recently. Is HDD capacity something you think will increase going forward? Do you think it will stop at 250GB, for example, in next year's PC models? Excluding the server field, where do you think most of the demand will be concentrated?
A16. At present, there is an ongoing shift in mainstream 2.5-inch HDDs from 320GB to 500GB. Going forward, we therefore expect 500GB products to account for an increasing share of our production. In addition, in terms of product development, we plan to supply 640GB products in the first half of 2013 as the next milestone. We thus believe there is further potential for growth in areal recording density.
Q17. So will the capacity of HDDs used in PCs increase? If capacity doesn't increase, that means the number of heads used will decline. How is the best way to look at the trend?
A17. As you point out, the capacity of PC HDDs themselves probably won't increase sharply going forward. Against this backdrop, the HDD head market will most likely shift focus to data centers, which use more heads. Therefore, we think that the number of heads used will tend to rise, and with this we intend to develop markets so that more of our heads are used.
Q18. Please comment on the impact on operating results for fiscal 2013 of the three areas mentioned on slide 9 of the presentation materials: reliable execution of structural reforms, review of capital expenditure and research and development expenses, and thorough cost reductions in material purchasing and overheads. Specifically, what benefits have you assumed? Or are you assuming those benefits from next fiscal year onward, not the current fiscal year? Please clarify the situation.
A18. Regarding reliable execution of structural reforms, we have continued to implement reforms since the previous fiscal year, so those benefits are included in our current plan. With capital expenditure, we plan to review items one by one. In areas we are closely scrutinizing now, we are assuming benefits of several hundred million yen in fiscal 2013 and more benefits in fiscal 2014 and thereafter. With research and development expenses, we will conduct reviews of equipment and other aspects going forward, so we cannot really comment on numerical benefits for fiscal 2013. With material purchasing, we have been expanding overseas procurement in particular since the end of the second quarter, and are repeatedly looking at purchasing cheaper materials and parts procurement, as we strive to reduce variable expenses. We expect benefits to emerge in the second half of fiscal 2013. With other expenses as well, we expect benefits in the second half of the current fiscal year, but we plan to do more than shown on the slide and generate more benefits.
Q19. Assuming the HDD market only grows 2% to 3% in fiscal 2014, I guess you'll have surplus production capacity for HDD heads. What actions are you going to do about that?
A19. Areal recording density is increasing and with it front-end production work is increasing. For this reason, when new products are released in the future, there won't be much slack. That said, we are conscious of the need to reduce investments in production capacity, given the market environment. But we will continue investing in technology to bolster our competitiveness.
Q20. I was under the impression that the life expectancy of HDD head production facilities was a little short. Does what you're saying mean that there's some new technology or innovation that can extend the lifetime of facilities a little? Or is it just an extension of what you have been doing before?
A20. The technology cycle with HDD head production facilities is very fast. However, we don't intend to discard previous front-end facilities and produce heads with brand new processes. Rather, we will augment existing facilities with new technologies. What this means is that we won't replace previous facilities with new facilities, but will reform facilities, adding new technologies to previous technologies.
Q21. Film application products saw a considerable rise in earnings in the second quarter. There was obviously the insurance payout, but given the temporary investment freeze, in preparing for fiscal 2014 to what level can you raise maximum production capacity? I expect that you'll raise present capacity little by little in the third and fourth quarters, but is it correct to assume that you can raise profitability in fiscal 2013 without making investments? Furthermore, aren't you thinking about raising production capacity in fiscal 2014?
A21. We intend to temporarily freeze capital expenditures in relation to electronic components, but we are also considering about increasing capacity for batteries. How to strike the right balance is a hot topic at present. We also plan to change the production approach a little more, so we achieve increased production at the same time as rationalization. We don't think we have much choice other than to invest in strengthening battery production in fiscal 2014 and thereafter.
Q22. Is it correct to assume that your share is rising in batteries?
A22. We expect the market for polymer batteries to grow and we plan to meet all customers' orders as much as possible. We want to create a platform for doing this.
Q23. Is my understanding correct that you haven't changed your projection for the number of heads used per HDD for fiscal 2014? In the past you've explained that TDK was targeting a market share of 35%. Has this target changed? Also, when do you start investing in heat-assisted HDD heads? And when do you expect the benefits to emerge?
A23. As we said before, we expect the number of heads per HDD to increase in nearline servers, so the number of heads as a whole should increase. So, while growth in the HDD market should only be around 2%, we expect higher growth in the number of HDD heads, of around 4% to 5%. At present, our market share is approximately 31%, but we are still aiming to increase it to 35% over the medium term by providing distinctive products and heat-assisted heads. We don't expect to have to invest that much in front-end processes for heat-assisted heads. But we will have to progressively invest in back-end processes, because lasers are required for assembly work. We will probably invest progressively from 2014, when mass production will begin.

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