Investor Relations

[ 3rd Quarter of fiscal 2013 Performance Briefing ]/span>Q&A

Q1. My question concerns restructuring. Could you give me an image about the extent to which your current plans are assuming a recovery in profitability and operating income after restructuring?
A1. It is difficult to give you specific figures because we are still finalizing structural reform plans. However, we are in the process of formulating a plan that will include targets for the cost of sales ratio and level of general and administrative expenses in particular.
Q2. I have a question about HDD heads. Could you explain in a little more detail the reasons for the upturn in third-quarter shipments and the fourth-quarter adjustment?
A2. Regarding the third quarter, some products for several types of HDD heads that were scheduled for shipment in the fourth quarter were actually shipped ahead of schedule at the end of the third quarter at the request of customers. So, while the HDD head shipment index shows 107 for the third quarter, if you took out these advance shipments, the index figure would have been more like 101 or 102. You should assume that the adjustment will only be of a short-term nature.
Q3. You are projecting an operating loss of ¥6.5 billion for the fourth quarter. What explains the ¥11.6 billion projected deterioration in operating income from the third quarter to the fourth quarter?
A3. Let we explain why we see operating income deteriorating approximately ¥11.6 billion from the third quarter to the fourth quarter. The first reason is a projected increase of approximately ¥3.0 billion in restructuring costs from the third quarter. These costs are mainly for passive components. In addition, in passive components, we expect to see lower sales of products for the communications market, as we said earlier, and to see a loss from lower capacity utilization as a result of this. Also, in magnetic application products, we forecast lower sales of HDD heads and magnets and a loss from lower capacity utilization. Projected lower sales of rechargeable batteries in film application products is another reason.
Q4. HDD shipments for the fiscal year ending March 31, 2013 are forecast at 566 million units. How many units are projected to be shipped in the fiscal year ending March 31, 2014? Furthermore, what is your forecast for HDD head shipments for the same fiscal year? Additionally, was there any change in the capacity utilization rate between the second and third quarters in front-end or back-end processes? Please comment on the necessity to recognize impairment losses given the capacity utilization rate has been poor.
A4. Projected HDD shipments for the fiscal year ending March 31, 2013 have been revised downward to 566 million units. We are presently looking carefully at shipment forecasts for the fiscal year ending March 31, 2014. For the first half of the fiscal year, shipments will probably be between 135 million and 136 million units on a quarterly basis, the level they are now. However, it is difficult to forecast shipments for the second half of the fiscal year ending March 31, 2014, due to variables such as replacement demand for switching business PCs from Windows XP to Windows 7.

Turning to HDD heads, we expect to see a slight difference from HDD shipment movements. In particular, we expect to see a drop in heads for 2.5-inch HDDs, especially with 2 heads. On the other hand, we expect to see an increase in shipments of HDD heads for so-called nearline HDDs, which should initially use 8 to 10 HDD heads and up to 12 to 14 in the future. So, while in the short term we probably won’t see a rapid increase in HDD head shipments, we should see HDD head demand rise over the medium term.

We do not expect to recognize an impairment loss on production facilities. Regarding back-end processes, since we believe we have a system that allows us to adjust production to match customer demand, we don’t plan to take an impairment charge. With front-end processes, the number of production processes has increased rapidly as wafer production generations have advanced. As a result, equipment for which we would ordinarily have had to recognize an impairment loss has been diverted for producing complex next-generation HDD heads, so we are using equipment efficiently. For this reason, we also don’t expect to recognize large impairment losses in front-end processes.
Q5. You are projecting an operating loss of ¥3.5 billion for the fourth quarter, even after stripping out ¥3.0 billion in restructuring costs. What change should we expect to see in the first quarter of the fiscal year ending March 31, 2014 and thereafter?
A5. Inventory adjustments have started in the fourth quarter in front-end processes for passive components and HDD heads, but these adjustments are of a one-off nature. As these factors won’t be present in the first quarter of the fiscal year ending March 31, 2014, we should see profitability improve.
Q6. So, would it be correct to assume that you may move back into the black from the first quarter of the fiscal year ending March 31, 2014?
A6. Yes.
Q7. What market share in HDD heads are you projecting over the medium term?
A7. We are projecting a share of just over 30% for the fiscal year ending March 31, 2013. Over the medium term, we are aiming for a share of 35% or more.
Q8. You have said that you plan to take further steps in passive components. In terms of base optimization, I guess that you have also discussed growth strategy and other topics from a more global perspective. Could you comment on how you plan to improve overall operations in the fiscal year ending March 31, 2014?
A8. We plan to continue stepping up the pace of structural reforms. With ceramic capacitors, we have already finished one round of reforms, including integrating bases. With high-frequency components, however, we intend to bolster our structure targeting smartphones and tablet PCs, so that we are better able to quickly respond to customers’ requests. We hope that these actions will translate into more orders in the future. With piezoelectric materials and products, as before, we think we can create a business structure that generates sufficient earnings by continuing to focus our energies on development.
Q9. You have lowered your operating income forecast for the fiscal year ending March 31, 2013. How is the ¥5.2 billion loss from lower capacity utilization split between the third and fourth quarters? Or will the loss from lower capacity utilization be booked entirely in the fourth quarter?
A9. Approximately ¥1.8 billion will be booked in the third quarter, and the remaining approximately ¥3.4 billion will be booked in the fourth quarter.
Q10. I have a question about SAW filters. What do you see as problems at present? And how do you intend to rectify them going forward?
A10. We believe that we must provide a faster and better response for qualification for customers. To this end, we plan to build an appropriate structure as close as possible to customers.
Q11. You are projecting that passive component sales in the fourth quarter will be between 2% and 4% higher than in the third quarter. Could you tell us how you see sales growing for each of the three product categories in passive components?
A11. Our fourth-quarter forecast assumes the yen will depreciate substantially, from ¥81 to ¥85 against the U.S. dollar and from ¥105 to ¥115 against the euro. Excluding the sales increase due to foreign currency fluctuations, we aren’t projecting a large change in sales from the third quarter.
Q12. I’d like firstly to confirm the meaning of a certain item. Does the loss from lower capacity utilization refer to a loss arising from low production due to the reduction of inventories rather than to low shipment volumes? Please define this term. Capacity utilization naturally drops when sales decline, but is this included in what you call loss from lower capacity utilization?
A12. The change in sales isn’t included. It is equivalent to the drop in capacity utilization from rightsizing inventories that have built up or exceeded a suitable level.
Q13. Please tell me more about the status of HDD head operations. In the third quarter, front-end capacity utilization dropped from around September, yet shipments rose, leading to higher-than-expected sales. However, it seems that profits were largely as expected, because of the drop in capacity utilization. It seems that you are projecting lower shipments for the fourth quarter than previously assumed. Given this situation, what are you doing to address capacity utilization? And how will profits change as a result of this? Furthermore, while you probably don’t know what demand will be like for HDDs in the first quarter (April-June) of the fiscal year ending March 31, 2014 at this stage, do you expect HDD head shipment volumes to rise somewhat?
A13. We have gradually adjusted production since the beginning of the second half of the fiscal year ending March 31, 2013 in front-end process and elsewhere, including trimming inventories. Even so, we were still able to ship quite a volume of HDD heads in the third quarter. But we expect orders to drop in the fourth quarter. Accordingly, we are running our operations with due consideration always given to the right level of inventories. We may in fact adjust capacity utilization further in the fourth quarter. In terms of back-end processes, because we are able to adjust production flexibly to match customer demand in a relatively short time, we plan to reduce front-end-related inventories further as we head toward the end of the fiscal year.

Regarding the outlook for the first quarter of the fiscal year ending March 31, 2014, we believe customer inventory adjustment will have run its course after the end of the Chinese New Year. For this reason, we believe we will see a slight rebound in orders in the first quarter.
Q14. I have a question about ceramic capacitors. I get the impression that ceramic capacitor operations are a little slow to improve profitability. Is this because demand has been worse than expected?
A14. In the past, we said that these operations would move back into the black in the fourth quarter. However, we now plan to restore profitability by the end of March 2013. There are certain conditions for this though. One is that the current exchange rate holds. Another is for sales for automotive use to remain healthy. And we need to restrict the number of unprofitable products. At present, the share of sales from automotive-related applications is rising. Sales volume for engine control units (ECUs), particularly for hybrid automobiles, is increasing, as is the average unit price. At the same time as pushing ahead with cost structure reforms through restructuring, we plan to bring out high-value-added new products, so as to grow this business’ top line.
Q15. I expected to see TDK achieve profit improvement in high-frequency components in the second half of the fiscal year ending March 31, 2013 on top-line growth in Wi-Fi modules and other products. However, it seems that sales didn’t eventuate as planned because of production changes at some customers. Looking ahead to the fiscal year ending March 31, 2014, do you expect to improve earnings through additional sales of products other than those you are selling in the current fiscal year? Or will profitability improvement come from an extension of what you have done heretofore.
A15. With Wi-Fi modules in high-frequency components, we want to maintain a good balance between profitability and the level of operations. At present, volume has fallen due to customer production cutbacks, but we believe this is only a temporary situation. Furthermore, we are seeing growth in China in discrete products?individual products rather than modules. And we still believe there is growth to come in discrete products in the Chinese market, so we are confident we can grow. In other high-frequency components, whether you are talking about diversity modules or FEMiDs (front-end modules with integrated duplexers), if we can raise capacity utilization by ensuring we capture sales, we believe we can improve earnings as a natural extension of our current operations.
Q16. If you cannot deliver diversity modules to multiple manufacturers, I don’t think you can raise capacity utilization can you? Or can you achieve higher capacity utilization by winning a large order from one company? I would expect that there is a very high likelihood of winning an order from at least one company…
A16. It depends on the customer, but customers that have many models have operations split regionally in North America, Europe and elsewhere. They probably split operations because some places are strong and some are weak depending on the band.
Q17. My question concerns the development of next-generation HDD heads. I know it depends on customers’ circumstances, but about when do you think we will see thermal-assisted HDD heads? Also, assuming you can answer my question, what will the capacity be?
A17. Thermal-assisted recording is an area TDK is working fervently on. As you point out, because this depends on customers’ products, we cannot determine the timing. But development efforts are proceeding with the goal of providing an environment to allow for TDK’s heads to be tested to check that HDDs work without problems before the end of 2014. The target for development is to achieve a recording density of 1 TB/P in 2.5-inch HDDs and 2 TB/P in 3.5-inch HDDs in the first generation of products, which would be equivalent to twice the recording density at present.