Investor Relations | IR Events | Performance Briefing

[ 1st Half of fiscal 2001 Performance Briefing ]President's address

Hajime Sawabe President and CEO

Hajime Sawabe
President and CEO

Thank you for taking time from your busy schedules to attend today's meeting. I will begin my remarks with a report on our operating results for the six months ended September 30, 2000, which is the first half of the fiscal year ending on March 31, 2001.

Consolidated net sales increased 6.8% to 352.0 billion yen and operating profit rose 0.4% to 36.4 billion yen. Interim net income increased 39.6% to 32.6 billion yen. Net income per share rose from 175.36 yen to 244.96 yen and our ROE improved from 8.8% to 11.1%. Other income for the interim period includes a gain of 12.5 billion yen on the establishment of a trust to fund pension liabilities, leading to the increase in net income for the period.

There are several noteworthy points regarding our results. First is the effect of foreign exchange rates. As you are aware, overseas markets account for a very high share of TDK's sales. In the past interim period, overseas sales were 65.7% of total sales, 0.5% higher than one year earlier. The yen appreciated 9% against the U.S. dollar in relation to last year's first half, rising from 117 yen to 107 yen. The yen also appreciated 20% against the euro. The yen's strength thus reduced translations of overseas sales into yen, lowering net sales by about 24.5 billion yen and operating profit by about 10.1 billion yen. We estimate that a one-yen change in exchange rates raises or lowers our annual sales by about 4.8 billion yen and operating profit by about 2.0 billion yen. Furthermore, an 8.2% reduction in sales prices reduced sales by 31.4 billion yen, mainly in the HDD head and recording media sectors. However, we were able to offset the effect of falling prices by increasing output and raising productivity. Operating profit increased by 140 million yen over the previous year's first half to 36.4 billion yen. This year, our operating profit in HDD heads and recording media fell below our initial plan, but growth in electronic components offset these declines.

By product sector, both the electronic materials and electronic devices sectors benefited from strength in markets for information and communications equipment, including mobile phones and PCs. Further supported by the increasing use of digital devices, we achieved large increases in sales of multilayer chip capacitors, multilayer chip inductors, inductive devices, high-frequency components and EMC components, among others.

Sales in the electronic materials sector increased 29.8% to 109.3 billion yen. This sector includes multilayer chip capacitors, ferrite products, magnets and other components. In the electronic devices sector, which includes high-frequency components, sales increased 19.9% to 75.1 billion yen. In the recording devices sector, however, we saw declining yields on heads with an areal recording density of 15 gigabits per square inch, a product that we began shipping in the fiscal year's second quarter. Results were further impacted by heavy rains, lightning and other storms that hit Japan's Chubu region in September, dramatically reducing our shipments. The result of these factors was a 9.0% decline in sales to 91.8 billion yen. Regarding demand trends in the HDD market, this sector's primary source of sales, the number of HDDs produced worldwide rose from 166 million units in the first half of last fiscal year to 230 million in the first half of this fiscal year. However, the average number of heads used per drive fell from 3.7 to 3.1. Total demand for heads therefore remained about the same at 621 million units. As our shipments declined, our share of the HDD head market decreased by 2% to 32%.

Looking ahead to the next fiscal year and beyond, we believe that this year will mark the end of the current downturn in head shipments because of projected growth in sales of such products as home servers and home entertainment equipment. Additionally, we expect to solve the production yield difficulties by December and return HDD head yield to the same level that we had in the first quarter of this year.

In the recording media & systems segment, sales fell 11% to 62.8 billion yen because of a rapid drop in CD-R disk sales prices and declining demand for audiotapes. The segment posted an operating loss of 2.8 billion yen. We plan to move quickly to improve our recording media business, including an improvement in the profit structure. CD-R disks, which were profitable last year, generated a loss as an oversupply of these disks caused prices to fall by about half. This was the reason for the segment's operating loss. We have thus changed our original thinking, which was to generate profits by switching from audiotape and videotape to optical disks. Our optical media business will be focusing on DVDs and other leading-edge technology. However, we will not necessarily produce all of these products internally. We will also be rapidly realigning our recording media production bases and sales channels. We plan to complete all these actions by the middle of the next fiscal year.

Now I would like to discuss our parent company results. Net sales increased 10.0% to 234.0 billion yen, operating profit was up 42.4% to 11.7 billion yen, current income increased 16.6% to 35.0 billion yen and net income was down 88.3% to 2.2 billion yen. The growth in sales and operating income was attributable to higher sales of multilayer chip capacitors and high-frequency components to manufacturers of communications equipment. The drop in net income, however, resulted from an expense of 34.6 billion yen due to the adoption of a new accounting method for retirement benefit liabilities. This expense is net of a gain of 15.2 billion yen resulting from the establishment of a trust to fund these liabilities. This was responsible for the 88.3% drop in net income. Interim dividends per share were 30 yen

Our projections for the full fiscal year ending on March 31, 2001 are based on a U.S. dollar exchange rate of ¥107 in the first half of the year and 105 yen in the second half. We estimate that consolidated net sales will increase 6.8% to 720 billion yen, operating income will increase 0.5% to 75 billion yen, income before income taxes will rise 17.1% to 86 billion yen and net income will be up 16.3% to 59 billion yen. We estimate that net income per share will be 443.27 yen. I apologize for the need to make these revisions to our estimates as of the end of this year's first quarter, but we had no choice because of the large decline in HDD head shipments.

I would like to discuss the differences between our current estimates and our outlook as of the end of the first quarter. First is exchange rates. Earlier this year, we were basing our estimates on a U.S. dollar exchange rate of 100 yen in the second half of this fiscal year. Now we are assuming a rate of 105 yen. Second is continued strength in demand for electronic components because of expansion in the data communications market and the growing use of digital technology. Although there were mobile phone inventory reductions in some sectors, mobile phones do not account for a very high share of our electronic component sales. This year, we expected that global mobile phone sales would be 420 million units. But most projections appear to be in the 400 million range. Since this is only a small difference from our original estimate, we do not expect this to affect us. Consequently, orders for our components are still strong and we estimate that sales of components for mobile phones will be about 7.5 billion yen higher in the second half of the fiscal year than in the outlook we released at the end of the first quarter. In recording devices, third quarter sales will continue to feel the effects of lower yields and natural disasters. Our estimate does assume that we will be able to raise yields in the fourth quarter to the same level as in the first quarter of this year. As a result, we have lowered by about ¥7 billion our second-half estimate for recording devices sales.

Regarding parent company estimates for the year, we are projecting a 7.2% increase in net sales to 466 billion yen, a 4.8% increase in operating profit to 20 billion yen, a 3.0% increase in current income to 45 billion yen. We are projecting a 69.2% decrease in net income to 7.5 billion yen due to the adoption of a new method of accounting for liabilities for retirement benefits.

Last September marked the end of the first six months of our new business plan called Exciting 108. Backed by favorable market conditions, our electronic components business surpassed our expectations. We foresee more opportunities in the future as digital and broadband technology become increasingly widespread. As I said at our previous earnings announcement, TDK intends to continue increasing its value as a provider of e-material solutions.

Although we have had difficulties with heads with a recording density of 15 gigabits per square inch, we are realizing increasing benefits from the approximately 200 engineers we added when we acquired Headway Technologies, Inc. in March 2000. Under our ongoing business plan, we intend to build an overwhelming competitive advantage in HDD heads.

In recording media, we believe that decisive actions to improve our operations are necessary, as I mentioned earlier. We plan to act quickly to review our business domains, our approach to the optical media market, our production network, our sales systems and other items. While some minor revisions are possible, our basic plan is to concentrate our resources on communications and data recording applications. And we will do our best to meet the goals we set for this segment at the beginning of this fiscal year.

In the communications field, sales of communications-related products rose to 14% of total sales in the past six months compared with 10% in the previous fiscal year. This is a growth rate of about 50% versus the first half of the previous fiscal year. In other market sectors as well, sales figures generally met our targets for the interim period.

In any case, continuously supplying innovative new products is the key to meeting our goal of being an "exciting company." We must enhance our new product development and technological capabilities. To do this, we will take decisive steps to increase our staff of engineers and reward them for their accomplishments. At the same time, we will expand our overseas R&D network. Regarding capital expenditures, we plan to spend between 350 billion yen and 400 billion yen on capital projects over the current business plan's four years. In this fiscal year, capital expenditures will amount to between 95 billion yen and 100 billion yen.

This completes my report. Mr. Iwasaki of recording media & systems is here attending his first earnings announcement meeting to provide more details on this sector. I believe you are already familiar with Mr. Hashimoto. I am also accompanied by our chief technology officer, Mr. Saito, so please ask any technical questions that you want. Thank you.

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