Investor Relations | IR Events | Performance Briefing

[ 1st Half of fiscal 2001 Performance Briefing ]Q&A

Q1. You have reduced the sales projections for recording devices that were released last August, explaining the reduction by providing three reasons for a decline in yields and unfavorable weather. Which of these factors had the greatest impact?
A1. Lower yields were responsible for about 80% of the reduction in estimated sales In the year's first half and weather for the remainder. Regarding the three factors affecting yields, we cannot provide a breakdown because this is sensitive competitive information. However, I can say that the three factors were about equal in terms of their influence. The relative impact of the lower yield will be about the same in the second half of the fiscal year.
Q2. How many HDD heads did TDK ship in the second quarter of this fiscal year and how did this compare with the same quarter last year in terms of numbers and growth rate? Also, please tell us how head prices have changed.
A2. Second-quarter head shipments were about 16% less than in the first quarter of this year. Unit prices fell by 11% compared with one year earlier.
Q3. Please provide a breakdown on ferrite products and capacitors in the electronic materials sales estimates for this year.
A3. We expect that capacitors will grow faster than ferrite products for the full fiscal year. Therefore, capacitors will be a slightly larger share of sales in the second half of this year than in the first half.
Q4. Would you provide us with third and fourth quarter estimates for the ¥87.4 billion in sales you project for recording devices?
A4. We estimate that fourth-quarter recording devices sales will be about 15% higher than third-quarter sales.
Q5. Based on projections TDK provided last August, second-quarter sales of recording devices were about 9 billion yen less than your estimate and electronic materials sales were about 2.5 billion yen short. On the other hand, you were able to meet your operating profit projection of 17 to 18 billion yen. How was TDK able to meet its profit projection despite the shortfalls in sales? Does this mean the impact of the fall in head yields was not all that significant? Or was your operating profit estimate for the second quarter quite conservative to begin with?
A5. Growth in sales of profitable electronic components offset the negative impact on earnings from HDD heads.
Q6. Will recording devices operating profit bottom out in the second or third quarter of this year?
A6. We believe that the second quarter was the bottom.
Q7. You have explained how you plan to deal with the three causes of the fall in HDD head yields. But future increases in recording density will present even greater technical challenges. Doesn't this mean that the same kinds of problems could happen again? Or do you believe that your present technology will be sufficient to prevent future yield drops?
A7. We believe that the three measures we explained today will be sufficient to accommodate next-generation HDD heads with a recording density of 40 gigabits per square inch. Our actions are thus not limited to 15-gigabit heads.
Q8. You told us about your intention of increasing your HDD head market share at the beginning of this fiscal year. However, the share has actually fallen since then. Should be consider this as just a temporary setback?
A8. Our estimates for this year are for a decline in our market share. Nevertheless, we will continue to work to achieve our ultimate market share target.
Q9. Based on your explanation of HDD head output capacity, it appears that annual production capacity will rise to about 300 million units. But external sources are reporting 200 million. Is there a problem with my calculations, or does this difference indicate an extremely low capacity utilization rate?
A9. Our figures represent volumes gross production figures. Actual production figures factor in yields.
Q10. Please tell us your estimates for HDD shipments for use in audio and visual equipment for the next fiscal year and the following year.
A10. We estimate that there will be 20 million HDDs for the AV market next year, which represents about 60 million heads.
Q11. How much of a cost saving do you foresee from the integration of recording media production facilities you are planning? And do you have an earnings target for the recording media business?
A11. We expect that the realignment and closing of recording media factories will produce an annual saving of about 5 billion yen on a consolidated basis. Regarding earnings, our medium-term target is to raise operating profit to more than 10% of sales.
Q12. When do you expect to complete the realignment?
A12. Completion may be delayed by about one or two months because of certain sensitive matters. However, we intend to complete this process during the first half of the next fiscal year.
Q13. Once the recording media market shifts from CD-Rs to DVDs, won't the same problem now taking place with CD-Rs occur again with DVDs? I understand that TDK has technical strengths in recording materials for these disks, but are there any ways that you can prevent problems you are now having with CD-Rs from affecting DVDs in the future?
A13. With regard to DVDs, our plans are based on the assumption that the market will develop in the same way as the CD-R market did. We thus plan to use our own production facilities solely for high-end products and have other DVDs made by other companies. We are now working on concrete plans on how to do this.
Q14. You have reduced HDD head sales estimates for the second half of this year by 6% from 93.0 billion to 87.2 billion yen. How was this reduction affected by volume, price and exchange rates? And how do these factors affect results in relation to the first half of this year?
A14. Our HDD head unit volume in the second half of the year will be almost 20% lower than the figure we used to formulate our 93.0 billion yen sales projection. We expect that volume will be 3% to 4% lower in the second half of this year than in the first half. Regarding prices, we expect a decline of only a few percent in the second half compared with this year's first half.
Q15. Would you explain why inventories are higher on the interim balance sheet and how you expect inventories to change in the future?
A15. Inventories have not increased significantly. The growth you see on the balance sheet represents increases in inventories of products where sales are growing, such as in the electronic materials and electronic devices sectors. So this is just an increase in products that are constantly moving through production and distribution. There is no significant change in monthly inventory turnover. Furthermore, there have been increases in both finished products and work in process.
Q16. Did the shortfall in first-half HDD head sales represent a drop in sales to a particular customer or to many customers? Also, is there any danger of a big drop in unit prices or other problem with regard to your plans to increase market share?
A16. The effect of our decline in HDD head sales was spread over all of our customers, not any one in particular. To achieve our market share goals, we foresee difficult negotiations with customers. However, we expect to be able to keep the drop in unit prices within the bounds of our plan.
Q17. What is your outlook for declines in unit prices of capacitors in the second half of this year?
A17. We experienced a unit price decline of slightly less than 2% for all of our electronic components. While there will be differences among various products, we foresee a similar decline in the second half of this year. As a result, we expect that prices will fall by about 2% for the entire year.
Q18. Regarding steps you took to deal with the HDD head yield problem, couldn't you have prevented this problem from occurring at all by taking these actions earlier? Or is this a problem unique to TDK that others are not experiencing because you have different equipment? What I am asking is whether this is a basic problem that may happen again, or if this is a problem that is unlikely to come up again.
A18. Regarding the yield problem, TDK has set a fairly high yield target and we are taking various steps because we have not fulfilled our own target. New equipment is necessary if we are to achieve this high yield. In this instance, a yield problem occurred because we moved up our production schedule by two or three months. Looking back, we should have been more careful about maintaining our original schedule.
Q19. Companies producing HDD heads for their own use are increasing their output. Are these companies raising output to meet demand that TDK cannot meet? Or does this represent gains in the technological capabilities of these companies?
A19. This is not a problem unique to TDK or to our customers. I think the causes for this growth are related to both TDK and these companies.
Q20. Would you provide us with your gross profit and SG & A expense assumptions for your full-year operating profit projection?
A20. Our projection is based on an overall gross profit margin of about 30%.
Q21. Please tell us sales of organic EL displays in the first half of the year and your outlooks for the second half and next fiscal year.
A21. Our organic EL display sales are in the tens of millions of yen per month. Turning to the next fiscal year, we are now studying what type of equipment we need to utilize to overcome the serious yield problems that we are currently experiencing. Therefore, I am unable to provide you with figures for the next fiscal year.
Q22. I believe that the current HDD head problem involves heads for 3.5-inch HDDs. Are there any problems occurring with heads for high-density 2.5-inch drives?
A22. Recently, we have seen the gap between recording densities of 3.5-inch and 2.5-inch disks decline significantly. So our current problem is not limited just to one of these formats.
Q23. How much did TDK's HDD head volume change in the first half of this year in relation to the first half of the previous fiscal year?
A23. Volume increased by 5.2%.
Q24. Are profit margins in electronic components, which offset the fall in recording devices sales, about the same as for HDD heads? And please tell us your projections for the second half of this year for sales growth and total market demand.
A24. We produce an extremely broad range of electronic components, some with good profit margins and others that do not perform as well. Overall, our general-purpose electronic components have higher profit margins than other products do. For example, our multilayer chip capacitors and inductors have an extremely high profit margin.
Turning to demand trends, we foresee growth in the need for electronic components as more digital products are manufactured. At the same time, manufacturers will be streamlining their products. But we also expect that applications for electronic products will expand, leading to considerable growth in demand for components. Judging from the orders we are receiving, it appears that there is still a shortage of multilayer chip capacitors.

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