Investor Relations | IR Events | Performance Briefing

[ 3rd Quarter of fiscal 2001 Performance Briefing ]Q&A

Q1. Can you give us a breakdown of sales in the recording media & systems segment?
A1. Audiotapes accounted for 15% of sales, down 22% year on year, while videotapes accounted for 37% of sales, down 13%. Optical disks represented 24% of segment sales, down 8%. The remaining 25% was accounted for by others and increased 18% year on year. Others includes PC cards and data tapes.
Q2. What is the breakdown by segment in the full year net sales projection of 700.0 billion yen?
A2. Electronic materials sales are projected to increase 25% year on year to 219.2 billion yen. Electronic devices sales are projected to increase 14% to 147.3 billion yen. Recording devices sales are projected to decrease 16% to 169.3 billion yen. Recording media & systems sales, meanwhile, are projected to decrease 8% year on year to 137.2 billion yen. Sales in semiconductors & others are expected to increase 28% year on year to 27.0 billion yen. This gives the total of 700.0 billion yen.
Q3. Is any change expected in TDK's projections for capital expenditures, depreciation or R&D expenses?
A3. There is not expected to be any revision to TDK's November 2000 projection of 90.0 to 95.0 billion yen for capital expenditures. Consequently, depreciation expenses are not expected to change significantly. We believe that R&D expenses will be around 1.0 billion yen below the previous projection. However, R&D expenses will still be to the order of 5% of net sales.
Q4. You explained that new structures are being developed for heads for HDDs all the time, and that an oxidation layer will be added. Isn't there a danger that by doing so the number of steps in the production process will be increased and, as a result, that the production yield will deteriorate?
A4. As you point out, adding an oxidation layer is an extremely difficult proposal. However, we have methods in place to develop special equipment that will overcome these difficulties and ensure that the production yield is not affected.
Q5. When did you first develop that equipment?
A5. In the first half of last year.
Q6. The revised projection for the second half of the current fiscal year from the one made in November 2000 has sales of recording devices decreasing by approximately 10.0 billion yen. Is this due to the fact that you haven't regained as much market share as you thought you would? Or has the downward revision been made to reflect the effect of an expected reduction in production by HDD manufacturers between January 2001 and March 2001?
A6. TDK expects to see a fall in demand across the whole marketplace in the fourth quarter, the period from January 2001 through March 2001. This is one of the factors expected to have an impact on sales. Regarding TDK's share, we have revised our projection downward by 1% from the previous estimate. This reflects the deterioration in production yield and the effects of the heavy rains in September and October last year, which held back shipments.
Q7. So would it be fair to say that factors in your operating environment and the failure to regain your market share are equally responsible for the revision in recording devices?
A7. Yes, about half and half.
Q8. Sales of electronic materials and electronic devices, including high-frequency components and multilayer chip capacitors, are declining. Did you revise your projections downward mainly because of lower volumes? Or is the downward revision a reflection of that as well as an expectation that prices will soften further in the fourth quarter compared to your expectations when the previous forecast was made in November 2000?
A8. We expect to see a substantial decline in volumes of general electronic components. The downward pressure we expect on some prices has also been factored into the revised projections.
Q9. What was the growth rate for ceramic capacitors in the third quarter? Can you also give us a sales breakdown by application?
A9. Sales for use in PCs and other data-related equipment, the main application, accounted for just under 30% of total ceramic capacitor sales and rose 45% year on year. Sales to the communications industry rose 70% year on year and accounted for just under 30%. Sales for use in audio and video products represented approximately 20% of the total and increased just under 50% year on year.
Q10. By how much do you expect production of mainstay products to decrease in the fourth quarter? How much will production decline in the first quarter of next fiscal year?
A10. I don't have detailed volume figures in front of me, but sales of ceramic capacitors, for example, are expected to decrease by approximately 2-3%, compared with the third quarter. Sales of high-frequency components, meanwhile, are expected to decrease more than this, by about 40% compared with the third quarter. Inductive devices sales are expected to decrease by about 10%. Regarding the next fiscal year, we are presently formulating our business plan and haven't compiled all the figures yet. As such, I can't say anything concrete at this stage. However I do expect the first quarter of the next fiscal year to continue to present challenges.
Q11. Can you give some idea as to how things are shaping up for the first quarter of next fiscal year and thereafter in respect of heads for HDDs?
A11. At present, we don't see any major changes being made to the medium-term business plan that we outlined last year. However, projected sales of heads for HDDs have been revised downward by about 18% for the fourth quarter from the November projection due to the influence of the market. We anticipate that the first quarter of the next fiscal year will continue to be severe.
Q12. You have revised your earnings projections for the fourth quarter from those released in November. What impact have recording devices had on the lower earnings estimate?
A12. The decline is sales of recording devices is approximately 10.0 billion yen. While it is difficult to quantify the impact of this on earnings, it is expected to be considerable.
Q13. Is construction of the multilayer chip capacitor plant in Iwate proceeding according to the plan in November 2000?
A13. Construction of the Kitakami Plant is proceeding on schedule and is slated to begin operations early next fiscal year.
Q14. When can one assume that volume production will start looking at the square parts of the TDK GMR Head Roadmap?
A14. The square parts of the roadmap do not indicate volume production. Where it says MP, this indicates the start of mass production.
Q15. In the present environment, where production yields are difficult to improve, prices of HDD heads have declined moderately. If the supply-demand equation collapses, do you think that prices will fall again? Or do you see this as less of a concern than the difficulty in improving production yields?
A15. From a medium-term perspective, while audio and visual products will also be a factor in determining price, there is no doubt we are confronted by a severe set of circumstances. I think there will be a slight softening of prices until around the second quarter of next fiscal year. In the medium- to long-term, we anticipate a difficult operating environment. Setting aside the technical difficulties, I see a continuation of pressure on prices.
Q16. In your earnings projections, you are assuming an exchange rate of 113 yen to the U.S. dollar for the second half of the fiscal year. Considering the positive earnings that will be generated from this exchange rate, your projected losses appear rather large. In addition to the effect of reduced production, can you confirm whether there are other factors at play here?
A16. In terms of exchange rates, the yen is indeed weakening against the U.S. dollar, and we expect a marginal profit as a result of this in the fourth quarter. However, we also have to take the euro into consideration. We no longer focus solely on a U.S. dollar-yen comparison. In terms of profit, we anticipate that the capacity utilization rate will decline in line with decreasing net sales. Furthermore, R&D expenses are also increasing. We shall be aggressively continuing to invest in R&D, and this will likely be reflected in an increase in the ratio of fixed expenses to net sales in the fourth quarter.

Additionally, we have been building reserves toward the end of the fourth quarter to cover costs associated with the business restructuring we are currently undertaking. This will be booked as a non-operating expense. At present we are looking at around 3 billion yen in restructuring charges for U.S. recording media factories. Specific details are being worked out at present.
Q17. You said that the first quarter of next fiscal year is going to be severe. Does "severe" mean the first quarter will be worse than the fourth quarter of this fiscal year, or do you mean it will about the same? Or do you mean that it will be "severe" compared with the fourth quarter, but that some sort of first-quarter recovery will be seen? Could you elaborate a little on the nuance of what you said?
A17. I do not believe that the first quarter will be any more severe. That said, I do think that we will continue to operate in a severe environment. Chiefly at issue here is how long inventory reductions will go on for.
Q18. The net sales decline in ceramic capacitors for the fourth quarter is projected at 2%-3% lower than the third quarter. This seems rather small. Can you comment on whether there is a particular reason behind this?
A18. Sales of ceramic capacitors are basically affected by the market and makeup of our customers. Given this situation, we do not expect sales of ceramic capacitors to decrease as much as other products. However, we do need to focus our attention on this product in the future.
Q19. How well are your HDD heads being received by customers?
A19. We certainly had a difficult time with the 20-gigabit/square inch (30 gigabyte/disk) head last year, and results fell short of our expectations. At present our HDD heads are being very well received, so much so that we believe a recovery is in the offing.
Q20. I see that the amount of time to switch from mass production of the 30-gigabit/square inch (40-gigabyte/disk) head to the 45-gigabit/square inch (60-gigabyte/disk) head is around 5 months. That means the new head will be introduced with very quickly. Do you think that the industry as a whole, including your customers, will actually stay in step?
A20. In terms of the mass production timeframe, not all products will be changed at once. Furthermore, some customers are well advanced and working toward commercialization of products. We have responded to that by setting these timeframes and proceeding with development of the products.
Q21. Could you tell us in broad terms about the operating profits of the recording media & systems segment and the electronic materials and components segment?
A21. Total operating profit for the third quarter was 18.1 billion yen. The recording media & systems segment recorded a loss of just over 1 billion yen - differing only slightly from the first half of the fiscal year - while the electronic materials and components segment accounted for the remainder.
Q22. How well did recording devices perform on a volume basis in the third and fourth quarters respectively?
A22. On a volume basis, sales of recording devices declined 10% in the third quarter, compared with the November projection. We forecast that sales for the fourth quarter will be 20% below the November projection.
Q23. At the present time, when do you expect operating profits for the HDD head business to stop falling? Looking ahead to the next 1-2 years, to what extent do you expect earnings to rebound in the HDD head business?
A23. Our earnings will see a positive improvement if production yields can be improved. While our basic thinking will not change, it will probably be extremely difficult to return the HDD head business to the level of earnings that MR heads once enjoyed.

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