Investor Relations | IR Events | Performance Briefing

[ Financial Results of fiscal 2001 Performance Briefing ]President's address

Hajime Sawabe President and CEO

Hajime Sawabe
President and CEO

Thank you for taking the time to attend today's meeting. I will begin my remarks with a report on our operating results for the full year ended March 31, 2001.

Consolidated net sales increased 2% to ¥689.9 billion, operating profit decreased 24.5% to ¥56.3 billion, income before income taxes declined 12% to ¥64.5 billion, and net income decreased 13% to ¥44.0 billion. Net income per common share was ¥330.54 and ROE decreased from 9.2% to 7.3%. Selling, general and administrative expenses for the fiscal year included ¥3.1 billion in restructuring expenses, mainly in respect of changes in the production system for recording media.

In fiscal 2001, the electronic components market was extremely strong from the 1st quarter through the 3rd quarter due to strong demand in the information and communications market, notably mobile phones and IT, and the increasing digitalization of audio and visual equipment. Orders peaked in September 2000, however, and sales started to decline in October. In the 4th quarter, demand dropped and customers responded by reducing their inventories, which hurt sales.

In the electronic materials and electronic devices sectors, sales increased approximately 18% overall, or ¥58.0 billion. This reflected 47% growth in sales of multilayer chip capacitors, 32% growth in sales of high-frequency components and 49% growth in sales of coils for inductive devices. On the other hand, the recording devices sector posted a 16%, or ¥31.6 billion, decrease in sales. The recording media & systems segment posted a sales decrease of 7%, or ¥10.9 billion. The result from offsetting the increases and decreases was a slight 2%, or ¥15.4 billion, increase in consolidated net sales.

TDK's medium-term management plan positions Communications and Recording as strategic fields. Sales in Communications were 30% higher year on year and accounted for 14% of net sales, up from 11% a year earlier. Recording sales decreased 7% year on year, however, accounting for 41% of net sales. In fiscal 2000, they accounted for 45% of net sales.

One of the principal factors for the fall in sales in the Recording field was HDD heads. We were slow to respond to market demands due to a misjudgment in the technological direction of the market. This misjudgment related to raising the output by changing the head structure, using MR formation and making the free layer thinner. Things didn't go as we had expected. A second reason for lower head sales was acts of nature, notably torrential rains, which caused a temporary suspension in operations. A third reason was arrogance. The annual rate of increase in HDD head areal recording density per square inch soared from 60% to 100-150%. We didn't think such a thing could be achieved. And we were arrogant in thinking that if we couldn't make it happen, neither could any of our competitors. Perhaps we also expected too much thinking that output could be improved by making the free layer thinner. We were unable to meet customer requests for areal recording density of 15 gigabits per square inch or 20 gigabits per square inch. And although we were the undisputed number one in HDD heads in fiscal 2001, we lost market share, dropping from 34% to 31%.

Another factor was Headway Technologies, a company we acquired in March 2000. While we reaped partial benefits from their technologies, we are not deriving all the potential benefits that we expect yet. Only the rise in fixed costs alone was conspicuous, and this negatively affected profitability. That said, Headway Technologies is stronger and dialogue with them has improved. We expect to ship 30-gigabit/square inch heads in June and 40-gigabit/square inch heads thereafter. Customers have applauded our advances and I am confident that we can translate this into a higher market share.

Our earnings hinge on how quickly we can improve production yields. Our strategy here is to stay at the forefront of technological development in our technological roadmap by increasing the head output, achieving higher frequencies and narrowing track width. These actions will garner trust from HDD manufacturers, bring them closer to us, and help us to strengthen alliances with them.

By cooperating in design with HDD manufacturers and sharing technologies for evaluating heads, our strategy for raising production yields will be easy to implement.

The next issue is shortening the development lead-time. The fourth issue is to concurrently push ahead with internal product development, design, process technologies and facility development. By doing so, we will quickly raise production yields and improve earnings.

Demand for PCs and servers alike is increasing. Consequently, so too is demand for HDDs. However, the number of heads being used is, as usual, falling. Indeed, in 2001, overall head demand decreased. I think this downward spiral will bottom out during the current fiscal year. I believe this because from the current fiscal year onward increased demand is expected in the new home-use market, which has been gradually gaining momentum. Thus I think magnetic heads still have sufficient product value for the next 5-7 years.

Another factor behind the decline was optical disks. With the growing popularity of optical media, CD-Rs are a pillar of recording media operations. However, the analysis that emerging markets were still some way off following this trend, was flawed. This led to a supply glut, which triggered price reductions. The result was large losses in CD-Rs. Distinguishing digital products presents difficulties and product lifecycles are short. As a result, a business model which handles everything from development through production and sales is not wise. That's why we have decided to purchase products from outside the company other than leading-edge technology products that we develop internally.

Consequently, we disposed of facilities surplus to requirements and trimmed our workforce. In March, we stopped production of CD-Rs in Japan and the U.S. Regarding existing analog media, we are amalgamating production bases to raise earnings. All restructuring should be finished by the end of May. The segment posted an operating loss of ¥9.0 billion in fiscal 2001, but is expected to move into the black in the current term.

Let's now have a look at non-consolidated results. Non-consolidated net sales increased 5.3% to ¥457.7 billion, operating profit increased 36.7% to ¥26.1 billion, and current income rose 14.6% to ¥50.1 billion. Net income, however, fell 64.1% to ¥8.7 billion. TDK posted an expense of ¥34.6 billion due to the adoption of a new accounting method for retirement liabilities. This expense was net of a gain of ¥15.2 billion resulting from the establishment of an investment trust to fund these liabilities.

Based on our policy concerning the distribution of profits, TDK plans to pay a year-end dividend of ¥30 per share, resulting in a dividend applicable to the year of ¥60 per share. On a parent-company basis the dividend payout ratio was high at 91%. But this resulted from the booking of a one-time charge of approximately ¥50 billion in line with a change in retirement benefit accounting as I mentioned earlier. On a consolidated basis, the dividend payout ratio was 18.1%, ROE was 7.3% and DOE was 1.3%.

Turning to projections for fiscal 2002, ending March 31, 2002, we are forecasting consolidated net sales of ¥690 billion. For operating profit we are projecting ¥40 billion, 29% lower than in fiscal 2001. Net income is projected to decrease 35% to ¥28.5 billion. On a parent-company basis, we project net sales of ¥385 billion, down 16%, and operating profit of ¥16.0 billion, down 39%. Net income is forecast to improve 95% to ¥17 billion.

In recording media, we ceased CD-R production in the U.S. and Japan at the end of March 2001. By the end of May 2001, we will have completed the amalgamation of audiotape production bases. As a result, we expect recording media to move into the black in the 2nd quarter of fiscal 2002. In recording devices, the market is very slow to recover and there are intense calls for price reductions. We expect that it will be difficult to generate earnings in the 1st quarter as a result. As with recording media, from the 2nd quarter, 30-gigabit/square inch heads and then 40- gigabit/square inch heads will be launched. We expect this to expand our market share and earnings should slowly recover.

In electronic components, inventory reductions in the PC and mobile phone markets are expected to continue through September. The 1st quarter should be the bottom of the cycle and orders should gradually come in the 2nd and 3rd quarters. While customer response is is recovering, the recovery itself will be patchy. Consequently, orders in the 3rd and 4th quarters should recover to the level of the first half of 2001.

TDK's earnings ability in the term under review, like the previous term, deteriorated. We must improve earnings as early as possible. To this end, we must pursue a low-risk, high-return strategy in HDD heads. As you know, the HDD business was high risk, high return, but has become high risk, low return. To mitigate risk, we must take on risk. By doing so, we can establish a strong market position, thereby decreasing risk. If we are to continue to prevail with this type, the next type and the next type after that, we can't take that position. Consequently, we must invest money and people, but given the expected decline in prices, we must do so in a manner which produces a multiplier effect. At the same time, we must bolster earnings by raising production yields quickly. Staying ahead here hinges crucially on cutting-edge technologies. Winning in this way will be explained by Mr. Hashimoto later. In this way, we will keep our leading position in the market, which will be instrumental in deepening ties with customers and other materials manufacturers, as well as in gathering information. Concurrently, we recently established the Production Engineering Development Center. This center will work on process technologies and facility development. Development and design activities must run parallel to and concurrent with this center.

The second theme is that we must generate cash flows in "cash cow" electronic components, including chip coils and DC-DC converters. While these are our forte, other companies have encroached on our territory. We will take back this lost ground.

These products have to become more compact, offer higher performance and be more multi-layered. We will leverage our coating technology, thin-film multi-layer technology and binder and other organic technologies, to establish a formidable position in terms of production technology and development.

The third theme is quickly achieving earnings above the cost of capital in our recording media business. You will hear from the managing director in a short while on this.

The current fiscal year presents challenges, as symbolized by market sluggishness and prolonged inventory reductions by customers. This should be a wake-up call for TDK. It provides us with the perfect opportunity to pull together to raise awareness of the risks we face. We will dedicate our efforts to lowering our breakeven point and shortening lead-times to ensure that we improve our earnings structure in the next term. I ask for your continued support and understanding. Thank you.

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