Investor Relations | IR Events | Performance Briefing

[ Financial Results of fiscal 2001 Performance Briefing ]Q&A

Q1. Can you give us a breakdown of the net sales forecast of ¥690.0 billion for fiscal 2002?
A1. In the electronic materials sector, capacitors represent about 70% and ferrite magnets the remaining 30%. In the electronic devices sector, inductive devices account for just under 60% and high-frequency components around 20%. We don't expect the makeup of the recording devices sector to change much. HDD heads are expected to account for just under 90% of sales in this sector. In the semiconductors & others sector, semiconductor sales are expected to account for around 50% of sales, a slightly lower proportion than in fiscal 2001.
Q2. Given the progress with HDD technology, when do you expect to start selling HDD heads for 40-gigabyte/platter HDDs?
A2. We are working with customers at the moment. We expect to start sales in the next two months, although we have some hurdles to overcome first.
Q3. You are forecasting sales of ¥325.0 billion for the first half of fiscal 2002. Can you give us a breakdown by sector?
A3. Electronic materials are projected to account for ¥102.0 billion, down 7% year on year. Electronic devices are projected to account for ¥62.0 billion, down 17%. Recording devices are projected to account for ¥75.0 billion, down 18% year on year. Semiconductors & others are projected to account for ¥9.0 billion, down by just over 30%. On the other hand, the recording media & systems segment is expected to post sales of ¥77.0 billion, just over 20% higher year on year.
Q4. How are sales and earnings for the 1st quarter of fiscal 2002 shaping up compared to the 4th quarter of fiscal 2001?
A4. The operating profit forecast for the first half of fiscal 2002 is ¥10.0 billion. The 1st quarter and 2nd quarter are expected to account for around 20% and 80%, respectively, of this figure. With net sales, the 1st quarter and the 2nd quarter are expected to account for around 45% and 55%, respectively, of the ¥325.0 billion net sales forecast for the first half.
Q5. More than a year has passed since you acquired Headway Technologies in March 2000. How would you evaluate the company's technological contribution in that time?
A5. Joint development is proceeding both in Japan and at Headway Technologies. And we are seeing some significant results. In particular, Headway Technologies had a major hand in developing a new film for achieving a higher sensitivity. It's difficult to say in monetary terms to what extent Headway Technologies has contributed to results, but their overall contribution has been valuable.

One further point needs to be emphasized from the management perspective. Results have come four months later than TDK had expected. We expected to see results from December 2000. TDK began technological dialogue with Headway Technologies soon after we acquired the company, which initially produced an improvement in sensitivity. However, there was a lack of sufficient communication thereafter. The TDK Group developed a sense of crisis due to the misjudgment of the technological direction of the HDD head development. As such, around March-April we moved to put in place a joint framework to facilitate communication. This has already produced results. Even despite the dialogue issues, Headway's technologies are as sophisticated as we expected.
Q6. TDK reduced fixed expenses in recording media by ¥7.9 billion. Was this in line with expectations or above them?
A6. The reduction was above our expectations in the sense that we achieved our target ahead of schedule.
Q7. Operating profit in the 4th quarter of fiscal 2001 was sharply down on operating profit in the 3rd quarter. Can you explain this result in terms of the performance in each sector?
A7. In the latter half of the 4th quarter, customers cancelled orders for capacitors, inductive devices and high-frequency components. As a result, sales for electronic materials and electronic devices decreased by approximately ¥9.3 billion and ¥8.5 billion, respectively, compared to the 3rd quarter. The decline in capacitor sales had the biggest impact on results. The decline in the capacity utilization rate accompanying the cancellation in orders resulted in a drop in operating profit. Another factor behind the sharp decline in operating profit in the 4th quarter was the inclusion of restructuring costs of ¥3.2 billion in SG&A expenses. Of this cost, ¥2.3 billion related to the recording media & systems segment and the remainder to the electronic materials and components segment. The decline in sales during the 4th quarter predominantly reflected lower volumes. Prices were hardly a factor.
Q8. How do you see volumes and prices shaping up for mainstay products-multi-chip capacitors, high-frequency components and inductive devices-in the current term?
A8. Executive Director Kiyoshi Ito of the Capacitors Division will answer this question and explain future developments in capacitors.

This slide shows how TDK's capacitors are built. In terms of production, thin-layer technology and multilayer technology are the most challenging. This slide shows the precision technology for stacking layers. For thin-layer and multilayering, materials and electrodes must be made finer.

The electrode area has the greatest impact on cost. In these electrodes, we used palladium. The price of palladium, however, skyrocketed from an average of ¥1,400 per gram in the previous term to around ¥4,000 at one point. This spike in the palladium price is hampering operations from a cost management perspective. We have almost switched entirely to base metals and are already using nickel. At present, around 95% of our operations use nickel.

As the slide shows, TDK has been manufacturing capacitors for around 15 years. Approximately 15 years ago, TDK manufactured general-use capacitors conforming to 3.2mm x 1.6mm in size with capacitance on the order of 0.1 micron F. In 2000, the company produced a capacitor just 0.6mm x 0.3mm in size with a similar capacitance of 0.1 micron F. This capacitor has approximately 160 times more surface area than model 3.2mm x 1.6mm.

Meanwhile, looking at improvement in capacitance for a given size, the B-parameter has improved by roughly 220 times from 0.1 micron F in 1985 to 22 micron F in 2000. The F-parameter has improved approximately 1000 fold from 0.1 micron F to 100 microns F. The company has incorporated base metals to a greater extent in capacitor design, and has already developed products with a variety of special properties, including F- and B-parameters. TDK launched products with C0G characteristic employing base metals in 2000.

I will now explain why TDK has employed base metals in its capacitors. The slide shows the general properties of capacitors. There are many different types of capacitors, besides ceramic capacitors made by TDK. There are four major types of capacitors: film capacitors, ceramic capacitors, tantalum electrolytic capacitors, and aluminum electrolytic capacitors. Film capacitors have outstanding properties, but low capacitance, and are very costly. Ceramic capacitors have excellent properties, but require a multilayer structure. This means that their cost increases in proportion to capacitance. Tantalum electrolytic capacitors have relatively poor properties, but are cost effective. Aluminum electrolytic capacitors are a notch better than tantalum capacitors, and are also cost effective.

As I mentioned earlier, TDK specializes in the production of ceramic capacitors. The company has been struggling to expand its ceramic capacitors into the markets currently served by film, tantalum and aluminum capacitors. To this end, we have been reducing overall costs by adopting thin-film and multilayer structures and using base metals instead of palladium, an expensive material. Since ceramic capacitors have excellent properties, reducing their cost will enable TDK to expand its business into markets currently served by other types of capacitors. We have been taking a variety of steps to reduce the cost of ceramic capacitors.

The pie chart shows statistics for the global capacitor market. In 1999, global, monthly sales volume was 45.8 billion capacitors, including: 30 billion ceramic capacitors; roughly 4 billion single-layer ceramic capacitors; 5.8 billion aluminum electrolytic capacitors; 1.8 billion film capacitors; and 1.7 billion tantalum capacitors. 1.7 tantalum capacitors have been replaced by ceramic capacitors.

Although ceramic capacitors account for 70% of the market in volume, they only accounted for 26% in sales in 2000. In the tantalum capacitor market, ceramic capacitors replaced ¥9.6 billion in tantalum capacitor sales, while tantalum capacitor sales alone totaled ¥31.6 billion. Film capacitor sales were ¥17.8 billion and aluminum capacitors were ¥63.6 billion. Although ceramic capacitors had the highest share in volume, tantalum and film capacitors made up the highest share in sales. This is why TDK is rising to the challenge of curtailing costs by employing thin-film and multilayer technologies. In answer to your question, we do not expect to post substantial overall growth in fiscal 2002. We forecast about 2% growth in sales volume. As I explained earlier, however, we are working to improve sales by about 10% by expanding sales of high-capacitance products (high-cost products with high selling prices) through the application of multilayer technology.

Presentation Material
Q9. Please explain the outlook for earnings in each business segments. How will first half earnings be affected?
A9. In the first half, TDK will still feel the impact of a drop in the capacity utilization rate in the 4th quarter. In capacitors, a major contributor to earnings in the electronic materials sector, we forecast a decline in earnings. However the impact will not be that large compared with the first half of the previous year owing to the use of base metals, and the higher proportion of sales of high-capacitance products.

The largest impact will be on inductive devices and high-frequency components in the electronic devices sector. This area is expected to be hurt by slowing demand in the communications market, particularly for mobile phones.

In recording media & systems, as explained by Mr. Iwasaki, it will be difficult for the sector to move back into the black since restructuring of existing products is still incomplete as of April 2001, and the effects will be felt in the 1st quarter. In the 2nd quarter, however, the completion of restructuring and an anticipated increase in sales is expected to return the sector to profitability. To sum up, earnings by the recording media & systems segment are expected to improve over the first half of the previous year, while the outlook for electronic components remains grim. This is because of the substantial drop in earnings in the electronic devices and recording devices sectors.
Q10. Please comment on inventory corrections. TDK's inventories have been increasing. In particular, in what areas are inventories rising and when will they return to appropriate levels? Secondly, I apologize for the general nature of the question, but you explained how differences between users will result in severe results in the first half. Please comment on the difference between users, and TDK's overall direction in this respect.
A10. Although you mentioned that TDK's inventories are rising, at present, we are producing in line with orders. We expect inventories to return to normal at the end of the 1st quarter or middle of the 2nd quarter. Set manufacturers' inventories are likely to return to normal by the end of the 2nd quarter or by the end of July.
Q11. Your outlook for growth in capacitor sales seems rather optimistic given results for the previous year. Do you have any sure-fire conviction, or any convincing figures to justify your projection?
A11. We do not expect volume to rise that much. Overall growth in sales volume is likely to be in the 2% range. Our outlook of 10% growth in sales is based on the following. In April, sales volume fell 15% compared to the corresponding month in the previous year. However, sales have remained essentially flat. Although we will begin to expand sales, we aim to sell a larger proportion of high capacitance products, and do not expect to raise volume. Although we can't make any promises, we would like to see sales grow by 10%.
Q12. Please describe capital expenditures on new products and businesses.
A12. TDK has made R&D investments in organic and non-organic EL displays, and polymer batteries. Investments are still insubstantial, since these projects have not reached mass production. Including other investments, TDK invested ¥7-8 billion in new business initiatives in the previous year. In fiscal 2002, we plan to invest approximately ¥7 billion in developing organic EL displays. The figure will depend significantly on our decision to develop active EL displays. In inorganic EL displays, we will base our investment on assessment of a certain technical issue. In polymer batteries, although investment will depend largely on approval of our customers, we estimate a figure of approximately ¥4 billion.
Q13. TDK's earnings forecast for the previous year were revised downward. In view of projections for each segment, what factors were considered in determining this year's forecast?
A13. Preliminary business plans were first drafted in December 2000. That was reviewed and improved upon by each operating division in February. Final review took place in March. By then, circumstances had changed considerably, with figures at the time calling for substantial increases in both sales and earnings. We continued to revise the figures with relevant divisions. As of April, estimates were still stronger than those released today.

Nevertheless, a high degree of uncertainty still attends certain aspects of the U.S. economy and other macroeconomic conditions. Forecasts released today have been revised downward compared with estimates released by divisions in April to reflect the poorer outlook at present, in view of deteriorating prices, and the unevenness in supply and demand.
Q14. In your presentation of TDK's balance sheet, you mentioned that inventories increased more than expected. How much can this be reduced, in real terms, during fiscal 2002? For TDK as a whole, is it reasonable to expect that a ¥10 billion change in inventories would result in a ¥5 billion difference in earnings?
A14. Although overseas inventories are susceptible to exchange rate changes at the fiscal year-end, as of the end of fiscal 2001 TDK's overseas inventories totaled more than ¥100 billion in absolute terms. As of the end of fiscal 2000, inventories stood at ¥84 billion, representing inventory to sales of 1.5 months. We believe this level is necessary. Although it would be desirable to reduce inventories still further, for the time being we aim to bring inventories down to this level.

The extent to which inventory changes affect earnings depends on the product mix of inventories and the profitability of each type of product. For this reason, I can't provide an exact figure at this time.
Q15. Demand for HDDs, excluding those for audio-visual applications, are projected to grow 3%. What were the grounds for this estimate?
A15. This figure was calculated on the basis of information obtained from TDK's customers in the HDD industry. The forecast is for HDD demand on a shipment basis.
Q16. According to my calculation, the unit price for HDD heads will decline by at least 10% during the year. Assuming this to be true, what is the reason for the decline? Please comment on the background to the fall in prices, in view of increasing areal recording density.
A16. TDK projects a decline in unit prices in HDD heads of 10% or more.
Q17. Please give us a general idea of the future profitability of HDD heads.
A17. The earnings outlook in the first half is extremely bleak. We expect a recovery in the 2nd half.
Q18. Please outline the factors responsible for forecast changes in earnings.
A18. The calculation of earnings forecasts for fiscal 2002 differed markedly from the calculation of actual results for fiscal 2001. The forecasts for fiscal 2002 assume a dollar exchange rate of ¥120 compared with the ¥111 rate for the term just finished. This represents a depreciation of ¥9 against the dollar, which will impact TDK's earnings at the operating profit level. On an annual basis, a depreciation of ¥1 yen translates into an increase of approximately ¥1.4 billion in operating profit, and vice versa. A depreciation of ¥9, therefore, means that operating profit will likely increase by roughly ¥12 billion. The absence of restructuring charges in fiscal 2002, compared with restructuring costs incurred in fiscal 2001, is another positive factor.

Meanwhile selling prices for electronic components on average fell 5% from the previous year in fiscal 2001. In fiscal 2002, especially in the first half, the effect of declining prices is likely to be felt, with prices for electronic components projected to plummet 9-10% during the year. In particular, the consequences of the decrease in capacity utilization rate in the first half of the year are to be felt more strongly this year. I cannot at this time pin this effect down to a specific figure.
Q19. TDK's medium-term management plan contains a strategy to achieve an overwhelming share in the HDD head market. The main point I think was to raise share among companies making HDD heads for internal use. Can you give us a progress report on how TDK is doing in this regard?
A19. As was pointed out, one of TDK's aims is to gain a foothold in the market among companies making HDD heads for internal use. We have acted to do so. But due to the soft demand in the HDD market, these manufacturers have scaled back their production considerably and we thus haven't expanded volumes as much as we thought we would.

As I also explained a year ago, there was a view that it would be impossible to garner orders from these manufacturers under present conditions in which technology is lagging behind. As was explained earlier in this presentation, the conditions in the previous fiscal year didn't enable us to enter this market. We want to change this in the current term.
Q20. You are projecting that TDK will grab market share with 40-gigabyte/platter HDD heads and that your market share will rise dramatically in the second half of the year. Can you explain why you think you can do that?
A20. As was explained earlier, these heads have been well received by customers. As such, we believe with a high degree of certainty that we can secure the number-one position. In this field, if you aren't number one, your volumes won't be high. By securing the number one position, I think we can raise our share in the second half of the year.
Q21. Please tell us whether you expect profits in capacitors to rise or fall in the current term, compared to the previous term? I understand that the Kitakami Plant is scheduled to come online around June, raising your production capacity by the end of the year. Can you give us a progress report on this and how you see profits shaping up in capacitors? Please also comment on increasing depreciation expenses in this area. Also, when is the capacity utilization rate expected to reach its lowest point? Furthermore, TDK will try to boost market share in order to increase the capacity utilization rate?
A21. Profits are certainly under pressure. However, we have acted in various ways to reduce costs. Production efficiency will be raised at the Kitakami Plant and we are now using base metals, as well as using multilayer technology. I think these actions have already yielded considerable cost savings.

There are various factors, but as Mr. Konno explained before, we want to increase sales and earnings in the current term based on the premise that the yen will depreciate to ¥120.

A ceremony to mark the completion of the Kitakami Plant will be held on May 18. Our initial plan called for the Kitakami Plant to have a monthly output capacity of 5 billion units. Given the changes in the market, however, we have postponed investment in facilities somewhat. At present, investments have been earmarked to achieve a monthly production capacity of 3 billion units. Once full-scale operations begin at the Kitakami Plant, the monthly production capacity will be on the order of 14 to 15 billion units.

Right now, the overall capacity utilization rate is around 50%. Therefore, we are aiming to clinch more orders moving forward.

Regarding high-capacity capacitors, TDK's technological advantage lies in thin-layer technologies and multilayer technologies. These technologies will underpin expansion in high-capacity capacitors.

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