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[ 1st Quarter of fiscal 2002 Performance Briefing ]Q&A

Q1. Can you give us a breakdown of the ¥280 billion forecasted net sales for the first half of the current fiscal year?
A1. In the electronic materials and components segment, electronic materials, electronic devices, recording devices and semiconductors & others account for ¥83.1 billion, ¥53.7 billion, ¥67.0 billion and ¥9.9 billion, respectively, of the forecast. The projection for the recording media & systems segment is ¥66.3 billion.
Q2. What was the difference between outstanding orders at the end of June 2001 and March 2001? By how much did you clear outstanding orders in the first quarter? Also, although you probably don't disclose the figures, can you give us an idea of how you see orders changing between the first and second quarters?
A2. Outstanding orders for electronic components declined approximately 25% between the end of March and end of June 2001. Our outlook as of May was that orders would bottom out in the first quarter and recover from the second quarter. However, at present there are no signs of such a recovery in prospect. That's why we are closely watching how orders trend between August and September.
Q3. Can you give us a rough idea of the first-quarter operating profits of each of your five main sectors?
A3. As was explained on May 10, 2001, the effects of restructuring the recording media & systems segment in the fourth quarter of fiscal 2001 would be felt also in the first quarter of the current term. A negative operating profit ratio of approximately 5% was recorded as a result. In the recording devices sector, sales fell sharply in the quarter as we lost market share. The first quarter echoed the difficulties of the fourth quarter. In the electronic materials and electronic devices sectors, profits fell in line with a drop in sales. However, multilayer chip capacitor earnings held firm at a relatively high level.
Q4. You stated that the profitability of multilayer chip capacitors basically remained at the high level of the previous period. Can we assume that earnings were flat?
A4. Because the capacity utilization rate was slightly down, costs also declined, but there is no denying that the operating profit ratio did decline. That said, the margin of decline wasn't that large.
Q5. How is the average unit price of multilayer chip capacitors trending?
A5. Unit sales prices of electronic components have fallen by just under 5% from the corresponding period in the previous fiscal year, but unit sales prices of multilayer chip capacitors are about at the same year-on-year level.
Q6. Has there been any change in your plan for capital expenditures, depreciation and amortization and R&D expenses from that announced in May 2001?
A6. As of May 10, 2001, TDK was projecting an increase in capital expenditures from ¥65.0 billion to around ¥70.0 billion for fiscal 2002. While we don't have any plans to revise specific figures, investments to ramp up capacity will be limited to particular areas in need of greater capacity, reflecting the considerably lower capacity utilization rate at the moment. Furthermore, other investments will be limited to those for rationalization and R&D. Because TDK's earnings are being squeezed, investments will be strictly confined to those that have a direct effect on raising earnings. Given this situation, capital expenditures for the full fiscal year will probably decrease to around ¥50-¥60 billion.
We expect depreciation and amortization expenses to be around ¥65 billion, basically unchanged from our projection on May 10, 2001. Because sales are falling, R&D expenses as a proportion of net sales will likely be around 6%, above the ratio we projected in May.
Q7. Assuming HDD head shipments in the first quarter of fiscal 2002 to be 1, how do you see shipments rising in the second, third and fourth quarters?
A7. We expect HDD head shipments to be largely the same in the second quarter as in the first. In the third and fourth quarters, we expect to see some fluctuations, but we expect them to be 1.3 to 1.5 times higher than in the first quarter.
Q8. Although it depends on customers, can we assume that there will be no delays in bringing out 40-gigabyte/disk HDD heads?
A8. We dealt with various problems affecting 40-gigabyte/disk HDD heads between May and July. As a result, we have greater confidence in our forecast for orders from customers. From this perspective, the figures for the third and fourth quarters look to be pretty firm.
Q9. Compared to the fourth quarter, operating profit as a whole seems to have improved somewhat even as sales are declining. Is this largely the product of restructuring in the recording media & systems segment or other factors? Could you give us a comparison between the fourth quarter of fiscal 2001 and the first quarter of fiscal 2002?
A9. Operating profit in the first quarter of the current fiscal year improved slightly over the fourth quarter. However, fourth quarter results included restructuring expenses of ¥3.1 billion. As such, the first quarter was in fact worse than the fourth quarter. Furthermore, it presently appears that operating profit will be under even greater pressure in the second quarter.
Q10. It looks like operating profit for the second quarter will decline by just over ¥5 billion on the first quarter. Could you give us a breakdown of the changes by sector in operating profit between the first and second quarters?
A10. We feel that the second quarter will be more challenging than the first quarter. The drop-off in demand for mobile phones and PCs is expected to reverberate in the second quarter, having not bottomed out in the first quarter. As such, profits for electronic components will be under greater pressure in the second quarter than the first. On the other hand, sales of recording devices are rising and restructuring measures in recording media have produced results. Overall we expect to see a slight improvement in earnings in the recording media & systems segment and recording devices sector in the second quarter.

With restructuring having ended in the Recording Media & Systems Segment, we will work our hardest to return this segment to profitability in the second quarter.
Q11. Why hasn't the profitability of multilayer chip capacitors fallen that much? Can you comment on the capacity utilization of facilities and operations at the new Kitakami Plant?
A11. Since the previous period we have been expanding production capacity. At the same time, we have lowered overall costs, including by switching to base metals for electrodes. This has allowed us to maintain profitability at a relatively high level.
The capacity utilization rate in the first quarter was about 50-60%. At present, we have a monthly production capacity of between 11-12 billion units. As for the Kitakami Plant, we are still in the process of conducting trial operations. As such, the new plant will not have a significant impact on production in the second quarter. The capacity utilization rate in the second quarter is expected to drop slightly to around 50%, compared with the first quarter.
Q12. I would like to know more details of your inventory. My assumption is that TDK was aiming for first-quarter sales of about ¥146 billion, but you fell ¥5 billion short of the mark. At the same time, you said that TDK would considerably reduce inventories. But inventories increased ¥7.1 billion. Did TDK actually plan to reduce inventories in the first quarter at all?
A12. TDK thought that first-quarter sales would be slightly higher than the ¥146 billion you just mentioned. The lower sales, at ¥141 billion, fell by more than your estimate, and resulted in the increase in inventories.
Q13. By how much do you expect to reduce inventories at the end of the second quarter?
A13. Our aim is to have inventories of about 1.5 months of net sales, as I believe I have already explained. However, because of the extremely unclear situation concerning orders, we have not stated clearly by how much we will reduce inventories. That said, we will endeavor to achieve this target by the end of the current fiscal year.
Q14. Please give us your thoughts on overall demand for HDD heads in the first half of fiscal 2002.
A14. At present, we estimate total first half demand of 260 million units, which equate to a slight increase on the 250 million units projected in May 2001. This is because in some areas we have been unable to capture demand from captive manufacturers.
Q15. You are forecasting HDD head volumes to rise considerably in the year's second half. This is probably premised on a substantial rise in market share in the second half. Could you please tell us which factor is more important: increasing orders from captive manufacturers, or taking market share from other manufacturers?
A15. We are estimating a first-half share of 22%, but expect to increase our market share in the second half to at least 30% with higher sales of 40-gigabyte/disk HDD heads. We also expect a return to higher orders from captive manufacturers.
Q16. The ratio of fixed expenses to net sales looks fairly high at the moment. Do you have any plans to launch a cost-cutting drive, including overhauling salary and employment systems?
A16. Results in the first quarter were certainly poor and we expect this situation to prevail for some time. Even assuming a recovery, because the diffusion rate for PCs and mobile phones is extremely high, sales will mostly be driven by replacement demand, meaning that a swift recovery would be improbable. To raise profitability, we recognize the need to embark on some structural reforms.

That's why we are presently considering what reform measures to take. We hope to be able to explain the specifics as soon as possible.
Q17. TDK has cleared the technical hurdles it faced with 40-gigabyte/disk HDD heads, so what is the reason for the product being slow to take off? Is it a matter of reliability of the HDD set? Or is it because demand isn't picking up?
A17. I have a feeling it is to do with the difficulty of launching a HDD set, an issue that relates to confidence in the product.
Q18. If that's the case, would I be correct in assuming that it will take until the end of the second quarter to ensure the reliability of the HDD set?
A18. Originally our HDD customers were planning to launch their 40-gigabyte/disk HDDs from around May. However, due to issues associated with HDD sets, they weren't in a position to do so until around July. We believe those issues have now been largely resolved.