Investor Relations | IR Events | Performance Briefing

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

Q1. Can you give us a breakdown by segment of forecasted net sales for the full fiscal year?
A1. The projection for total net sales is ¥560.0 billion. Of this, the electronic materials sector accounts for ¥164.4 billion, electronic devices ¥106.3 billion, recording devices ¥139.0 billion, and semiconductors & others ¥17.4 billion. The recording media & systems segment accounts for ¥133.0 billion.
Q2. Can you give us an idea of the first-half operating profits for each product within the electronic materials and components segment?
A2. We don't disclose earnings information for individual products. However, in broad terms, earnings of multilayer chip capacitors naturally fell in line with the fall in sales, but profitability was still at a high overall level. On the other hand, HDD head and ferrite earnings came under considerable pressure. The same can also be said of earnings from inductive devices.
Q3. What percentage of production do you see taking place in China three years from now?
A3. In the previous fiscal year, sales of products manufactured in China accounted for ¥200 billion of net sales. Of this, ¥40 billion was to the Chinese domestic market, and the remainder was exported. Adding further momentum moving forward, we want to increase the ratio of sales in the Chinese market. That's why we have set up this new business development group and are currently looking at various options. This approach will have an impact at both our Japanese and Asian production bases. So we're looking into that side of things, too. Still, at present we are just considering our options, and since no specific decisions have been taken, I cannot give you any projection right now of what will be taking place in three years' time. I would like to explain in more detail at a later date when things have been crystallized.
Q4. Given that TDK's competitors, particularly those overseas, have been relentlessly reducing their prices of multilayer chip capacitors, how have you managed to maintain your earnings so well?
A4. It hasn't been all plain sailing for TDK's multilayer chip capacitors. Profits have been more stable than in other sectors but it should be noted that they actually fell by about 50% year on year.
Q5. Can you give us a breakdown of the sales projections of ¥144.3 billion by sector for the third quarter of fiscal 2002?
A5. We are forecasting sales of ¥42.0 billion in the electronic materials sector and sales of ¥27.0 billion in the electronic devices sector. Projected sales for recording devices are ¥36.0 billion. For the semiconductors & others sector we are projecting sales of ¥3.3 billion. In the recording media & systems segment, our forecast calls for sales of ¥36.0 billion. The total of these projected sales is ¥144.3 billion.
Q6. Can you pinpoint for us the areas that caused segment profits to deteriorate between the first and second quarters?
A6. In the electronic materials and components segment, the decrease in earnings was mainly attributable to falls in the electronic materials and electronic devices sectors. Recording devices also dropped slightly.
Q7. Can you give us an idea of how you see profits trending in the recording devices sector from the second quarter through the third and fourth quarters?
A7. We expect 40GB/P products to become the mainstream in the market. As such, we should see a gradual improvement in earnings through the second, third and fourth quarters from a low point in the first quarter.
Q8. TDK's plans call for the elimination of 8,860 jobs. Can you break down that figure for Japan and overseas for each fiscal year?
A8. Of the 8,860 planned layoffs, we aim to cut 6,380 jobs in the current fiscal year and 2,240 jobs in the first half of next fiscal year. The other 240 jobs, including those from natural attrition, will be phased out in fiscal 2004. Of the layoffs planned for the current fiscal year, 1,880 jobs will be eliminated in Japan and 4,500 overseas, where 1,500 jobs were eliminated in the first half and 3,000 jobs will be cut in the second half. In Japan, of the 1,880 planned layoffs, 660 will be accounted for by terminations of contract employees' agreements, extensively in the first half.
Q9. What effect do you expect restructuring to have from the second quarter onward?
A9. We expect to incur restructuring costs of ¥1.1 billion in the first half of the current fiscal year and approximately ¥6.5 billion in the second half. We expect to see the results of this restructuring from around the fourth quarter, when we expect to yield benefits of approximately ¥4.0 billion.
Q10. You stated that TDK is expecting to record expenses totaling ¥7.6 billion in the current fiscal year for structural reforms. Can you give us a breakdown of those costs?
A10. The ¥7.6 billion in restructuring costs is made up of ¥5.0 billion related to personnel and ¥2.6 billion related mainly to the disposal of production facilities.
Q11. What other charges do you expect to book in addition to the restructuring costs of ¥7.6 billion in the current fiscal year?
A11. As I explained earlier during my presentation, we are presently considering additional measures to the structural reforms already implemented. As we have yet to negotiate further measures with the divisions concerned I cannot discuss specific details or figures at this time. Let me reiterate that when details have been finalized, we will release them as quickly as we can.
Q12. You said that you expect restructuring to yield benefits of ¥4.0 billion in the fourth quarter alone. What benefits do you expect next fiscal year?
A12. The planned elimination of 8,860 jobs is expected to yield ¥4.0 billion in benefits in the current fiscal year. Next fiscal year, the planned layoffs are expected to result in a ¥16.0 billion reduction in labor costs. Naturally, there will be other expenses associated with these costs. These costs will be consumed by sales price reductions and other things, and have not been factored into our figures. However, we do expect to see some consequential reductions in expenses other than labor costs.
Q13. In my view, TDK appears to be overextending itself in terms of the elemental technologies and materials its businesses are involved with. TDK's latest reforms seem to focus on your unprofitable businesses, but aren't you thinking seriously of ways to make TDK a more attractive company?
A13. I understand that you might think that TDK is spreading itself too thin. But, what you must remember is that TDK's earnings are sometimes derived from gains in media earnings and sometimes from growth in head earnings. It's just that both media and head earnings are low, as you know. To improve earnings to levels commensurate with the cost of capital of these business lines, we are narrowing down our focus. Because tapes and HDD heads have limited users, ordinary consumers and HDD manufacturers, respectively, these businesses are susceptible to the economic circumstances of their customers. On the other hand, "commodity" products such as multilayer chip capacitors are sold to consumers in manifold markets, enabling risk to be mitigated somewhat. TDK's core competences have traditionally been electronic components, materials and materials development, so we will channel resources into these core business lines. With regard to multilayer chip capacitors and inductors, coating technologies that were developed in tapes and evaporation technologies can be used in multilayering technology. As these technologies become finer, they will also be useful in head sputtering and other technologies. Thus these technologies also fall within the areas that we will concentrate on.
We want to derive electronic component earnings chiefly from products such as finer large-capacity multilayer chip capacitors and inductive devices, and DC-DC converters. We are concentrating resources also because we are emphasizing not just modules and components but also functions.
Q14. Can the president give us some idea of his present target for operating profit next fiscal year given the structural reform measures that are under way?
A14. To be honest, even the outlook for the fourth quarter of the current fiscal year is extremely unclear. Due to orders received and other factors, we have a pretty good idea about the third quarter. It is very difficult to forecast demand in our business in the fourth quarter, however, because our customers, including set manufacturers, have revised their earnings projections downward in light of unclear market conditions. As such, from next fiscal year onward, we are working under the assumption that sales will be flat. Based on this, we hope to improve earnings through measures such as reducing fixed expenses and improving variable expenses.
Q15. Is the ¥16.0 billion you hope to save by paring labor costs next fiscal year in addition to the ¥4.0 billion in savings you forecast in the current term?
A15. We are targeting savings of ¥4.0 billion this fiscal year and ¥16.0 billion next fiscal year.
Q16. It would seem that TDK has been slow to pull out of certain areas, even as it promotes selection and concentration of resources. Why is that?
A16. As you point out, TDK has been advocating the selection and concentration of resources and we recognize the need for speed in doing so. TDK is continually identifying unprofitable products and reshaping its product portfolio accordingly. That said, because there haven't been any major changes in business units, there have been few changes in our product portfolio.
The reason that this process hasn't gone as well as planned stems from two main factors. First is a sufficient lack of fluidity in the Japanese labor markets. Secondly, cutting a product from our lineup has a negative impact on other products that use the same production line. These are the reasons for the delay in eliminating unprofitable products.
Q17. What are TDK's exit rules for businesses?
A17. Given the reasons for the delays in executing our selection and concentration strategy to this point, we have reviewed the exit rules for products. We have grouped our products differently so that we can clearly determine whether to continue with a product or let it go even if the production process stops. We are now examining how best to allocate resources to this initiative.
We have decided to classify businesses that have returned negative TVA (TDK Value Added) for the past two years as "critical businesses" and to thoroughly review their business plans from various angles based on NPV (Net Present Value). In principle, we have decided to exit businesses that we don't expect to make it back into the black within three years in terms of NPV. With respect to businesses that we expect to see return to profitability in terms of NPV within three years, we will conduct thorough, half-yearly reviews and allocate resources appropriately. This is all part of our present structural reforms.
Q18. What was TDK's market share for HDD heads in September 2001?
A18. TDK's share in September was around 25%.
Q19. Can you explain the logic behind TDK's second-half plan for its HDD head business?
A19. It is a fact that we are trailing other companies, but as I explained earlier, TDK's heads have passed the qualification test and gained the approval of OEMs (HDD makers supplying to PC makers). Even if OEMs approve the products of other companies, those products will still lag behind and will be regarded as second-vendor products. There will also be a clear gap between first- and second-vendor products in terms of quantities.
We were in the reverse position with 20GB/P products in that we weren't first to get approval, but TDK is positioned to capture the top position with 40GB/P products. I think the prospects are good in terms of both market share and sales in the second half.
Q20. What is the composition of mainstay products in the electronic materials and electronic devices sectors in TDK's full-year net sales projections?
A20. Ceramic capacitors make up around 64% of projected sales of electronic materials. In electronic devices, we expect inductive devices and high-frequency components to account for around 55% and 17% of sales, respectively.
Q21. In the HDD head business, can you tell us about developments concerning captive manufacturers (HDD manufacturers that produce heads in-house) and non-captive manufacturers?
A21. I think we hold about a 50% share of 40GB/P products sold to non-captive manufacturers. Our policy has been to treat all customers the same regardless of whether they are captive or non-captive manufacturers. We are not thinking of aggressively expanding business with any specific manufacturer.
Q22. What specific actions are you taking in regard to changes in the medium-term network environment you spoke about as part of TDK's future growth strategies?
A22. When the environment does indeed change, I think we will see the emergence of wireless networks from the perspective of convenience, for example. At the beginning of October, we commercialized an Air H" CF-type wireless data card for DDI Pocket, which is offering a PHS service. We are also getting ready for the advance of Bluetooth technology, although the infrastructure is still not fully in place yet. In wireless LANs, we are accelerating preparations for 5GHz wireless LAN cards that are set to become the de facto standard for high-speed home networks, as well as access points.
While pursuing these initiatives, we will also move quickly to identify market trends. Part of this strategy is bringing to market electronic components that meet market needs, for example the communications power supplies and high-frequency components used in wireless LAN networks.
Q23. Will you revise your plan to trim TDK's consolidated workforce if there is a sudden surge in demand next fiscal year?
A23. Next fiscal year will be extremely testing. If demand happens to pick up, then I can say that we won't increase our workforce. One way of approaching this will be to put in place a system both in Japan and overseas whereby we employ people on a contract basis and thus turn fixed expenses into variable expenses.
Q24. Which area do you expect to improve the most in terms of earnings in the second half?
A24. HDD heads primarily. Then recording media where we expect higher sales due to seasonal factors. In components, we expect higher earnings from slightly increased sales of multilayer chip capacitors.
Q25. So will the improvement in HDD heads be wider than those in recording media and multilayer chip capacitors?
A25. We intend to raise our HDD head market share from 20% at present to 30% in the fourth quarter. Production yields will naturally improve, so I think your question answers itself.
Q26. What is your current view of the inventory situation, and what do you intend doing with the capacity utilization rate in the second half?
A26. Inventories are presently at the same level as at the fiscal 2001 year-end. That means we need to reduce them further. Given that sales are not increasing, however, inventories will not decline unless we maintain a capacity utilization rate similar to the second-quarter level.
Q27. It seems to me that you are having a difficult time in the electronic components segment, and in terms of TDK's competitiveness. What do you, as TDK president, perceive to be the biggest problems encountered thus far?
A27. Firstly, the upward curve of HDD head recording density just keeps on rising. This in itself has not served to reduce the value of HDD heads, but we haven't been able to lift production yields in response to the rise. Overall, this has weakened our profit structure. We thought that while relying on HDD heads for earnings, we could focus resources on electronic components and restructure our recording media operations. But those plans have gone a little awry now.
Another problem is that TDK as a whole was slow in recognizing change. We lost touch with our spirit of challenge and took a passive attitude to business. As a result, the benchmarks we set ourselves were extremely low. As the president of TDK, I feel responsible for our company's lack of urgency. Now, however, our sense of urgency has escalated. By restructuring our systems and organizations to bridge the distance between TDK and its customers, we can work with greater vigor and speed than ever before.
Q28. What specific steps are you taking to develop your solutions-driven businesses?
A28. Probably the best example is EMC-related products, of which components form the core business. Other businesses range from anechoic testing chambers to related automated measurement and evaluation systems, hardware and software. If, for example, a customer has a problem with noise that falls outside existing regulations, then TDK can help identify the problem and even provide components that offer a solution. Given the recent advances in wireless networks, we can provide antenna solutions based on radiation patterns in anechoic testing chambers, including where to set up antennas. Future wireless environments will see an overabundance of electromagnetic waves. For example, we will need to absorb the electromagnetic waves at Electronic Toll Collection (ETC) automated tollgates. We will respond by selling solutions as opposed to individual pieces of hardware and products.
I will give you another example of what we view as a solutions-driven business. Most home appliance manufacturers have limited knowledge of wireless environments. When creating a home network, home appliance makers will team up with TDK to address such issues as electromagnetic waves, wireless modules and how to handle interfaces from PC interfaces to home appliance interfaces.
Q29. In the HDD head business, how will you respond to future fluctuations in the market shares of TDK customers?
A29. To avoid risk in the event that a manufacturer that does not deal with TDK seizes an overwhelming competitive advantage, one example we are considering is to develop high-end heads through tie-ups with a certain customer.
Q30. I suspect there have been internal problems at TDK in getting to the current situation. Where do you consider those problems to lie?
A30. In recognizing change, or to put it another way, in our lack of agility and sensitivity to the market. One example is our decision regarding capital expenditures in the first half of last year. Another is that we did not reduce our inventories, even though the situation at the end of last year compelled us to. This delay in recognizing change, and our slowness in acting to it, stemmed from the larger problem of TDK's relationship with the world outside TDK.

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