President & CEO
[ Slide 1 ]
Thank you for taking time to attend today's earnings conference. Your continued support for TDK is greatly appreciated.
[ Slide 2 ]
Today, I would like to provide an overview of our third-quarter results of operations and the outlook for the entire fiscal year.
In the third quarter, consolidated net sales were ¥149.2 billion, 17.2% less than in last year's third quarter. There was an operating loss of ¥14.2 billion compared with operating income of ¥18.1 billion last year. Income before income taxes fell from ¥15.6 billion to a loss before income taxes of ¥13.8 billion, and net income fell from ¥10.4 billion to a net loss of ¥9.8 billion. The operating loss includes restructuring charges of ¥8.5 billion.
[ Slide 3 ]
In the electronic materials and components segment, segment sales were down in all markets except automobiles, where results were generally flat. There were year-on-year sales declines of 60% in communications sector, 13% in AV products, and 7% in office equipment.
With regard to the communications sector, we announced our intention two years ago of raising sales of communications products from 10% to 20% of our total sales. In the past fiscal year, these products increased to 16% of sales. In the current fiscal year, communications products have fallen to only 8% of total sales. The effects of poor market conditions were magnified by our weak position as a latecomer to the communications market. We will focus on creating a powerful product line-up to generate growth during the next period of market expansion.
The relatively small drop in the office equipment sector was due to a recovery in sales of HDD heads. Head sales were 28% higher than in the second quarter, returning to year-on-year growth at last. We were able to recapture market share as 40GB/P heads account for a rising share of HDD demand. We estimate that our HDD head market share has grown from 20% in the first half to an average of 28% for the second half, and 30% in the fourth quarter.
We had been facing difficulties due to the termination of HDD production by a major customer of ours and low production yields of heads. Now, our yields are improving and the outlook for the new 60GB/P and 80GB/P heads is becoming clear. I believe we have reached the point where investors can look forward to good news regarding HDD head earnings.
In the recording media & systems segment, sales increased 9% as declines in audiotape and videotape were offset by growth in optical media, datatape and software products. Audiotape and videotape fell below the 50% level to account for 44% of segment sales.
CD-Rs remained in the red as prices fell sharply. I believe that we need to take further actions to improve our CD-R profit structure, which is highly reliant on Europe.
Datatape earnings are improving. We view these tapes as a category that holds much potential.
Earnings in the recording devices sector and the recording media & systems segment were about the same as our estimates. Earnings in the electronic materials and components segment worsened, though, because demand did not rebound as soon as we had expected and discounting exceeded our projections.
[ Slide 4,5 ]
Now, I will discuss our forecasts for the fiscal year.
On a consolidated basis, we are forecasting an 18% decline in sales to ¥565.0 billion, an operating loss of ¥36.0 billion compared with last year's profit of ¥56.3 billion, and a net loss of ¥23.0 billion compared with last year's profit of ¥44.0 billion. We estimate that non-consolidated sales will fall 32% to ¥312.0 billion, operating income will fall from ¥26.1 billion to a loss of ¥7.8 billion, current income will fall 84% to ¥7.8 billion, and net income will fall 89% to ¥1.0 billion.
In the first half of this fiscal year, TDK reported the first operating loss since we began preparing consolidated financial statements in 1975. Unfortunately, we expect to report our first full-year consolidated loss as well. When we announced our interim results last fall, we estimated that we would have an operating loss of ¥1.3 billion and net income of about zero for the full year. We are currently working on restructuring measures that will be implemented in addition to the changes in our profit structure that I outlined today. I will provide a report on these actions once we have finalized the numbers. I apologize for our need to significantly reduce our forecast for the current fiscal year.
[ Slide 6 ]
I would now like to discuss the reasons for the changes in our forecast for this year compared with the outlook we released at our first-half earnings announcement, along with additional actions to bolster our profit structure.
Let's first look at operational factors that forced us to increase our estimated operating loss for this year. Discounting of sales prices will reduce operating income by a further ¥6.0 billion. Finished product manufacturers are submitting increasingly greater demands for price reductions. Consequently, the actual discount rate for the third quarter, relative to the first half of the fiscal year, was 9.5%, exceeding our initial estimate of 7.5%.
Another factor was lower sales in the electronic materials and components segment and a more unfavorable product mix. This will reduce operating income by an additional ¥7.0 billion. In the information and communications sector, we were mistaken when we forecast an upturn in mobile phones and base stations. Sales of inductors, high-frequency components, ferrite and capacitors declined. Although sales of these products are now slowly improving, our forecast for the pace of the improvement was also off target.
[ Slide 7 ]
Next, let's examine expenses for our restructuring program.
At our first-half earnings announcement, we estimated that restructuring charges would amount to ¥7.6 billion. This represented ¥5.0 billion in early retirement expenses and ¥2.6 billion for the disposal of equipment and other items. At this time, we are adding another ¥18.0 billion in restructuring charges, ¥10.1 billion for early retirement and ¥7.9 billion for equipment disposal and other items. That raises our estimate for total restructuring charges this year to ¥25.6 billion, ¥15.1 billion for early retirement and ¥10.5 billion for equipment disposal and other items.
Through these actions, we plan to reduce our workforce by 7,280, including 2,780 in Japan and 4,500 outside Japan, by this coming March. In the following fiscal year, we plan to begin taking steps that will cut our workforce by an additional 2,000, outside Japan. We also expect our domestic workforce to shrink by an additional 480 due to natural attrition. Overall, we expect to achieve a net reduction of 9,760.
We are also realigning our production bases. We have reorganized eight domestic manufacturing subsidiaries into three companies. We plan to close three factories in Japan and three outside Japan. In addition, five factories are scheduled to be downsized.
Due to these measures, we expect to cut fixed expenses by ¥34.5 billion in the fiscal year ending in March 2003. Labor costs are to fall by ¥20.0 billion, rather than the ¥16.0 billion figure we stated at the first-half earnings announcement. The remaining savings will come from other cost reductions of ¥14.5 billion.
We are reexamining raw material costs, too. At the first-half earnings announcement, we stated our intention of cutting these costs by ¥20.0 billion. In response to ongoing demands for price discounts, we have revised our business plan for the coming fiscal year to include additional reductions in the cost of raw materials.
(Note: The projected cost reductions for the fiscal year ending March 2003 are based on results for the first-half of fiscal 2002, i.e. based on figures compiled prior to the implementation of restructuring measures in the second half.)
We are making steady progress in all of these actions to improve our profit structure. I am determined to bring about rapid improvements in our earnings and corporate value.
[ Slide 8 ]
Finally, I would like to discuss the dividend. We plan to pay a year-end dividend of ¥20 per share, resulting in an annual dividend of ¥50 per share applicable to this fiscal year. This is ¥10 less than in the previous fiscal year. We are allocating funds that would have been used for dividends to our restructuring program. Our goal is to quickly improve our financial health and raise the dividend payout ratio. Regarding directors' remuneration, there will be no bonuses this year and we are making further reductions in base salaries. From February, salaries of directors will fall by as much as 25%.
To summarize, TDK has posted sharp declines in sales and earnings. Everyone in this organization is committed to restoring profitability as soon as possible. I ask for your continued support and understanding as we take the necessary steps. Thank you.