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[ Third quarter of fiscal 2002 Performance Briefing ]Q&A

Q1. Third-quarter sales were more than 10% higher than in the second quarter, but so were the cost of sales and SG&A expenses. What were the reasons for the growth in these expenses?
A1. The main reason is that SG&A expenses in the third quarter included restructuring charges of \7.3 billion, mainly for early retirement expenses at our domestic subsidiaries and the disposal of equipment.
Q2. Would you provide us with operating income data for the electronic materials and components segment and the recording media & systems segment for the third quarter and your estimates for the year.
A2. We had planned on recording media & systems segments returning to the black this fiscal year, but the segment posted a small loss in the first half. In the second half, results will be impacted by declining CD-R sales prices and other factors. The segment has posted losses in each of the first three quarters of this year, and a small loss is expected in the fourth quarter, too. We are forecasting a company-wide operating loss of \36.0 billion for the full year. The electronic materials and components segment is thus responsible for the remainder of our projected operating loss for the year. Note that this year's estimated operating loss includes restructuring charges of \21.4 billion.
Q3. Would you provide a summary of second, third and fourth-quarter earnings in major product categories, excluding restructuring charges?
A3. In electronic materials, electronic devices, recording devices and recording media & systems segment, there were only minor changes in operating income between the second and third quarters. In the fourth quarter, we expect that earnings in electronic materials, electronic devices and the recording media & systems segment will decline somewhat from the third quarter, but that we will see a small improvement in the recording devices sector.
Q4. It appears that TDK has been a little slower than other electronic component manufacturers in reducing inventories. What are your thoughts about this?
A4. Price instability in certain categories of the recording media & systems segment caused some inventory increases in this segment. However, you are right. We are taking a systematic approach to reducing inventories while introducing supply chain management methodology. Through these measures, we plan to achieve even greater inventory reductions in the following fiscal year.
Q5. Third quarter sales in the electronic materials and components segment increased over the previous quarter, but losses in this segment have worsened. Are lower unit sales prices solely responsible?
A5. Besides falling unit sales prices, a lower capacity utilization rate was also responsible.
Q6. What is your earnings forecast for next fiscal year?
A6. Although earnings are being pressured by calls for further discounts, we are currently implementing measures that will allow us to generate profits even in the event that net sales remain flat at the current fiscal year's level of \560 billion.
Q7. Please give us the figures for R&D expenses, depreciation expenses and capital expenditures for the current and next fiscal year.
A7. As the current fiscal year is not yet over, I can't give exact figures, but R&D expenses should be approximately \37 billion. R&D expenses for next fiscal year should be about the same as this year. For the current fiscal year, depreciation expenses should be around \60 billion and capital expenditures roughly \53 billion.Depreciation expenses for next fiscal year should decline slightly.
Q8. In November 2001, you stated that you expected restructuring charges to be \5.5 billion in the third quarter. Actually, restructuring charges in the third quarter totaled \7.3 billion. You also stated that fourth-quarter charges would be \1.0 billion. Are you now changing the outlook for restructuring charges in the fourth quarterto \13.0 billion? And at the November earnings announcement, you stated that the benefits of cuts in personnel expenses would produce savings of about \4.0 billion in the fourth quarter. Are you revising this figure now?
A8. You are correct about restructuring charges. The reduction in personnel expenses that we will see in the fourth quarter will come from restructuring measures taken in the third quarter. We had expected to receive about 1,000 applications for early retirement at our domestic subsidiaries. The actual figure, though, was about 1,500. We expect that the additional workforce reduction of 500 will produce a further cost reduction of approximately \0.5 billion compared with estimates announced along with interim earnings, increasing savings from our initial estimate of \4.0 billion to approximately \4.5 billion.
Q9. My question involves the ongoing structural reforms. I would like to know if management is considering reducing the size of the company to a suitable scale so that TDK can get a new start. To eliminate difficulties with existing businesses, this reduction could even cut assets or net sales by one-third . I would very much like to hear the president's thoughts regarding TDK's unprofitable businesses.
A9. As I explained at our first-half earnings announcement, we have reviewed our unprofitable businesses for the purpose of eliminating products where we believe it will be difficult to recover our investments over the next three years. We have already identified several candidates, and we are considering removing them from our product line. Right now, our capacity utilization rate is very low. For this reason, I want to identify areas where we can improve profitability, assuming normal capacity utilization, and take suitable actions now. Consequently, earnings are more important than sales. I am not concerned about sales declines. We will always remain focused on improving the operating income margin.
Q10. I understand that TDK must reduce its workforce, review unprofitable businesses and realign production activities. But can you provide more information about becoming more competitive from the standpoint of business fundamentals?
A10. We started a review of all our R&D themes last October. Based on this review, we will begin concentrating on a smaller number of themes next April. We want to provide our customers with timely new product plans. We will no longer wait for business, instead taking the offensive. This is why each business unit now has a product planning capability. Changes in IC circuitry are having a great impact on passive components. We are bolstering our skills in IC technology with the aim of developing more electronic materials and components. To commercialize new products faster, we will create a centralized database for our knowledge. In our core competences of materials and process technology, we will be bolstering our ability to develop organic, hybrid and other materials to complement our traditional expertise in the inorganic domain. And as we reinforce nanometer-class processes, we will be withdrawing from activities that are unrelated to our core activities and where we cannot create value.
Q11. The company has recently offered a special voluntary retirement package focused on TDK. This program appears to build on the early retirement incentive program introduced last year at domestic subsidiaries, which received roughly 1,500 applicants. How do TDK's subsidiaries feel about this program, which focuses restructuring measures on TDK proper for the first time?
A11. The decision to cut personnel is among the most difficult faced by TDK, and is looked to only as a last resort. Our original intent was to carry out both initiatives at once, but the measures have been introduced separately to accommodate deliberations with labor unions, which are necessary in respect to TDK's domestic operations. Some of those who lost their jobs at subsidiaries commented on the importance of maintaining TDK's presence in regional areas of Japan, such as Akita Prefecture. I keenly feel their pain. Nonetheless, TDK's morale has not been damaged by restructuring measures. Rather, TDK employees are more determined than ever to make a concerted effort to generate profits beginning next fiscal year.
Q12. Some of TDK's businesses seem to be suffering from declining profitability. Will TDK implement additional restructuring measures?
A12. The implementation of the restructuring measures announced on November 1, 2001, along with interim earnings, will continue into the next fiscal year. TDK has already announced all restructuring measures it plans to implement to date.
Q13. What are TDK's targeted profit margins, and will there be additional restructuring measures if these targets are not met?
A13. TDK targets an operating income margin of 13%. In the electronic materials and components segment, TDK is currently spread too thin and some products are manufactured only for recognition. TDK aims to create No.1 products and pursue higher profitability by narrowing products down to those which give full play to its core competencies. However, further restructuring is not an immediate option, since we believe recent domestic restructuring initiatives are sufficient.
Q14. Excluding restructuring charges, how much did capacitor earnings fall in the third quarter compared with the second quarter?
A14. We estimate that profitability in the third quarter will be about 5% below the first half. Additionally, profitability in the fourth quarter will be about 3% lower than the third quarter.
Q15. You stated that the average unit price for products in the electronic materials and components segment, including HDD heads, was down 8% year-on-year. What is the status of discounting on capacitors? And what is your outlook for the next fiscal year?
A15. Compared with March 2001, the average sales price of multi layer chip capacitors was down by about 17% overall as of last December. Looking ahead, we feel that discounts are still likely to increase. Although there are signs that discounting is slowing, we are still seeing demands for price reductions.
Next fiscal year, I'd like to see prices decline by no more than 10%.
Q16. If capacitor prices continue to fall, do you think your capacitor business can achieve higher earnings in the next fiscal year?
A16. We have taken steps to improve operations by conducting a sweeping restructuring program this fiscal year. We are now formulating plans aimed at generating higher earnings in the coming fiscal year.
Q17. Multi layer chip capacitor average sales price fell 17% from March to December 2001, and TDK forecasts a further decline of 10% for the next fiscal year. Is this figure realistic, in view of intensified competition among Asian manufacturers?
A17. The projection of a 10% decline is admittedly optimistic.
Q18. How do HDD head shipment volumes in the third and fourth quarters compare with the second quarter? And how are HDD head orders now?
A18. Compared with the second quarter, third-quarter shipments were 20% higher and we expect that fourth-quarter shipments will be 50% higher. Regarding orders, the fourth quarter is better than the third.
Q19. The HDD head market seems to become highly volatile with each change of generation. How will TDK consistently duplicate its success with 40GB heads with ensuing generations of 60GB and 80GB heads?
A19. Since 60GB heads incorporate existing technologies, they will enter mass production at an early stage, allowing TDK to get off to a strong start. Likewise, TDK will advance mass production of 80GB heads by resolving existing and new technological issues, and by further reducing development lead time for wafers.
Q20. In the HDD head business, TDK is reportedly teaming up with HDD manufacturers in the server field. What progress has been made in this regard?
A20. For contractual reasons, all that I can report is that things are going along smoothly.
Q21. Can you give us your thoughts on third-quarter earnings in the HDD heads business?
A21. I cannot disclose earnings on specific businesses, but production yields are improving and volumes are increasing. Therefore, at the very least, the situation is better than it has been up to now.
Q22. Do you think the improvement in profits in the HDD heads business will be greater between the second and third quarters or between the third and fourth quarters?
A22. The profit improvement will probably be greater between the third and fourth quarters.

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