Investor Relations

[FY2003 1Q Performance Briefing]Q&A

Q1. TDK's projections of structural reform expenses for fiscal 2003 remain unchanged at ¥8.5 billion. Structural reform measures in fiscal 2002 targeted savings of ¥23.0 billion in labor costs and ¥14.5 billion in other fixed costs. We estimate that structural reforms in fiscal 2003 will yield a total of approximately ¥2.0 billion in benefits.
A1. TDK has started shipping samples of TMR heads for HDDs. What are your estimates for capital expenditures needed to begin mass production?
Q2. TDK has started shipping samples of TMR heads for HDDs. What are your estimates for capital expenditures needed to begin mass production?
A2. Assuming mass production begins in April 2003, TDK does not foresee additional capital expenditures, provided that the TMR heads to be mass-produced are for use solely in one or two of the many types of HDDs available on the market. However, additional capital expenditures will be needed when TMR heads account for more than half of TDK's shipment volume, which we expect to happen in the latter half of next fiscal year.
Q3. Please give us your projections for the profitability and shipments of heads and capacitors in fiscal 2003.
A3. Assuming that first-quarter HDD head shipments in fiscal 2003 represent 100, TDK projects corresponding figures of 102 for the second quarter, and 110 for the third and fourth quarters, respectively. Head earnings are projected to remain at the first-quarter levels throughout fiscal 2003.

I would like to hold off on giving precise figures for growth in capacitor shipment volumes. However, let me say that capacitor sales rose 13% in the first quarter compared with the fourth quarter of fiscal 2002. Quarter-on-quarter capacitor sales are projected to remain flat in the second quarter. On the earnings side, while heavy discounting continues, TDK's structural reform measures have restored the company's ability to generate earnings.
Q4. At the May 8 earnings release conference, TDK projected that the profitability of capacitor operations in the first quarter of fiscal 2003 would exceed that achieved in the third quarter of fiscal 2002. How did TDK actually perform?
A4. Despite heavy discounting in the first quarter, levels of profitability in capacitor operations are recovering. Results were as forecast in May.
Q5. TDK projects ¥8.5 billion in total structural reform expenses for fiscal 2003. Please give us a quarterly breakdown of the portion of structural reform expenses that will be shown as restructuring costs on the income statement.
A5. The first quarter saw TDK book restructuring costs of approximately ¥800 million. TDK has budgeted for restructuring costs of ¥2.3 billion in the second quarter and ¥3.7 billion for the second half. The cost allocation for the third and fourth quarters is undetermined at present. In line with the above, TDK projects total restructuring costs of approximately ¥6.8 billion for fiscal 2003. However, TDK also projects structural reform expenses of ¥1.7 billion in fiscal 2003 to be shown as manufacturing costs on the income statement. This will bring projected total structural reform expenses for fiscal 2003 to ¥8.5 billion.
Q6. TDK has presented an analysis of first-quarter earnings relative to the same period last year. Can you give us a breakdown of first-quarter earnings relative to the fourth quarter of fiscal 2002?
A6. An analysis of quarter-on-quarter earnings has not been prepared. However, those numbers should reflect cost cutting and rationalization initiatives, as well as the beneficial effect of structural reform measures.
Q7. What is the ratio of sales of electronic materials and electronic devices to orders received in these segments, respectively?
A7. Rather than give a precise figure, let me say that the ratio of sales to orders received exceeds unity. Orders have significantly increased since the start of 2002, but have tapered off slightly since May. However, orders remain at a high level relative to the first quarter of fiscal 2002.
Q8. To what extent did first-quarter net sales and operating income surpass projections?
A8. Net sales were ¥148.7 billion, exceeding our projection of ¥145.0 billion by ¥3.7 billion. Operating income was ¥6.0 billion, ¥2.0 billion higher than our target of ¥4.0 billion. Despite booking foreign exchange losses in other income (deductions), TDK posted income before taxes of ¥3.3 billion, slightly above our target of ¥3.0 billion.
Q9. Although operating income surpassed first-quarter projections by ¥2.0 billion, why didn't TDK revise its projections for the full fiscal year?
A9. The main reason was that the outlook for exchange rate movements remains extremely unclear, given the current instability in the U.S. economy. Also, orders have been on a slight downward trend since May. Taking these factors into account, TDK wishes to maintain its initial fiscal 2003 projections announced at the beginning of the year.
Q10. Will slumping stock prices in the U.S. have an adverse effect on TDK's operating results for the latter half of the year?
A10. Consumer spending may be dragged down if flagging stock markets in the U.S. impact on economic fundamentals, resulting in a detrimental effect on TDK's operations. There will also be indirect consequences. Lower stock prices will result in unrealized losses on marketable securities. This will produce unrealized losses on securities contributed to TDK's retirement benefit trust, and thus bring down the value of pension assets. Consequently, TDK may have to incur charges in fiscal 2004 and subsequent years to cover the shortfall.
Q11. Please give us an idea of quarterly HDD head shipments compared with the previous year, and the percentage of 40GB/P heads relative to total head shipments.
A11. Shipments of HDD heads increased 31% in the first quarter, compared with the same period in the previous year. Relative to the first quarter of fiscal 2002, TDK projects shipments of HDD heads to increase 33% in the second quarter and 45% in both the third and fourth quarters. The percentage of 40GB/P heads, relative to total shipments, was about 90% in the first quarter, and is projected to be 65% in the second quarter, 30% in the third quarter and 20% in the fourth. TDK expects 60GB/P and 80GB/P heads to account for the remaining share in each quarter.
Q12. TDK has acquired Headway Technologies, Inc. How is the company contributing to TDK's head business?
A12. Headway Technologies is making a significant contribution to TDK's head business, especially in the area of design. Headway Technologies' bottom structure employing a lead over lay structure were ahead of TDK's technologies, and are now used in TDK's 60GB/P heads. TDK also plans to adopt writers based on a Headway Technologies design in future recording heads, specifically, HS writers. Headway Technologies will also develop a next-generation writer head for use in 120GB/P heads. TDK has fully incorporated the company's technologies into its 80GB/P heads.
Q13. TDK reported operating income of ¥6.0 billion, compared with its projection of ¥4.0 billion. How do you analyze the difference of ¥2.0 billion?
A13. The difference primarily reflects brisk sales in April and May, and a favorable exchange rate. Driving sales relative to the first quarter of fiscal 2002 were HDD heads, capacitors, DC/DC converters for entertainment applications.
Q14. TDK reported total structural reform expenses of ¥36.1 billion, including opportunity losses, in fiscal 2002. What effect did these structural reform measures have during the first quarter?
A14. Structural reform measures implemented in fiscal 2002 targeted savings of ¥23.0 billion in labor costs and ¥14.5 billion in other fixed costs, compared with the pre-implementation period. Of the ¥23.0 billion in targeted labor cost savings, TDK had carried out the structural reforms needed to yield savings of ¥4.5 billion by the end of the third quarter of fiscal 2002. The savings of ¥4.5 billion materialized in the fourth quarter of fiscal 2002. The remaining labor cost savings of ¥18.5 billion are expected to materialize in fiscal 2003.

TDK, however, projects net labor cost savings of ¥14.0 billion in fiscal 2003, down from the base estimate of ¥18.5 billion, reflecting an increase in pension costs due to declines in pension assets, and an increase in labor costs owing to the hiring of new graduates.

Because a portion of the ¥23.0 billion in targeted labor cost savings for fiscal 2003 had already appeared in the fourth quarter of fiscal 2002, TDK projects the beneficial effect of labor cost savings to materialize mainly in the first, second, and third quarters of fiscal 2003, on a year-on-year basis, respectively. On this basis, TDK had initially expected ¥4.5 billion in labor cost savings to materialize in the first quarter. However, savings in the first quarter were held to around ¥3.3 billion to ¥3.4 billion, on account of higher labor costs. This was the result of a rise in overtime pay brought on by an increase in capacity. The effects of savings in other fixed costs were expected to materialize at the outset of fiscal 2003. Assuming that savings would materialize evenly throughout the year, TDK had expected to see savings of ¥3.6 billion, or 25% of ¥14.5 billion, appear in the first quarter. TDK estimates that the actual result was about ¥4.5 billion.
Q15. Please give us figures for the fall in sales prices for capacitors from the fourth quarter of fiscal 2002 to the first quarter of fiscal 2003, as well as projections for sales price trends in the second quarter. The average unit price for components as a whole is projected to decline by more than 9% year on year, with capacitors expected to be discounted slightly more heavily than others. Does TDK plan to revise this outlook? Also, can you give us your outlook for sales prices?
A15. To answer your first question, average sales prices for capacitors have declined approximately 5% since March. Looking at quarterly trends in sales prices, there are still strong calls for discounts from our customers. Our full-year outlook for capacitor prices remains unchanged since our last earnings release conference. Next, capacitor sales in June were down slightly on April, due to the effect of falling orders since May. This gave rise to concerns about sales in June and following months. However, sales in July are largely on a par with June.
Q16. TDK explained at its previous earnings release conference that it would classify certain businesses as critical business units. Operations worth about ¥67.2 billion in sales were identified as such, from the second quarter onward. Can you give us an update on progress to date regarding these plans? How does this progress relate to revised sales projections for certain product segments, namely the semiconductors and others segment, and recording media and systems segment?
A16. TDK explained at its previous earnings release conference that operations worth ¥67.2 billion in sales were identified as critical business units. Of this total, we plan to withdraw from product segments worth approximately ¥6.2 billion in sales in the first half. TDK is making steady progress toward halting production in these product segments, as planned. However, even after the end of production, TDK still bears contractual obligations to supply some of these products. This will have a slight effect on sales for some time. Also, while plans call for halting production, TDK will continue to manufacture in small quantities, certain niche products for which we are the sole manufacturer. In operations accounting for the remaining ¥61.0 billion, we will continue to monitor monthly financial results and progress in addressing restructuring themes geared to transforming critical business units into profitable operations. At the end of the first quarter, TDK will begin evaluating critical business units, specifically their financial results and progress in addressing restructuring themes. A key focus is to ascertain whether these business units are meeting targets on schedule, and if not, how far behind they may be. This assessment will serve as the basis for further decisions. Two or three critical business units are currently behind schedule in meeting targets. On the whole, the remaining business units are outperforming their targets.

The downward revision of sales figures for the semiconductors and others segment and recording media and systems segment, are presented in note 2, on the bottom half of the first page of TDK's first quarter earnings release. The main reason for the downward revision was the deduction of sales promotion-related costs from net sales due to a change in accounting standards. Previously, sales promotion-related costs had been separately allocated to net sales and SGA expenses. One factor behind the revision was the fact that the majority of sales promotion-related expenses are associated with recording media and systems and certain semiconductors.
Q17. While first-quarter HDD head shipments fell short of projections, sales were largely on target thanks to the favorable exchange rate and an effort to sustain sales prices. How then did HDD head shipments fare in terms of earnings, against targets? Also, please give us you outlook for HDD head earnings in the second quarter and beyond, taking into account the production yield of 40GB/P and 60GB/P heads.
A17. In the first quarter, HDD head shipments fell slightly below target in June, but profitability has been improving steadily since the fourth quarter of fiscal 2002, in line with projections. We explained earlier that HDD head shipments are projected to rise in the second quarter and beyond, while HDD head earnings are projected to remain flat. These projections indeed reflect production yields.
Q18. You talked about HDD head shipments falling short of target in June. Can you explain the logic behind lowering your projection of shipments for the first half, while raising it in the second?
A18. The main reason for the revised projections is that our customers have substantially revised their production plans. While initial plans called for a shift from 40GB/P HDDs to 80GB/P HDDs, these plans were subsequently revised. Our customers are now planning to manufacture both 60GB/P and 80GB/P HDDs. There are two reasons for this change. One is the delay in developing HDDs equipped with multiple heads. Second is falling demand for models equipped with 2.5-inch HDDs. The upward revision of the second-half projection reflects our expectation that production of 60GB/P and 80GB/P HDDs will come fully online. In particular, we foresee a sharp rise in the number of HDDs equipped with single heads. We also expect a substantial volume of additional orders for 40GB/P heads.
Q19. TDK has reported that it has started shipping samples of TMR heads, but there still must be technological hurdles to overcome. Given that there are alternatives to this technology, how much effort is TDK channeling into TMR heads?
A19. The decision to pursue TMR heads will ultimately rest on the number of companies that can use this technology effectively. You are right in saying that there are a number of unresolved technical issues, relating to electrical resistance and other areas, but we estimate that currently, at least two companies will be able to apply the technology. In fact, HDDs equipped with TMR heads are already operational. However, other customers may begin exploring alternative approaches that include extending the use of 80GB/P-class heads, increasing the number of heads per drive, and minimizing spacing loss. Other customers may seek to develop perpendicular recording technology. TDK is considering responding, in principle, to all of these emerging alternatives. While we will mainly focus efforts on TMR heads, we also recognize the importance of keeping a close eye on technological developments in the marketplace and keeping all options open.
Q20. Although you raised the key issue of how effectively customers will be able to use TMR heads, head manufacturers are also faced with technological difficulties in mass production, such as controlling film thickness. What is your stance on this issue?
A20. As you know, TMR heads employ a CPP structure, making it easier to fabricate read track width when compare with current TDK GMR. In other words, TMR heads present advantages, as well as difficulties in mass production. Meanwhile, we are currently assessing, the performance of TMR film, including the distribution of film. So far, our findings are encouraging.
Q21. Sales of HDD heads in the first quarter decreased just over 10%, compared with the fourth quarter of fiscal 2002. Can you tell us how much HDD head shipments fell in the first quarter, compared with the same period? Also, was market share affected?
A21. Market share and shipments of HDD heads remained mostly the same in the first quarter, relative to the fourth quarter.
Q22. TDK is forecasting ¥2.3 billion in restructuring costs classified as selling, general and administrative expenses, in the second quarter. Please give us a quarterly breakdown of projections for the portion of structural reform expenses classified as manufacturing costs.
A22 Figures for restructuring costs were provided earlier. Let me give precise figures for total structural reform expenses, including restructuring costs and the portion of structural reform expenses classified as manufacturing costs. In May, TDK projected structural reform expenses of ¥1.2 billion in the first quarter, ¥4.0 billion in the second quarter, and in the latter half, ¥2.4 billion in the third quarter and ¥0.9 billion in the fourth quarter. Accordingly, total projected structural reform expenses were ¥8.5 billion for fiscal 2003. However, we have revised those projections in the current quarter, as the implementation periods of various structural reform measures are slightly out of sync with one another. The revised quarterly projections for total structural reform expenses are ¥1.9 billion in the first quarter, ¥2.9 billion in the second quarter, and a combined ¥3.7 billion in the third and fourth quarters. For the full year, the projection for total structural reform expenses remains the same as our earlier forecast at ¥8.5 billion. The allocation of total structural reform expenses for the third and fourth quarters is mostly the same as the proportion presented earlier in May.
Q23. It appears to me that TDK incurred an operating loss, excluding total structural reform expenses, of ¥1.6 billion in the fourth quarter of fiscal 2002. Am I correct in understanding that TDK will post operating income, excluding total structural reform expenses, of ¥7.9 billion in the first quarter and ¥4.9 billion in the second quarter?
A23. On that basis, the first-quarter figure is the sum of operating income of ¥6.0 billion, as shown on the income statement, and structural reform expenses of ¥1.9 billion, which equates to ¥7.9 billion. The second-quarter projection factors in forecast structural reform expenses of ¥2.9 billion. The figure is the sum of projected operating income of ¥4.0 billion and ¥2.9 billion, which equates to ¥6.9 billion.