Investor Relations | IR Events | Performance Briefing

[3rd Quarter of fiscal 2003 Performance Briefing]Q&A

Q1. Compared with your October 31 forecast, your latest forecast raises second-half sales by ¥23.1 billion but operating income by only ¥0.2 billion. Would you tell us more about this? You have raised your second-half sales forecast for recording devices (HDD heads) by ¥16.5 billion, so I would think that operating income would rise proportionally. Does that mean you are significantly cutting your operating income forecast in the other four categories (electronic materials, electronic devices, semiconductors and others, and recording media & systems)?
A1. You are correct. We have raised our sales forecast for the second half by ¥23.1 billion. This increase comes mainly from recording devices. Our operating income forecast for electronic devices rose along with sales but not at the same rate as sales. At the same time, we reduced our operating income forecasts in the other four categories because of unexpectedly strong price discounting pressure.
Q2. Please give us third-quarter numbers and fourth-quarter estimates for structural reform expenses, including restructuring costs shown on the income statement.
A2. Third-quarter structural reform expenses were about ¥2.8 billion. This represents about ¥2.6 billion in restructuring costs (about ¥1.0 billion for personnel, ¥1.3 billion for plants and equipment, and ¥0.3 billion for the removal of equipment). The cost of sales includes expenses of about ¥0.2 billion for the disposal of inventories. On October 31, we stated that expenses for the fourth quarter would be about ¥1.7 billion. Since some of those expenses were incurred earlier, in the third quarter, we now estimate that fourth-quarter structural reform expenses will be about ¥900 million. Restructuring costs will be about ¥850 million and expenses in the cost of sales will be about ¥50 million. Due to these changes, our estimate of structural reform expenses for the fiscal year has been raised from about ¥8.5 billion to about ¥8.7 billion. So this program is proceeding largely as planned.
Q3. Please tell us your estimates for capital expenditures, depreciation expenses and R&D expenses for the current fiscal year.
A3. As shown on page 6 of the supplementary data we handed out, we have reduced capital expenditures from ¥50 billion to ¥40 billion, depreciation expenses from ¥60 billion to ¥57 billion, and R&D expenses from ¥32 billion to ¥31 billion.
Q4. Please provide a breakdown by product category of your fiscal year sales estimate of ¥608.1 billion.
A4. As is shown on page 7 of the materials you have, our forecasts are ¥170.4 billion for electronic materials, ¥114.0 billion for electronic devices, ¥173.8 billion for recording devices, ¥14.6 billion for semiconductors and others, and ¥135.3 billion for recording media & systems.
Q5. Looking at operating income after restructuring costs, TDK had profit margins of about 5% in both the second and third quarters. And operating income increased 30% from the second to the third quarter. But it appears that your outlook for the fourth-quarter profit margin is only about 3%. I believe this is due to strong demands for price reductions. But why can't TDK absorb the impact of these discounts in the fourth quarter, even though you could in the second and third quarters?
A5. The biggest reason is a decline in sales. Third-quarter net sales were ¥161.6 billion, but we expect the fourth quarter to post sales of about ¥150 billion. The drop of about ¥11 or ¥12 billion in sales will have a big impact on earnings in the fourth quarter.
Q6. Please tell us your basis for the operating income forecast of ¥20.2 billion for this fiscal year. Does this figure simply represent the ¥0.2 billion by which third-quarter operating income exceeded your forecast of ¥6.0 billion? Or is this increase over your previous ¥20.0 billion forecast the net result of changes in items like depreciation, structural reform expenses and price discounts?
A6. We have not analyzed the fourth quarter as minutely as you described. Our operating income forecast is based on the forecasts provided by each operating division. It is not based simply on the figures your quoted.
Q7. Compared with your previous forecast, depreciation has fallen by ¥3 billion and R&D expenses by ¥1 billion. How are these reductions divided between the third and fourth quarters? Also, your October 31 fiscal-year forecast projected a price discounting impact of about ¥60 billion. What is your estimate of this impact now?
A7. R&D expenses will be about the same in the third and fourth quarters. So this decrease is not due to a drop in the fourth quarter alone. Due to our plans to cut capital expenditures below initial plans, we expect that fourth-quarter depreciation will be about ¥200 or ¥300 million less than in the third quarter. But I don't think there will be any significant differences between R&D expenses and depreciation in the third and fourth quarters.

Last October, we announced that price discounting would probably reduce sales by about ¥60 billion. The actual impact was ¥29.4 billion in the first half and ¥19.0 billion in the third quarter. Since new long-term contracts start in January, we expect that discounting will hurt sales even more in the fourth quarter. But fourth-quarter sales will fall below the third quarter, so we estimate that the impact of discounting will be about the same as in the third quarter.
Q8. According to today's report on progress with selection and concentration, TDK plans to keep manufacturing a large number of existing products. Will these products actually contribute to earnings in the next fiscal year? Please comment on the outlook for these products.
A8. Regarding progress with selection and concentration, we divided products defined as Critical Business Units (with a total sales value of ¥67 billion) into 5 categories. The fourth category, "Products that have growth potential and are expected to improve next fiscal year," represents sales of ¥14.1 billion. Since we based this decision on long-term potential, these products may not return to the black in the following fiscal year. But some of these products are expected to achieve substantial improvements with regard to profitability relative to this fiscal year. The fifth category, "Products for which profit recovery is expected next fiscal year due to further restructuring in fiscal 2003," represents sales of ¥26.8 billion. These are all products that should be profitable now. But since things don't always work as planned, we will continue to implement structural reforms this fiscal year to make these products profitable again.
Q9. How much will products in categories four and five contribute to earnings in the next fiscal year?
A9. We have no firm figures, but I think these products will make a significant contribution.
Q10. Compared with the previous forecast, you have reduced the earnings outlook for all product categories (electronic materials, electronic devices, semiconductors and others, and recording media & systems) except recording devices. In which area was the reduction in your forecast greater, the recording media & systems segment or the three electronic materials and components' categories?
A10. The reduction was greater in electronic materials and components (electronic materials, electronic devices, and semiconductors and others), where we are exposed to severe price discounting pressure.
Q11. Will the recording media & systems segment be profitable in the fourth quarter?
A11. Yes, we expect that this segment will be profitable.
Q12. In the third quarter, the recording media & systems segment booked about ¥1 billion in structural reform expenses. Exactly what were these expenses for?
A12. These expenses resulted from shutting down an audiotape factory in Germany.
Q13. What percentage of CD-Rs are purchased from other manufacturers?
A13. We cannot give you a specific number. Right now, Luxembourg is the only place where TDK is manufacturing CD-Rs. That means we are relying on OEM suppliers for a fairly large percentage of these discs.
Q14. Recently, we have seen the appearance of HDDs that use only a single head. Will this have an impact on recording devices sales in the next fiscal year?
A14. Single-head HDDs are now produced by one U.S. and one Korean company. We don't think that other companies will start making these drives, so the effect on sales will probably be minor.
Q15. Why do you think so?
A15. This involves our customers' strategies, so we can't comment.
Q16. You have told us that price discounts reduced third-quarter sales by ¥19 billion. This is much larger than the first- and second-quarter reductions. According to other manufacturers of passive components, prices have stopped falling in the second half of this fiscal year. But TDK's figures seem to indicate that prices are dropping even faster. Is this how we should interpret your results? And can you tell us of any differences in discounting trends among individual products?
A16. Compared with the first half of this fiscal year, discounting in the third quarter was much more severe. Products facing pricing pressures were high-frequency components and capacitors, as explained in the past.
Q17. Why were discounting demands so strong? Was it the need to cut prices to preserve market share relative to your competitors? Or was it strong demands from your customers?
A17. The situation is different in each of our business units. Basically, discounting pressure is linked to supply-demand dynamics. Component manufacturers have excess capacity even now, so I think this is the reason we are seeing discounting.
Q18. If we say that HDD head shipments were 100 in the first quarter, how did your shipments change in the second, third and fourth quarters? And please tell us how 60GB/P and 80GB/P products have changed as a share of total HDD head sales. I believe that TDK employs different technology for its 60GB/P and 80GB/P heads. Does that mean your costs are lower so that we may see a change in profitability in the future?
A18. Regarding shipments, if first-quarter volume is 100, I stated at our previous meeting that the second and third quarters would be 110 and the fourth quarter 103. Now, I can say that the second quarter was 110, the third quarter was 128 and the fourth quarter will be 137. I would like to provide a comparison between the total for 60GB/P and 80GB/P heads and 40GB/P heads. That's because there is no clear dividing line between 60 and 80. Customers that are unable to use 80GB/P heads at this density use these same heads at the 60GB/P level. At the previous meeting, I stated that 40GB/P heads would be 99% in the first quarter, 73% in the second, 43% in the third and 16% in the fourth quarter. But these heads were still 56% of our HDD sales in the third quarter. And we expect this share to be 44% in the fourth quarter.

You are right. TDK uses different technology for 60GB/P and 80GB/P heads. I can't say anything about whether or not this reduces our costs. But it now appears that our start-up of 80GB/P production will be surprisingly trouble-free. It also appears that HDD manufacturers are having much less difficulty in starting production of drives with 80GB/P heads than they did when they began making drives with 40GB/P heads. That means the main factor affecting profitability will be production yields. Right now, we believe that these yields will not worsen very much.
Q19. Your fourth-quarter figure of 137 for HDD head shipments means that volume is up almost 10% over the third quarter. Is this because TDK is capturing market share?
A19. Yes. The increased volume reflects the market share captured from competitors as well as higher demand from individual manufacturers.
Q20. Please tell us about HDD head earnings. You told us that HDD head sales increased from the second to third quarter. Should we view this growth as producing proportionally higher earnings too? Also, since HDD head sales will be flat in the third and fourth quarters, will earnings rise or fall?
A20. Sales rose sharply but there wasn't the same rate of growth in earnings from the second to the third quarter. From the third to fourth quarter, sales volumes will rise but monetary sales will be about the same. Since that means sales prices are declining, earnings will decline a little.
Q21. Will HDD head capital expenditures in the next fiscal year be higher or lower than in the current year? And how much of the ¥10 billion reduction in this year's capital expenditures is related to HDD heads?
A21. We are planning on HDD head capital expenditures of about ¥9 billion this year and next fiscal year. The ¥10 billion decrease represents planned capacity expansion to meet an expected increase in demand that is no longer required as demand hasn't recovered as much as expected. We are not holding down investments in our HDD head operations.
Q22. Your plans for the 80GB/P and 120GB/P HDD heads appear to be a little off course. Previously, you indicated that some 120GB/P heads would use TMR technology.
A22 We think that TMR technology will be used mainly for 120GB/P heads used in mobile and 2.5-inch HDD applications.
Q23. Please tell us how ceramic capacitor volumes, prices and earnings changed from the second to third quarter, and your outlook for the fourth quarter
A23. Capacitor volume has been flat. Sales prices have fallen slightly. And capacitor sales have been declining steadily from the second quarter onward. When we announced first-half results, we stated that the capacitor profit margin declined a few percent from the first to second quarter, subsequently remaining level. This is generally the situation at present.

Regarding prices, the situation is the same as when first-half results were released. Second half prices will be 5% to 6% lower than in the first half of the fiscal year. Compared with the previous fiscal year, first-half prices dropped 12-15%, but we expect second-half prices to fall by less.
Q24. It seems that earnings in electronic components (electronic materials, electronic devices, and semiconductors and others) were poor despite an upturn in HDD head results. Is it possible that electronic component earnings weren't as bad as they appear to be? Maybe some of the increase in expenses was due to investments that will produce benefits beginning next fiscal year, rather than to structural reform expenses? Would you tell us if you posted any such up-front expenses?
A24. We posted no up-front expenses as you described in your question. Although we do not believe there is a major downturn in demand, you should view the poor electronic component (electronic materials, electronic devices, and semiconductors and others) earnings as the result of our decision to significantly cut back fourth-quarter sales based on our December performance.
Q25. From your explanations of HDD head operations, it seems that TDK will post record-high HDD head shipments in the fourth quarter. Is that true? Also, are you seeing any order cancellations or signs of possible cancellations from China during the Chinese New Year period?
A25. I think that fourth-quarter HDD head shipments will be very close to an all-time high for us. Second, we are seeing absolutely no order cancellations during the Chinese New Year. In fact, customers are asking us to sell them even more heads.
Q26. On the HDD head demand side, the need for HDD recording capacity is growing at an annual rate of about 100%. But, on the supply side, HDD head recording capacity is only rising at about 60% each year. Doesn't this point to an increase in the number of heads per drive?
A26. Let's look at where demand for HDDs is greatest in terms of capacity. Right now, 200-300GB drives are in increasing demand. We think that demand for 80GB/P heads will increase sharply in the April-June quarter of 2003. But we won't know for certain until PC manufacturers have finished testing HDDs from various manufacturers. We believe that these high-capacity HDDs will be used mainly in PCs rather than AV products.

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