Investor Relations | IR Events | Performance Briefing

[Financial Results for Fiscal 2003 Performance Briefing]Q&A

Q1. On page 8 of the handout materials, you give us business segment sales forecasts for the first and second half of fiscal 2004. Would you break these down into quarters? And can you provide quarterly operating income forecasts?
A1. We cannot supply quarterly sales forecasts because of the uncertain outlook. Regarding operating income, we are forecasting \15.7 billion in the first half and \22.2 billion in the second half for electronic materials and components, and \1.3 billion in the first half and \1.8 billion in the second half for recording media & systems.
Q2. In the second half of fiscal 2004, you are forecasting year-on-year growth of about 16% in sales of electronic materials and electronic devices. Why are you expecting this kind of growth?
A2. We believe capacitors will generate significant growth in sales of electronic materials. We do not expect to see much growth in other product categories. In electronic devices, we expect to see growth in sales of sensors, actuators and inductive devices.
Q3. Now that we are in the second month of this fiscal year's first quarter, can you comment on whether or not sales of electronic materials are meeting your plan?
A3. Regarding capacitors, we set a very conservative target and sales are largely as planned. Sales of HDD heads are exceeding our plan. We foresee a big increase in capacitor sales in the year's second half because we expect to make inroads in markets now controlled by tantalum capacitors. Of course, we cannot be certain this will occur. With regard to inductive devices, sensors and actuators, we have made good progress with new products that we submitted to users for tests. We believe that we will be able to offer these products in the summer and fall. While these types of components are becoming increasingly like commodities, sales plans are relatively easy to formulate because there are cases where users require customized components.
Q4. How would you characterize the volume of HDD head shipments in the first and second quarters of this fiscal year in comparison to the third quarter of the past fiscal year?
A4. There are fluctuations in HDD head shipments from quarter to quarter, so I would like to answer your question on a half-year basis. If shipments in the past fiscal year's second half were 100, then this year's first half will also be about 100 and the second half will probably be about 101.Based on trends since the beginning of this fiscal year, we believe that first-quarter HDD sales will be 30% higher than in last year's first quarter. We have set conservative targets for two reasons. First, we want to avoid the need to lower our forecast. Second, it is difficult to predict results because of the volatility of sales in the HDD head business. At this time, orders for 80GB/P heads are extremely strong.
Q5. If you say that capacitor shipments were 100 in the third quarter of the past fiscal year, what level of shipments do you foresee in this fiscal year's first and second quarters? And how is capacitor profitability changing from the fourth quarter of fiscal 2003 into this year's first and second quarters? I would also like to know how much the drop in capacitor unit prices is affecting profit margins.
A5. We do not disclose capacitor shipments in terms of volume. However, I can say that, in monetary terms, sales in the past fiscal year's fourth quarter were about 5% or 6% less than in the third quarter. In this fiscal year's first quarter, though, capacitor sales are 5% to 6% higher than in the third quarter. We expect to see sales growth of more than 10% in the second quarter, and similar growth in the third and fourth quarters. We had to deal with intense pressure for price discounts during the past fiscal year. This caused a small decline in profit margins in the year's second half. In this fiscal year, however, cost-reduction programs and other actions are improving margins. So we plan to generate capacitor earnings this fiscal year that are about the same or slightly higher than in the past fiscal year.
Q6. At the first-half earnings announcement last fall, the president told us about actions to achieve satisfactory profit margins in magnets, inductive devices and high-frequency components. What were the results of these actions in last year's second half and what kind of profit margins do you expect to generate? Please tell us your level of confidence and a progress report, including increases in manufacturing output, with respect to these three products.
A6. Inductive devices is a field of traditional strength at TDK. We wrap wires around our own ferrite cores and fabricate multilayer coils. Unfortunately, we have been losing market share during the past several years. Recently, we have altered our ferrite production facilities and taken other actions in order to manufacture a highly powerful ferrite that has a low profile. Orders for components using this ferrite have been growing. We have altered designs to achieve smaller size as well and are now marketing these components. As a result, estimated earnings for this fiscal year will be about 80% of our target. As I noted earlier, earnings from ferrite used in coils is recovering. However, we are still not seeing an upturn in earnings from ferrite for large cores such as deflection yoke cores, a category where the drop in unit prices is particularly steep. Although ferrite products returned to the black in the past fiscal year, its earnings did not exceed the cost of capital. This year, our goal is to cover this cost.

In the magnet sector, ferrite magnets are performing very well. Small magnets for automotive applications are doing particularly well. We are increasing our share of this market by making even smaller magnets. Although there is no problem with ferrite magnet earnings, there is extreme pressure on prices of metal magnets. The situation is worst in the market for metal magnets used in HDDs. There is still room to improve materials, but we have not yet completed our work, so profitability remains poor. Since metal magnets haven't even reached half of their earnings goal, we will be acting quickly to turn this business around.

In high-frequency components sector, we dealt with the overall weakness of our communications-related components by removing many products from our lineup so that we can focus on profitable items. For example, we are now focusing on isolators and substrate components. TDK ranks among the world's leading suppliers of isolators, so we have concentrated on isolator models that generate earnings that exceed our cost of capital. We plan to raise profitability to our targeted level in the fiscal year that begins in April 2004. Since profit margins of our high-frequency components have fallen considerably, we will need quite a bit of time to restore satisfactory profitability. Unfortunately, high-frequency components will not achieve our desired profitability level in the current fiscal year.
Q7. Please explain your R&D strategy. I think TDK's problem is that the company can't easily translate its immense technological expertise into competitive products. Have actions you've taken during the last six months really brought about meaningful changes in the organizational development process? From the viewpoint of someone at the company, how are things changing? How will projects now in the pipeline actually generate profits?
A7. I think you are correct in pointing out that our technological strength has not contributed to cash and this is something we are now trying to correct. Regarding our organization, we have established an Application Center to bridge the gap between our technologies and our customers. I think this action alone has greatly altered the mood at TDK. Regarding technology, we have a diverse range of technologies to match the diversity of our products. Naturally, this breadth has its advantages. So we will be delving more deeply into certain technologies while retaining the advantages of having a broad technological base. In the past fiscal year, we reviewed and realigned all of our R&D themes. At this time, we are just starting work on new themes resulting from this process. Until now, our \34 billion R&D budget was divided evenly between operating divisions and head office R&D. And a large share of the head office R&D expenditures was channeled to activities that were not tied closely to actual business operations. The result was a low level of return on those investments. Following our review, we are now raising the share of expenditures that target actual businesses so that research work can produce cash more effectively.
Q8. It appears that developing new capacitor materials is becoming more and more difficult. Would you explain TDK's policy regarding the development of these materials, including changes in development methods and possible tie-ups with other companies? I would like to hear about TDK's plans for developing capacitor materials and how you will distinguish yourself from competitors.
A8. Regarding materials, capacitors using the same basic metal employed today first appeared in the late 1980s. So it's natural for people to believe that, since we've been improving on this metal ever since, there isn't much more room for further improvements. But the thickness of the dielectric layer is now just one-tenth what it was a decade ago. This naturally means that advances in materials technology are needed to achieve the required levels of reliability and performance as capacitor layers become thinner and capacitors incorporate more and more of these layers. We will see more progress in making dielectric layers thinner and increasing the number of layers to raise capacitance. This will demand advances in materials technology. But we believe that the decisive factor may very well be process technology. From this standpoint, it is possible that the time may come when TDK conducts an R&D program with another company. But for the time being, we will continue to compete with other companies.
Q9. You stated that process technology may be more important than materials technology. At this time, there is virtually no difference among the materials technologies of Japan's leading manufacturers in terms of particle diameter and distribution. Does that mean companies will be competing on the basis of multilayer technology?
A9. We don't think that differences in materials technology among companies have largely disappeared. Our position is that, while materials technology is of course critical, the importance of process technology is increasing. Let me explain something in technical terms. Barium titanate no longer acts as a dielectric when particle size falls below 0.15 microns. So the dividing line between winners and losers in the capacitor market is likely to be determined by the ability to skillfully structure and process this material.
Q10. You have stated that TDK will continue to work on making capacitors that can replace tantalum capacitors. Right now, there is probably a gap of one generation, so it will be difficult to create a ceramic capacitor that can replace tantalum six months from now. What are your thoughts about this?
A10. Looking back over the past decade, history has proven that ceramic capacitors can consistently take over an increasing range of tantalum capacitor applications. As this process takes place, tantalum capacitors have been taking over the territory of aluminum electrolytic capacitors. So we believe that all types of capacitors will increase their maximum capacitance.
Q11. My question concerns the choice between GMR and TMR heads. Would you explain the background behind this selection process?
A11. The choice between GMR and TMR is basically a matter of placing priority on frequency characteristics or output power. This is most likely how customers will make this decision. So we are prepared to fill orders for both of these heads and are working with customers.
Q12. Please tell us why TDK's share of the HDD head market is rising and why demand for these heads is currently so strong.
A12. TDK's market share is rising because our customers are implementing winning strategies and because TDK is the winner among these customers in terms of the share of heads we supply. The reason demand is strong is that about 10% of HDDs are now used in products other than PCs and PC peripherals. We think this non-PC share is too high. We believe that our current strength lies in the ability of our client HDD makers to increase their own market shares and in our solid relationships with these manufacturers.
Q13. Your plan calls for an increase in operating income of \18.9 billion. How much will each segment contribute to this increase?
A13. Taking a conservative stance, we expect flat earnings ratio in recording devices. We expect to see a recovery in the electronic materials sector because of the small downturn we experienced in the second half of the past fiscal year. In electronic devices, which includes high-frequency components, we have been concentrating resources on carefully chosen products, and have implemented structural reforms and terminated certain products. We therefore expect to see dramatic improvements.
Q14. In your breakdown of operating income changes for fiscal 2004, you include a contribution to earnings of \35.1 billion from changes in net sales and product mix. Can you provide an explanation of this relatively large number?
A14. We are forecasting an increase in net sales from \608.9 billion to \635.0 billion, a difference of \26.0 billion. But since this factors in price discounts of \50.0 billion, the effective increase is \76.0 billion. Assuming that expenses are divided evenly between variable and fixed components, this effective increase in sales would therefore raise operating income by a little more than \35.0 billion.
Q15. We are forecasting an increase in net sales from \608.9 billion to \635.0 billion, a difference of \26.0 billion. But since this factors in price discounts of \50.0 billion, the effective increase is \76.0 billion. Assuming that expenses are divided evenly between variable and fixed components, this effective increase in sales would therefore raise operating income by a little more than \35.0 billion.
A15. We are projecting an improvement of about \1 billion in the recording media & systems segment and no significant improvement in recording devices. That means the remaining increase in operating income will come from electronic materials and electronic devices. The improvement in electronic devices will be larger, but I cannot provide a specific figure.

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