Investor Relations | IR Events | Performance Briefing

[ 1st Quarter of fiscal 2004 Performance Briefing ]Q&A

Q1. TDK booked structural reform-related expenses of about \1.5 billion in the first quarter. Will there be any change in the amount you are projecting for the full year? If so, could you comment on how the remainder of these expenses will be allocated in the second, third and fourth quarters?
A1. We expect to book \4.0 billion in structural reform-related expenses for the full year. \1.5 billion was budgeted for the first quarter, and for the second, third and fourth quarters we have budgeted \1.4 billion, \0.8 billion and \0.3 billion, respectively. Given that actual expenses in the first quarter were \1.5 billion, we are proceeding according to plan. The lion's share of the \1.5 billion incurred in the first quarter was for restructuring in electronic component-related areas.
Q2. Please comment on the profitability of capacitors in the first quarter compared with the fourth quarter of fiscal 2003. Also, how do you see profitability changing in the second and third quarters of fiscal 2004?
A2. The operating margin improved about 2.0 percentage points in the first quarter compared with the fourth quarter of fiscal 2003, despite severe price discounting. Profitability in the second, third and fourth quarters of fiscal 2004 is largely dependent on discounts, but at the very least we should be able to maintain the same level of improvement. This is because of efforts to expand sales of capacitors with greater capacity ratings and continued measures to cut costs.
Q3. Assuming that the fourth quarter of fiscal 2003 represents 100, what was the rate of increase in HDD head shipments in the first quarter? Also, how do you see shipments trending in the second and third quarters based on orders at the moment?
A3. We don't give out quarterly figures. Assuming that the second half of fiscal 2003 was 100, we are forecasting shipments in the first half of just over 105 and shipments in the second half of about 105. If anything, volume will probably be slightly higher in the first half than in the second half.
Q4. If possible, please explain what share of HDD head sales are accounted for by 80GB/P products at the moment?
A4. We reported the ratio of 40GB/P heads to 60-80GB/P heads in May this year, but at present 40GB/P products are accounting for a higher proportion of HDD head sales than we had expected due to an extended product life. At the previous earnings conference, we projected that 40GB/P heads in the first and second quarters would represent 19% and 7% of total HDD head sales. But in the first quarter they actually accounted for 22% of total sales, and we are forecasting these heads to represent 21% and 10% of the total in the second and third quarters. Even in the fourth quarter we expect sales from 40GB/P heads as there will probably still be some applications for these products. The difference between the percentages and 100 represents the proportion accounted for by 60-80GB/P products. 80GB/P heads, which we call real 80 heads, are in strong demand and seeing their share grow very rapidly.
Q5. Operating income in the electronic materials and components segment increased around \7.0 billion to \11.0 billion, compared with \4.0 billion in the fourth quarter of fiscal 2003. Could you please break down this increase, giving us an idea of the relative contributions of electronic materials, electronic devices, recording devices and semiconductors and others?
A5. I can't give monetary amounts, but I can tell you in order which product sectors were the biggest contributors. First was recording devices. Next was electronic devices, which made a slightly larger contribution than electronic materials. Semiconductors and others had the least impact. Nevertheless, earnings increased in all product sectors of the segment.
Q6. Would I be correct in thinking that recording devices accounted for half of the increase in operating income in the electronic materials and components segment? Or was it less than half?
A6. Recording devices clearly made a significant contribution, but I can't answer your question directly.
Q7. The operating income from some products will naturally be better in the second quarter than in the first and vice versa. Assuming that no product sectors worsen from the first to the second quarter, please tell us the order in which you expect improvements.
A7. We expect the improvement in electronic materials and electronic devices to be about the same. With respect to recording devices, given that first-quarter results were relatively high, we don't at this stage think that performance in the second quarter will surpass that.
Q8. My question is about sales trends of multilayer chip capacitors. Sales of these products grew about 10% in the first quarter, compared with the fourth quarter of fiscal 2003. How do you see sales trending in the second and third quarters?
A8. We are forecasting sales growth of around 7% between the first and second quarters, and the same rate of growth between the second and third quarters. But we are projecting a 3% or so decline between the third and fourth quarters at the moment due partly to seasonal factors. In May, we were projecting sales to grow slightly more on an annual basis, but at present we think sales will fall short of that.
Q9. TDK has implemented structural reforms in the recording media & systems segment so as to deliver operating income in fiscal 2004. I wonder whether that goal is still achievable given the first-quarter loss? Will you take additional restructuring actions if it looks difficult to achieve?
A9. We still expect this segment to return to the black for the full year. Of course, we will make reforms where necessary. While optical media sales are growing sharply, we haven't been able to translate this growth into profits yet. Our most pressing issue therefore is finding ways to improve profitability in this area.
Q10. You decided not to revise your earnings forecast even though operating income in the first quarter exceeded \10.0 billion. Given that you forecast \17.0 billion in operating income for the first half at the earnings conference in May this year, a simple calculation means that second-quarter operating income will be lower than the first quarter's. But isn't it correct to assume that second-quarter operating income will exceed first-quarter operating income?
A10. You are right that second-quarter operating income would be \6.8 billion, if the first quarter's \10.2 billion is subtracted from the first-half estimate of \17.0 billion. But that's oversimplifying the situation. At present, we feel that it is best to wait until we announce our interim results, when the outlook will be a little clearer, before possibly revising our forecasts, given the uncertainty in our operating environment.
Q11. Am I correct in assuming that recording device sales in the second quarter are likely to be lower than in the first? Or are they likely to be flat?
A11. First-quarter sales were high and, at the present time, we are projecting sales in the second quarter of around the same level. But given the various uncertainties in the market, we have set conservative estimates.
Q12. What effect, if any, will the acquisition by Western Digital Corporation of Read-Rite Corp. have on TDK's HDD head business?
A12. It is still too early to say what the effect will be of Western Digital acquiring Read-Rite following the latter's bankruptcy. Read-Rite didn't have much of an influence on our market share in respect of post-40GB/P products, so we don't expect to see much of an effect in the near term. That said, we are monitoring the situation to see what effect, if any, there will be. As a manufacturer of HDD heads, our stance is to continue to maintain a strong market position by supplying our customers with 80GB/P and, after that, 120GB/P products that satisfy their requirements.
Q13. Based on the technology road map for HDD heads, it seems as though the commencement of TMR head volume production will be slightly delayed. At the previous earnings conference, TDK said that TMR heads would be used in 2.5-inch drives. Has there been any change in respect of that?
A13. Although there was no presentation about HDD heads today, you will find some information in the presentation materials. As you know, real 80 heads are rapidly being adopted for use in 3.5-inch drives at present. As was reported at the previous earnings conference, we plan to supply GMR heads for use in 120GB HDDs for 3.5-inch drives as the next generation product. Regarding 2.5-inch drives, we are working on development with customers to make them compatible with TMR heads.

In terms of the roadmap, rather than delays in development, changes in the timing of the launch of HDDs on the market have been more influential. More specifically, the launch of real 80 heads is taking the same if not more time than 40GB/P products. At the previous earnings conference, we reported that mass production of 120GB/P products, including TMR heads, would probably start in December this year. We now expect production to be delayed by just over a quarter. We are thus continuing to have products certified with the aim of starting mass production around April 2004 at the earliest.
Q14. It is estimated that TDK's HDD heads had a share of 35-40% in the first quarter of fiscal 2004. But considering industry factors, such as Western Digital's acquisition of Read-Rite and the state of competitors, is it possible that your market share will be even higher in a year from now even assuming no change in the next six months? Or would it be more correct to assume that TDK's market share will fall from its current high level? Please comment on how you see your market share in a year from now.
A14. There is no question that at the moment we are slightly ahead of our 33% market share target for the full year. Given that Western Digital's acquisition of Read-Rite was only finalized last week, it is difficult to project what effect this will have on our market share in six months or a year from now. What we can say though is that we expect 80GB/P products to still be the mainstream products in six months. Western Digital is an important customer for TDK, so we are continuing to work to supply quality products. At the very least, we want to preserve our market share.
Q15. It is generally believed that 80GB/P heads will last for about another year. But now it appears that HDD head yields are improving and that buyers will be demanding price discounts. What are your thoughts about the outlook for the operating margin for HDD heads in light of these factors?
A15. For 40GB/P heads, we experienced extremely strong demands for price discounts because these heads would be used for a long period of time in the same generation of products. During that time, we have collaborated with HDD manufacturers and taken other steps to raise the HDD head yield, a process that has produced concrete benefits. We hope that the same will hold true of 80GB/P heads. At the very least, we hope to use the same measures as we did with 40GB/P heads to raise the 80GB/P yield to the point where we can meet demands for price discounts. Our basic stance is to prevent a decline in the operating margin.
Q16. Please give us a breakdown of the \4 billion in structural reform-related expenses you plan to record in the current fiscal year.
A16. The majority of these expenses will involve actions in the electronic materials and components segment targeting facilities and operating bases. We believe all of these actions will produce immediate results.
Q17. How do you view TDK's position in the electronic components market as a whole? And what changes do you think will occur in this market between the first and second quarters?
A17. At this time, based on August and September orders, we think that we are seeing some orders linked to our customers' plans for the Christmas season. So we believe that orders will be higher in the second quarter than in the first quarter. On a monthly basis, there was no change in June, but orders climbed in July. We cannot say anything now about the third and fourth quarters.
Q18. I estimate that TDK's first-quarter capacitor sales were almost 10% higher than in the fourth quarter of the previous fiscal year. Was this growth due to favorable market trends or to an increase in TDK's market share?
A18. Growth was due to the combination of our success at selling multilayer capacitors that can replace tantalum capacitors and slight growth in the market from the fourth to the first quarter.
Q19. At the May earnings conference, you stated your intention of improving operating income by introducing new products in the electronic components category, starting in the second half of the fiscal year. Would you comment on how this is progressing?
A19. There is no change in our fundamental position. We are hoping to see benefits from new inductive devices begin to appear in the second half of this fiscal year.
Q20. In the presentation materials, you say that you are assuming an average of 2.6 heads per HDD in the current fiscal year. Would you give us separate figures for the first and second half of the fiscal year?
A20. As you can see in the materials, we have raised our forecast from 2.5 to 2.6. The biggest reason is a revision in the first-half forecast because the life cycle of 40GB/P heads is turning out to be longer than had been expected. Because of this, we have delivered a larger volume of heads than we expected. We suspect that the inability of HDD manufacturers to raise HDD yields as much as they wanted also contributed to growth in the volume of HDD heads we delivered. However, we believe that average heads per HDD during the second half will be the same as in our plan. For these reasons, we raised our full-year forecast from 2.5 to 2.6.
Q21. Please comment on the current state of HDD head production capacity and your plans for the future. I would like to know how much you can increase shipments above the current level.
A21. I cannot provide you with specific information about HDD head production capabilities, but I can say that we are now extremely busy. We plan to slightly raise wafer production capacity. And we are seeing the start of full-scale demand for femto sliders, which we have spoken about before. These sliders are smaller than the current pico sliders. This will greatly increase the number of sliders that we can produce from a single wafer. Of course, that means we would be able to increase output of sliders without a significant increase in wafer output. We are now working to quickly obtain femto certification for some 80GB/P heads.
Q22. When do you plan to begin shipping femto sliders?
A22. Once we complete the certification process, we plan to begin volume shipments starting with spring 2004 models.

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