Investor Relations | IR Events | Performance Briefing

[ 1st Half of fiscal 2004 Performance Briefing ]1st Half of FY04 Consolidated Results and Fiscal 2004 Projections

Mr. Hajime Sawabe President & CEO
Fiscal year as the base figure of 100, second quarter sales were 116.


Sales of ferrite cores posted a significant decrease due to the growing shift to flat-panel displays for TVs and computer monitors.

Magnet sales declined during the period. Although automotive demand remained strong as the use of electronics in automobiles continues to expand, sales were affected by lower production levels and demands for price cuts for magnets used in applications such as micromotors.

In the electronic devices sector, sales decreased 11.5% to 52.5 billion yen.

In inductive devices, sales were higher for automotive applications due to the increasing use of electronics in automobiles. Sales also rose for EMC filters, common mode filters and other components used in communications equipment. However, although sales of components for digital AV products were strong, these sales could not cover the fall away in demand for TV components since the end of the FIFA World CupTM last year. The overall result was a year-on-year decline in sales of inductive devices. In the second quarter, sales of new products increased and demand was strong from manufacturers of PCs and digital home electronics. As a result, sales were 5% higher than in the first quarter and about the same as last year's strong first quarter. We expect more growth in this year's third and fourth quarters.

Sales of high-frequency components fell during the period. Sales of components used in mobile phones climbed, but this growth was outweighed by price cuts and lower demand in other market categories.

Sales of sensors and actuators rose due to strong demand in the PCs and peripherals and communications fields. However, lower production levels of game consoles sharply reduced sales of DC-DC converters. The result was a decline in total sales in this product category.

In recording devices, sales jumped 42.5% year on year to ¥111.4 billion. The main factors behind this increase were growing demand for HDD heads used in both PCs and other applications, and success in increasing market share from 28% in last year's first half to 33%.

In semiconductors & others, sales increased 3.7% to 8.2 billion yen. Sales of semiconductors used in set-top box modems and LAN/WAN applications were lower. Sales of anechoic chambers also declined. These declines reflected low levels of capital spending in communications infrastructure and a general reluctance among clients to make investments. Total sector sales rose, however, because of growth in sales of other products.

Looking at results in the electronic materials and components segment by the markets we serve, sales of components for PCs and peripherals rose 25%, representing 56% of segment sales. This increase was primarily propelled by the robust demand for HDD heads mentioned earlier. Automotive component sales edged up 1% and accounted for 9% of segment sales, while sales to the communications industry were level and represented 8% of segment sales. The significant 26% decline in sales of audio and visual component sales, which accounted for 11% of segment sales, can be explained by the drop in sales of components for game consoles and of ferrite cores as the market shifts to flat-panel displays.

In the recording media & systems segment, sales were largely unchanged at 61.9 billion yen. Audiotape and videotape sales declined, but this fall was covered by an increase in optical media sales. In optical media, CD-R and DVD sales were higher despite the impact of lower unit prices. Sales of tape-based data storage media for computers also rose as higher volumes offset a steep drop in unit prices. However, segment sales were slightly lower because of weakness in software.

Sales were up 27% in Asia and 8% in Europe but down 23% in the Americas and 3% in Japan. Overseas sales increased 10.7% year on year to 234.7 billion yen, rising from 71.6% to 74.2% of total net sales.

As an electronics component manufacturer, we believe that we need to move quickly to create an optimal operating structure, including sales, manufacturing, R&D and personnel systems, which can adapt to the shift in the market from the U.S. and Europe to China.

Operating income was 24.0 billion yen, 14.0 billion yen higher than in the first half of the previous fiscal year. This improvement was driven by an increase in sales and an improved product mix, generating 23.8 billion yen; 18.9 billion yen from streamlining efforts such as purchasing discounts, higher yields and cost cutting; and a 2.5 billion yen decline in structural reform expenses compared to the previous period. These outweighed negative factors such as discounts in sales prices of 8.2%, equating to a decline in monetary terms of 28.4 billion yen; and a 2.8 billion yen negative impact from exchange rate fluctuations as the yen strengthened from 122 against the U.S. dollar in the previous fiscal year to 118 in the period under review.

In the electronic materials and components segment, operating income increased 15.1 billion yen year on year to 25.8 billion yen. The main reasons were strong sales of HDD heads and streamlining measures that covered all types of components.

In the recording media & systems segment, the operating loss increased 1.1 billion yen to 1.8 billion yen. Despite growth in optical media sales, earnings were affected by a drop in sales of magnetic tape products and weakness in the software category. Operating income includes a 900 million yen charge resulting from the sale of a software subsidiary.

TDK is stepping up efforts to build a solid earnings base, chiefly in optical media and tape-based data storage media for computers.

Free cash flows increased 2.8 billion yen from one year earlier to 33.5 billion yen. This was the result of a more productive use of assets exceeding the improvement in operating income. For example, there was a year on year improvement in inventory turnover from 1.7 months to 1.5 months, the fixed asset turnover ratio rose from 2.3 to 2.9, and the trade receivables recovery rate fell from 2.8 months to 2.7 months.

Moving onto non-consolidated results, net sales fell 8.8% to 152.5 billion yen, operating income declined 69.5% to 1.1 billion yen, and current income dropped 30.5% to 4.8 billion yen. Income before income taxes fell 74.1% to 500 million yen and net income dropped 6.7% to 1.1 billion yen. The interim dividend has been set at 25 yen per share.

Next, I would like to look at TDK's projections for the fiscal year ending March 2004. We are forecasting consolidated net sales of 636 billion yen, 4.5% higher, operating income of 45 billion yen, up 104%, income before income taxes of 46 billion yen, a rise of 154%, and net income of 33.5 billion yen, an increase of 179%. These figures represent upward revisions of forecasts announced on May 7 and July 30 this year, which projected consolidated net sales of 635 billion yen, operating income of 41 billion yen, and net income of 30 billion yen.

We have also revised the projected yen-dollar exchange rate from 120 to 110 yen for the second half of the year. This change had the effect of reducing the net sales forecast by 20 billion yen and the operating income forecast by 6 billion yen for the second half.

Moving onto non-consolidated sales and earnings forecasts, TDK is projecting net sales of 307.8 billion yen, a decline of 4%, operating income of 2.1 billion yen, down 34%, current income of 7.5 billion yen, a drop of 17%, and net income of 2.4 billion, up from 100 million in the previous year.

Due to a revision in projected foreign exchange rates, the net sales forecast has been reduced by 5.6 billion yen and the operating income forecast by 4.9 billion yen in the second half.

Exchange rates and the direction of the U.S. economy are key to TDK's outlook. There are a number of encouraging signs at this time, including the global upturn in stock prices, favorable trends in macroeconomic statistics and strong earnings at U.S. high-tech firms. However, doubts remain about whether we are on the verge of a broad-based economic recovery. The primary source of uncertainty is the inability to determine whether or not a true recovery is occurring in the U.S. economy, which has the greatest impact on the global economy, and particularly the electronics industry.

The U.S. appears to be taking numerous actions to spur an economic rebound as the presidential election in November next year approaches. In fact, tax reductions and low interest rates kept consumer spending strong in the quarter that ended in September. The goal is to use strong housing and military expenditures to trigger higher private-sector capital spending. However, U.S. companies remain cautious about capital spending and inventory increases.

The U.S. seems to be allowing the dollar to weaken because of the approaching presidential election. But a weaker dollar holds the risk of a significant outflow of foreign capital from the U.S. This could have serious consequences.

In Japan, strong exports have lifted the economy. But there is a contradiction between the persistent trade surplus and the government's wish to use a weak yen to increase exports. This situation means that we must be prepared for a stronger yen. Today, I have provided an earnings forecast based on a rate of 110 yen to the U.S. dollar, but we must act quickly to prepare for a further strengthening of the yen.

I believe that the strong orders for electronic components will continue at least to the end of 2003. In fact, we are seeing shortages of many items. The outlook is favorable in many important markets, including digital home electronics, HDDs and automotive electronics. But we must remain cautious regarding capital spending and keep a close eye on the U.S. economy, sales during the Christmas selling season and foreign exchange movements.

In the first half of the fiscal year, we exceeded our sales and earnings forecasts. But looking at the status of our structural reforms, I think that we have really only reached the halfway point with regard to our final objectives. Although we have made progress in lowering the break-even point and raising asset productivity, we are falling behind in laying the groundwork needed to implement our growth strategy. We must also move faster to shore up the profit structure of the ferrite core and recording media businesses, both important TDK businesses for many years.

However, we are positive. New businesses are taking shape and our people are determined to attain our goals. We will continue to make steady headway toward our strategic objectives in order to raise the value of TDK for all its stakeholders.

Thank you.