Investor Relations

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

Q1. Please provide third quarter sales estimates by product category.
A1. We are forecasting total third quarter sales of 167.0 billion yen. The breakdown is 44.5 billion yen in electronic materials, 29.2 billion yen in electronic devices, 53.2 billion yen in recording devices, 3.5 billion yen in semiconductors and others, and 36.5 billion yen in recording media and systems.
Q2. What is your outlook for operating income this fiscal year in the electronic materials and components segment and the recording media and systems segment?
A2. We are expecting the electronic materials and components segment to generate operating income of 45.0 billion yen and the recording media and systems segment to break even.
Q3. Looking at operating income in the electronic materials and components segment, first half income was 25.8 billion yen, but your full-year forecast is 45.0 billion yen. That means you are expecting a 6.6 billion yen decline in the second half. Which of the five product categories in particular are you expecting to see lower earnings?
A3. We expect higher second-half earnings in electronic materials and electronic devices and believe that recording devices operating income will fall in the second half.
Q4. If first-quarter HDD head shipment volume was 100, how do the second, third and fourth quarters compare?
A4. If the first quarter is 100, second-quarter shipment volume was 103. We expect to see comparative figures of 106 in the third quarter and 104 in the final quarter.
Q5. Would you give us an idea about operating margins for capacitors and inductive devices in each quarter of this fiscal year?
A5. Although we are facing severe discounting demands in the capacitor market, we believe that operating margins, including foreign exchange losses, will remain about the same as in the first half throughout the fiscal year. In inductive devices, operating margins were about the same in the first and second quarters, and we believe that margins will improve by almost 2 percentage points in the second half including foreign exchange losses.
Q6. Mr. Sawabe remarked that structural reforms are only about at the halfway point. What about your progress with the critical business units that you discussed last year?
A6. The products we are targeting represent annual sales of about 67.0 billion yen. In the past fiscal year, we stopped manufacturing products that represent about 11.7 billion yen of these sales. We will decide whether to continue manufacturing the products generating the remaining 55.3 billion yen in sales by examining their potential. Although there was a big loss from these products last year, there was a steep drop in this loss in this year's first quarter. And in the second quarter, losses from these remaining products fell to only a few hundred million yen. These figures show that we are making real progress. In the second half, we do not have a clear picture of results because of foreign exchange losses. But I believe we will not have the kind of losses as we have in the past.
Q7. HDD heads are performing very well. Is this merely a reflection of the recovery in the PC market, or should we view this as a sign that demand for HDDs is growing outside the PC sector?
A7. Notebook PC sales are strong, especially in industrialized nations. Demand for 3.5-inch drives is increasing at a healthy pace, too. There is no doubt that non-PC HDD demand is growing. But I think a more important factor is growing demand for replacing HDDs in used PCs in developing countries.
Q8. Is it true that non-PC HDD applications are not currently having a significant impact on TDK's HDD head business?
A8. We estimate that non-PC demand now accounts for about 9% of the HDD market. So there is no significant impact yet. I think that we will not see any real impact until at least next summer, and maybe not until 2005.
Q9. Looking at operating income in the electronic materials and components segment, there was an improvement of 3.8 billion yen between the first quarter's 11.0 billion yen and the second quarter's 14.8 billion yen. Which product categories contributed to this improvement?
A9. Electronic materials and recording devices posted higher earnings in the second quarter relative to the first.
Q10. You stated that second-quarter HDD head shipment volumes were 3% higher than in the first quarter. Was there any change in TDK's market share? And please comment on the current impact of Western Digital's acquisition of Read-Rite.
A10. We believe our HDD market share remained the same in the first and second quarters. Western Digital is a TDK customer, so we cannot really comment on this matter. However, we believe that we will begin seeing an impact in the fourth quarter of this fiscal year.
Q11. Please provide information on quarterly sales of capacitors for this fiscal year. Also, how are prices moving?
A11. If capacitor sales were 100 in the previous fiscal year's fourth quarter, the first quarter this year was about 109 and the second quarter was about 116. We estimate that sales will be about 123 in the third quarter and about 105 in the fourth quarter. Price discounts in the first half, relative to one year earlier, were between 15% and 20%. In the second half, we expect that supply-demand dynamics will improve. Relative to the first half, we are expecting a foreign exchange impact of about 5% and a price discounting impact of only about 5%.
Q12. Ferrite, magnets, inductive devices and high-frequency components have either been low-margin items or unprofitable for some time. At this point, how are these products performing relative to the beginning of the fiscal year? And what is TDK doing to further improve the profitability of these products?
A12. Growth in production of LCDs, PDPs and other flat-panel displays is severely affecting the profitability of deflection yokes and flyback transformer cores used in cathode-ray tube TVs and monitors. We therefore need to take rapid and decisive steps to deal with this situation. In magnets, sales to Japanese clients are strong, but orders from the U.S. Big Three automakers have been weak and show no signs of rebounding in the second half. So magnet profitability is falling below our initial target for the year. In inductive devices, we are recapturing market share, backed in part by new products, and profit margins have returned to target levels or even higher. Therefore, first and second quarter results were much better than in the first half of last year. Although foreign exchange is an uncertainty, we expect to see steady quarter-to-quarter improvements from the second quarter onward. In high-frequency components, we have taken decisive actions to eliminate unprofitable products. Although profitability has not returned to what we had hoped for, we are seeing significant monetary improvements compared with one year ago. Since earnings are still not yet satisfactory, we will focus more closely on strategic products in the third and fourth quarters and the next fiscal year, as we seek to increase sales of these components.
Q13. Do you think you can return ferrite, magnets and high-frequency components to the black in the next fiscal year?
A13. Our goal is to achieve at least a break-even performance at the operating level.
Q14. TDK has increased its outlook for HDD head demand. Is this revision based on assumptions such as the certification of TDK HDD heads, shifts in preferred supplier priority by clients, or other specific events?
A14. In the 80GB/P category, we have never lost a customer, including through the certification process by individual clients. However, regarding a shift in priority by clients from number one to number two preferred supplier, we were moved from one to two by one company for a single HDD model. We believe that we qualify as number one preferred supplier in all other cases. In market share, we believe we are maintaining a share of more than 60% for non-captive customers.
Q15. Please give your analysis of operating earnings in the second half relative to the first.
A15. Second half estimates can be obtained by simply subtracting first half results from our full-year forecasts. Our full-year operating income forecast of 45.0 billion yen is the sum of 24.0 billion yen in the first half and 21.0 billion yen in the second half. A rise of 10 yen versus the U.S. dollar would reduce operating income by about 6.0 billion yen. In the first half, the average exchange rate was 118 yen, and we expect the rate to average 110 yen in the second half. Based on the 6.0 billion yen figure, the 8-yen difference equates to an operating income decline of 4.8 billion yen. In the first half, price discounts had an impact of 28.4 billion yen. We expect a further price erosion of about 1% in the second half, primarily in electronic components, resulting in an impact of about 3.2 billion yen.

Structural reform expenses were 2.6 billion yen in the first half. And since ferrite and magnet products are not necessarily profitable, and for other reasons, we plan to record additional structural reform expenses of about 3.6 billion yen in the second half. In other words, projected second-half structural reform expenses will total 5.0 billion yen, the sum of the 1.4 billion remaining in our initial plan and the additional 3.6 billion yen. Compared to first-half structural reform expenses of 2.6 billion yen, that translates into a net impact of 2.4 billion yen on earnings.

In the recording media and systems segment, our software business is underperforming. You heard today that we sold our software company. In the first half, the software business had a 2.4 billion yen loss. The sale of this business will therefore have a positive impact on second-half results. Furthermore, we expect an earnings contribution of about 11.3 billion yen due to higher capacity utilization and other factors. Other items will have a negative impact of 6.3 billion yen, mainly depreciation and amortization expenses.
Q16. Looking at first-half results and your operating income forecast for the fiscal year, it appears that your forecast for second-half recording devices earnings is below first-half earnings. Does this merely reflect your conservative stance? Or are you facing increasing discounting demands from customers because of the extended product life of the 80GB/P head. When forecasting operating results in the coming fiscal year, how should we view the contribution of higher production yields versus the negative impact of falling prices and depreciation expenses, among other items?
A16. Results will be flat if production yield improvements can offset price declines. If price declines outpace yield gains, though, earnings will fall. Presently, all HDD manufacturers are stepping up output volumes, particularly for 3.5-inch drives. This may result in an oversupply of these heads, probably in the first quarter of the next fiscal year, maybe as soon as next March. In this case, we will naturally see prices drop and profit margins erode. If the 80GB/P head's product life extends all the way to the second or even third quarter of the next fiscal year, we will most likely face intense pressure to cut prices. However, we are already implementing yield improvement measures that take into account this scenario.
Q17. Please confirm whether or not TDK is manufacturing capacitors at full capacity at the present time. Also, is the electronic components market overheating? And could this situation cause a market downturn in the fourth quarter of the fiscal year?
A17. Capacitor orders have increased sharply since September. Demand is strongest for high-capacitance models. Compared with the first and second quarters, our output of these capacitors is up by about 20% in the current quarter. Growth is not as high for general-purpose capacitors. Taking a closer look at actual orders, although some appear to be double orders, total monthly demand is now running at about 70 to 80 billion units. Since we cannot estimate demand reliably after adjusting for these double orders, we cannot accurately determine actual demand. Normally, capacitor demand peaks in the third quarter, so we could see a drop of about 10% in the fourth quarter if demand patterns are typical.
Q18. If the effect of the Read-Rite acquisition by Western Digital appears in the fourth quarter of this fiscal year, can TDK generate sufficient orders in the following fiscal year from sources to cover the drop in orders from Western Digital? Is there any need for concern about excess production capacity, or do you think that strong demand will prompt the need for investments in wafer and assembly facilities? Please give us your view of the HDD market in the coming year.
A18. Based on the expectation that we will see an impact from the Western Digital acquisition, we are naturally taking measures to seek alternate sources of demand. Regarding capital expenditures, even if overall demand continues to climb, we believe the shift to femto sliders for 2.5-inch disks will accelerate. In this scenario, there will be almost no need for additional investments related to manufacturing up to and including the slider process. But, to be fair , some investments may be needed at assembly facilities.
Q19. Since we are almost at the end of October, can you give us any information about actual results versus your sales forecast for the third quarter?
A19. Orders in the electronic materials and components segment on a monetary basis in October, were 15% higher than in July. So growth is occurring despite foreign exchange losses due to the current rate of about 109 yen to the U.S. dollar. Growth is high even in relation to September. However, it is uncertain whether or not this level of demand will continue through November and December.
Q20. How does TDK post sales with regard to HDD assembly activities and what effect does this have on earnings? Also, to what degree can assembly operations contribute to operating results in the future?
A20. These activities are carried out based on requests from customers for some of their HDD assembly, so therefore have almost no effect on sales and earnings in recording devices. There is an indirect benefit, though. We believe that TDK and our customers can achieve an improvement in yields, an advance that will benefit both of us.
Q21. Today, you remarked that HDD heads have made a big contribution to the improvement in earnings and that you have completed many restructuring projects. What is TDK's ideal structure? For example, what businesses should generate what share of earnings? Can Mr. Sawabe comment on what kind of company he wants TDK to become and over what time frame?
A21. As we stated earlier, we believe that the recording media and HDD head businesses should be high-profile TDK businesses. Electronic materials and components should be the core source of earnings with HDD heads positioned on top of that. I think this would create a robust profit structure. But HDD heads are the primary earnings generator in this fiscal year, so I think we need to act swiftly to change our over reliance on this single product category.

In recording media & systems, we have made major changes to the product lineup. We have withdrawn from the software and other businesses. And we are approaching the point where we can generate earnings from recording media & systems. Although we cannot hope for earnings levels of the past, we plan to generate earnings that exceed our cost of capital. In electronic materials and components, our core business, we plan to use TDK recording media and HDD head key technologies to create products for future applications that are cheaper, more compact and deliver improved performance. Depending on how well we can address our customers' needs, I think we can capture a prominent position in the market. Therefore, in terms of our profit structure, we plan to generate stable earnings from capacitors, inductive devices, sensors, magnetic materials and other products of this nature. By that, I mean a double-digit operating margin. On top of that, we want to add earnings from recording media and HDD heads. And I hope to accomplish this over about the next three years.