Investor Relations | IR Events | Performance Briefing

[ 3rd Quarter of fiscal 2004 Performance Briefing ]Q&A

Q1. My question is about the schedule for commercializing HDD heads that is on the second page of your discussion about the HDD head business. According to this schedule, there are only two product generations. Before, your product schedule listed the 40, 60, 80 and 120 GB/P categories. Now there are only two. This obviously shows that we are seeing a slowdown in progress in developing heads or in raising areal recording density. If this change extends the life of 120 or 80 GB/P heads from one to, for example, two years, would this have a negative impact on TDK?
A1. The speed at which new heads are developed is clearly slowing. Users are still ordering 40 GB/P heads, and we expect demand to continue through the fourth quarter. And we expect demand for 80 GB/P heads to extend into 2005. Our schedule states that mass production of 120 GB/P heads will start about April 2004. Actually, the start of production will be about three months later, so the life span of 80 GB/P technology is becoming longer. This is having a negative impact on TDK. A longer period of demand for 80 GB/P heads naturally means that we will face increasing demands for discounts. Higher production yields are improving earnings but discounting exerts pressure on earnings. However, since we have already achieved a fairly high yield, we expect that price discounts will have a greater impact on earnings than yield improvements. Consequently, we believe it will be difficult to improve HDD head profitability in the next fiscal year.
Q2. Is that because TDK's HDD head customers have no reason to switch to 120 GB/P heads?
A2. The problem here is whether or not you can lump all next-generation products under the umbrella of 120 GB/P technology and 3.5-inch disk capacity. Logically, if a 120 GB/P head (which results in a 120 GB capacity on a 3.5-inch disk) is used with a 2.5-inch disk, it should produce a capacity of 60 GB. But raising 2.5-inch disk capacity to 60 GB actually requires a head that can place 150 GB, not 120 GB, on a 3.5-inch disk. Consequently, some HDD manufacturers have started commercial output of 100 GB models, and others have started making 125 GB and 133 GB models. What all this means is that you cannot define all products within the context of 120 GB/P and 3.5-inch disks. In the future, a slightly different, more appropriate expression might be required.
Q3. When you announced first-half results, the third-quarter sales forecast for recording devices was \53.2 billion. But actual sales were \65.4 billion. That's about \12.0 billion more than what you were forecasting. You have stated this is due to one-time factors. Would you break down the reasons for this sales increase between one-time factors and others?
A3. There were two reasons for the higher sales: higher sales volumes and an increase in the head stack ratio (HSA).

Regarding one-time items, we saw an increase in our position relative to competitors as our orders increased. Another item was problems at a certain HDD manufacturer that does not purchase heads from TDK. This resulted in an increase in production volume at TDK customers and contributed to a small increase in our market share. Finally, demand for HDDs was greater than expected, a factor that is not a temporary factor.
Q4. You have increased your fiscal year operating income forecast by \7.5 billion from \45.0 billion to \52.5 billion. Can you provide a breakdown of this increase by product categories?
A4. Recording devices is the largest component of this increase. Next is electronic devices, followed by electronic materials.
Q5. If head and capacitor shipments were 100 in the second quarter, about how much were these shipments in the third quarter, and what is your outlook for the fourth quarter?
A5. Making the second quarter 100, head shipments in the third quarter rose to 124 and fourth quarter shipments should be 114. The fourth-quarter decrease is due to the unusually strong third quarter. The rise in head sales was due to the factors that I just explained. For capacitors, I will provide monetary sales data because we don't release volume data. Here, making the second quarter 100, monetary sales rose to 102 or 103 in the third quarter and will probably stay about the same in the fourth quarter.
Q6. How far along is certification work on the femto slider and TMR head? And about when will shipments of these products begin? One year from now, about what proportion of total head sales do you think the femto slider will represent?
A6. We will soon start pre-production of one type of femto slider. Full-scale production will probably start in April. This slider will most likely be used primarily on 2.5-inch and smaller drives. Pico sliders will probably be sufficient for 3.5-inch drives in desktop computers for the time being. Therefore, we currently estimate that the femto slider will represent between 10% and 15% of total HDD sales one year from now.

Regarding certification of TMR heads, as I stated earlier, manufacturers have begun full-scale certification work on these heads for 60 GB/P applications in 2.5-inch and mobile drives. We expect to ship a substantial volume of samples for certification work this month and next. Commercial production will begin when this work is completed. We would like to begin mass production in this year's third quarter or near the end of the year.
Q7. Please tell us your outlook for demand this year for 3.5-inch and 2.5-inch drives. Based on guidance from Seagate, Maxtor and WDC, monetary sales of 3.5-inch drives will drop about 10% in the quarter ending in March 2004. How much volume growth is TDK projecting, taking into consideration the downturn in the current quarter? Demand is strong for 2.5-inch and smaller drives. What is TDK's view of this market?
A7. We are forecasting a small increase of about 5% in 3.5-inch drives. For 2.5-inch and smaller drives, and particularly 2.5-inch models, we expect 20% growth. However, competition in the 2.5-inch category is fierce. Almost all 3.5-inch drive manufacturers will probably begin producing 2.5-inch models as well during 2004. That means competition will be intense. The other small sizes are 1.8 and 1 inch. Here, we think there is much growth potential for 1.8-inch drives, perhaps as much as 20% to 25%.
Q8. What is your outlook for HDD head demand and the number of heads per drive?
A8. As I just noted, 3.5-inch drives will probably post only a small increase. But total head demand will probably increase a little more because of an increase in drive models that use three or four disks. Regarding 2.5-inch drives, there are no models that use only one head. All use two or more. We are basing our head demand estimates on these assumptions, so this leads us to predict growth of more than 20% in head demand.
Q9. About how much do 3.5-inch drives for desktop PCs account for total head demand?
A9. We believe that 3.5-inch drives for desktop PCs and servers account for about 70% of total demand for heads.
Q10. I would like to know the reasons why the fourth-quarter sales forecast for capacitors is the same as third-quarter sales. Also, what is your factory utilization rate and what will be the impact of lower unit prices on this year's results?
A10. Regarding the capacitor sales forecast, as was discussed earlier, there is no bad news in particular. Demand for information and communications products remains solid. This is why we think fourth-quarter sales will be about the same as in the third quarter. Regarding factory utilization, our plants are now operating at virtually full capacity.
Q11. How will inventory adjustments affect the HDD market in the fourth quarter? I'm asking this because trade inventories at Western Digital, Seagate, Maxtor and others have increased a little. If there are inventory reductions, I think that would cause HDD output to drop slightly. Does TDK's plan already include the impact of these events?
A11. Yes, our fourth-quarter plan reflects these events.
Q12. Has TDK's view changed regarding the internal production of HDD heads by Western Digital? And has this internal production already started affecting TDK's results in the third quarter?
A12. Regarding Western Digital's internal head production, we are just now beginning to feel the effects. We think that orders from Western Digital will begin to drop in the first quarter of the next fiscal year.
Q13. Can you give us an idea of the scale of the impact of Western Digital's head production on your operations?
A13. It's difficult to express the impact in numerical terms. But we think that we can cover about 80% of the drop in Western Digital orders through additional sales to other customers.
Q14. You have said that you expect 5% growth in the 3.5-inch market and more than 20% in the 2.5-inch market in the next fiscal year. I think that, as an external supplier of heads, TDK's HDD head growth rate will be less than the HDD market's growth rate. Based on this view, can you tell us if the HDD head business in the next fiscal year will post higher or flat sales, including the effect of foreign exchange? And if you think sales will be higher, what will be the sources of this growth?
A14. We will definitely feel the effects of Western Digital's decision to make its own heads, and this effect will not be small. So how are we going to preserve and even raise sales? We will go after more sales to other captive manufacturers, something we are doing right now. Our strategy also includes helping non-captive manufacturers capture a larger share of the HDD market. We believe that we must formulate a strategy that ensures we do not lose ground to captive manufacturers and other companies with regard to HDD head technology and other aspects of this business. I hope this gives you an idea of our plans.
Q15. Do you think the non-captive market will increase or decrease for suppliers of these products?
A15. Our view is that this market will be flat.
Q16. Please discuss the profitability of HDD heads and capacitors in the second, third and fourth quarters.
A16. Profitability of capacitors was down marginally in the third quarter relative to the second quarter because of the yen's appreciation. We think profitability will be about the same in the fourth quarter as in the third quarter. For HDD heads, there was an improvement of about one percentage point in profitability from the second quarter to the third quarter, probably because of strong demand. We think profitability will decline in the fourth quarter because of the absence of the one-time factors that lifted third-quarter results and of lower production volumes.
Q17. Now that it's almost the end of January, can you comment on the likelihood of TDK meeting its fourth-quarter plan?
A17. Sales of electronic materials and electronic devices were about the same in January as in December. HDD head sales are in line with our expectations.
Q18. Please tell us about poorly performing businesses. First, please confirm the fourth-quarter streamlining expenses for ferrite operations that you mentioned earlier and tell us what benefits you expect? Also, in other business sectors, what is the status of the critical business units that you have talked about in the past, where earnings are low or there are losses? And what are your plans for these business units?
A18. Fourth-quarter ferrite streamlining expenses will be about \3.0 billion. These expenses will be used to deal with our business network, which has grown too large. I can't provide any specific benefits, but we hope to see fixed expenses fall along with other improvements. Regarding critical business units, which we have been reporting on since 2002, we saw a significant improvement in the second quarter that brought them closer to the break-even point. This was discussed at our first-half earnings announcement. Improvement continued in the third quarter, taking these business units even closer to breaking even.
Q19. If TDK spends about \3.0 billion for streamlining ferrite operations, I can see that profitability will improve. But can you provide information on about how much fixed expenses will fall? Or by how much earnings will improve in relation to the \3.0 billion?
A19. We cannot comment on this subject as some elements have not been made public.
Q20. We cannot comment on this subject as some elements have not been made public.
A20. Yes. However, we cannot provide any more information concerning this subject.
Q21. Please provide data on third-quarter capacitor sales by application and product category.
A21. Capacitors sales for AV products increased 1% and accounted for 19% of total capacitor sales, PC-related sales increased 10% and were 19% of the total, and sales for communications products increased 24% and were 18% of the total. Multilayer chip capacitors represented 89% of total capacitor sales. High-capacitance capacitors accounted for 56% of multilayer chip capacitor sales and posted a sales increase of about 21%.
Q22. You stated that you expect to see HDD head profit margins fall in the next fiscal year because of the growing impact of price reductions. Now that the shift to 80 GB/P technology is over, what is the situation regarding the supply and demand for HDD heads. Is demand sufficient to keep prices steady? Please provide us with a more detailed explanation.
A22. Regarding the balance between supply and demand for HDD heads, we think that customer demand will be greater than the supply in the fourth quarter. Of course, this balance will be affected by the start of internal production by Western Digital. In the first quarter of the next fiscal year, we may see a slight oversupply of heads emerge because of the impact of Western Digital. Naturally, yields will be rising. However, we expect that growth of the HDD market as a whole will offset the effect of Western Digital's internal production, so total demand will remain level.
Q23. If 80 GB/P heads continue to be the mainstream product and there is no immediate switch to the next generation, could TDK cope with this situation in terms of pricing?
A23. We would have no choice other than to adjust prices to deal with this situation.

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