Investor Relations | IR Events | Performance Briefing

[ Financial Results for Fiscal 2004 Performance Briefing ]Q&A

Q1. Would you give TDK's net sales forecast for the first half of fiscal 2005 and break it down by product sector?
A1. We are forecasting sales of \89.1 billion for electronic materials, \56.8 billion for electronic devices, \101.0 billion for recording devices, \8.7 billion for semiconductors & others, and \62.1 billion for recording media & systems, for a total of \317.7 billion in consolidated net sales.
Q2. Would you explain the differences between the results and forecasts for the fourth quarter of fiscal 2004? It seems that net sales forecasts were not met primarily because of recording devices, while operating income effectively beat the forecast after adjusting for the unexpected increase in pension expenses. Can you explain further?
A2. The primary reason for the decrease in net sales was recording devices. As such, results in electronic materials, electronic devices and other product sectors were largely in line with forecasts. The main reason for the higher operating income was that our original plan assumed that earnings on recording devices would fall considerably in the fourth quarter. Actual results were better. This was probably because we adopted an overly conservative outlook in the wake of the extremely strong third-quarter performance by recording devices, which was partly due to unusual factors. A better production yield also contributed to the higher-than-expected result. The electronic materials and components segment met our earnings forecast despite the unexpected increase in pension expenses that you mention. Basically, that means earnings in this segment exceeded our forecast by the amount of this pension expense.
Q3. Comparing the fourth quarter of fiscal 2004 with the third quarter, it seems that the drop in operating income was small relative to the large drop in net sales. If you exclude one-time expenses and structural reform expenses, effective operating income in the third quarter of fiscal 2004 would have been around \19.8 billion. And if you eliminate structural reform expenses, effective fourth-quarter operating income would have been over \18.0 billion. My impression is that earnings were down only slightly even though the drop in recording devices sales was comparatively large and there was no notable improvement in sales in other sectors. What were the reasons for this?
A3. Fourth quarter net sales were about \21.0 billion less than in the third quarter. Based on this decline, you would expect to see operating income fall by around \4.0 billion. While there were structural reform expenses in the fourth quarter, there was also a gain on the sale of land. Total unusual items amounted to roughly \4.0 billion, including a one-time charge of \1.7 billion for pension expenses. In other words, operating income was just under \20.0 billion if one-time items were excluded. If unusual items of \4.0 billion are deducted as well, fourth-quarter operating income would be around \16.0 billion.
Q4. Would you break down the \60.0 billion forecast for fiscal 2005 operating income? How much in structural reform expenses is included in this forecast? To what extent is the approximate \10.0 billion decrease in recording devices sales expected to affect operating income? By how much do you expect operating income to improve in electronic materials, electronic devices and the recording media & systems segment?
A4. We are planning approximately \3.7 billion in structural reform expenses in fiscal 2005, and sales in recording devices are expected to fall roughly \10.0 billion. Furthermore, in our plans, we are assuming transactions with Western Digital will account for 1% of HDD head sales. We plan to counter the large fall in sales with various strategies. Based on the assumption that we will incur reasonable development expenses associated with the planned launch of 100GB/P, 120GB/P and other new products, we expect to see a considerable drop in recording devices operating income from the previous fiscal year. On the other hand, we are finally seeing better profitability in businesses that were slow to respond to structural reforms. We thus expect to see higher earnings in electronic materials, electronic devices, semiconductors & others as well as the recording media & systems segment, following the sale of the software business. Because we expect these gains to more than outweigh lower earnings in recording devices, we are projecting higher earnings for TDK as a whole.
Q5. Looking at your forecasts for fiscal 2005, it seems that you are forecasting a large rise in operating income in the second half given your operating income forecast of \24.5 billion for the first half. Does this imply a rise in recording devices operating income in the second half after a fall in the first half?
A5. That's right. Compared to the first half, we expect an improvement in operating income in the second half, which is the case in a normal year. In particular, in the second half we expect to cancel out around 70% of the effect on operating income of Western Digital's in-house manufacture of HDD heads.
Q6. Effective earnings in the fourth quarter of fiscal 2004 were about \17.0 billion, taking into consideration structural reform expenses and other factors. But for the first half of fiscal 2005 you are forecasting operating income of only \24.5 billion. What are the reasons for the large drop?
A6. Even though there was a decrease in fourth-quarter orders, there were still orders for HDD heads from Western Digital. Our forecast for fiscal 2005 is premised on there being almost no Western Digital orders from the first quarter onward. Our forecast may be slightly conservative because we are also adopting a low estimate for HDD head production yields.
Q7. Would you break down the planned \55.0 billion in capital expenditures for fiscal 2005?
A7. We have earmarked \20.0 billion for recording devices, \25.0 billion for electronic materials and electronic devices, and \10.0 billion for the recording media & systems segment and other areas.
Q8. At TDK's previous earnings conference, it was pointed out that the handout materials only showed two product generations, 80GB/P and 120GB/P. In the past, the product schedule listed three generations of products. You were asked whether this meant that the life of 80GB/P products was being extended. Your answer was that the speed of new head development was slowing, extending products lives, and that you would face increasing demands for discounts as a result. Now you are saying that 120GB/P products will be delayed until early this fall and that 160GB/P products will be delayed even more. Do you therefore expect the pricing environment to become even more severe? Please comment on your pricing forecasts.
A8. We think it is almost certain that there will be pressure on prices. However, although it isn't shown on the handout, 100GB/P products are starting to make an impact, and our forecast is for this product to account for an increasing share of sales. The sales ratio of this product is low at the moment because it is only being supplied to one company. But we are expecting reasonable numbers in the second half of the year, which will lift the proportion of sales represented by this product to around 40%. Production yields are also expected to improve. While we aren't forecasting recording devices sales for fiscal 2005 of the same level as fiscal 2004, we still hope to get close to last year's number.
Q9. I have heard from various sources that there has been explosive growth in demand recently for 1-inch and 1.8-inch drives. Is this positive news for TDK?
A9. We have heard that there has been an "explosive" increase in demand for 1-inch drives, but that market is not nearly as big as the market for 3.5-inch and 2.5-inch drives. I think growth in the 1-inch market is put at around 2 to 3 times current production volumes. Naturally, this will benefit TDK. One concern, however, is whether a sufficient number of glass substrates for the HDDs can be supplied. 1.8-inch products are also moving in a positive direction for TDK.
Q10. The word in the market is that problems with some Maxtor HDDs are caused by TDK heads. Would you comment on the facts and effect on TDK?
A10. You refer to Maxtor in your question. I think you are referring to an issue concerning a HDD with one head. We are aware of a problem having arisen with such a product. At one HDD manufacturer, which is a customer of TDK, we are aware that a HDD-related problem has been pointed out by a PC manufacturer to whom HDDs were supplied. However, we don't think this has affected TDK in any way. This is because, while orders for single heads have decreased slightly, multi-head orders are up, so overall orders haven't changed. In other words, transactions are extremely brisk. In answer to your question, it is not clear that the HDD problem to which you refer is related to the head. One would reasonably assume that if the head was to blame, there would have been a noticeable effect on transactions with TDK. There has been no such effect. We cannot comment further on this subject as this matter also concerns the customer.
Q11. Would you comment on the degree to which Western Digital will affect results? Are your fiscal 2005 forecasts assuming no sales or shipments to Western Digital? At your previous earnings conference, you said that TDK could cover about 70% of the drop in Western Digital orders with orders from other sources. Would you comment on the effect of Western Digital and strategies for covering the drop in the context of your plans for fiscal 2005?
A11. We are not saying that there will be no business with Western Digital in the current fiscal year. Orders are expected to be close to zero, around 1% of our total orders for HDD heads. Total HDD head volumes for the first and second quarters of fiscal 2005 are expected to be about the same as in the corresponding quarters of fiscal 2004. And we think that we will be able to cover a considerable share of the drop in Western Digital orders with orders from other customers in the third and fourth quarters. It was suggested that our forecasts are calling for lower year-on-year shipments in fiscal 2005, but that is not the case.
Q12. How did fourth-quarter profitability in recording devices compare with the third quarter?
A12. Sales declined in the fourth quarter from the third quarter, but the operating profit margin percentage was largely unchanged. So despite a sharp fall in sales in the fourth quarter from the third quarter, recording devices generated sufficient earnings to preserve the operating profit margin percentage. This made the decline in overall operating income appear to be small.
Q13. You said that fourth-quarter profitability in recording devices was about the same as in the third quarter. But aren't you concerned that profitability will drop rapidly in the first quarter because profitability was preserved through a high capacity utilization rate that caused an increase in inventories at the end of the year?
A13. Inventories totaled approximately \73.0 billion at the start of fiscal 2004 and finished the year at approximately \77.0 billion, an increase of about \3.0 billion. Because inventories were a little higher in the prior fiscal year, progress is being made in bringing down inventories. We believe there has been no precipitous fall in earnings in recording devices at the start of the first quarter as a result of an extreme increase in inventories at the end of fiscal 2004.
Q14. You have said previously that there are two main reasons for the expected sharp increase in recording devices sales from the first half to the second half of fiscal 2005. One is an increase in orders from companies manufacturing HDD heads internally, so-called captive manufacturers. The other reason you cite is actions to increase your share of deliveries to manufacturers who purchase heads from TDK. Would you go into a little more detail about these two reasons?
A14. The two factors you mention in your question work in parallel. Because TDK's earnings rise when non-captive manufacturers do well in the HDD market, our approach is to think of strategies to make that happen. One way is alliances. My feeling is that because new technologies and exclusive technologies will be required going forward, TDK will be comparatively well placed. We will also be successful at winning orders from new captive manufacturers. This two-pronged approach will start with 80GB/P products.
Q15. What are your forecasts for sales volumes of HDD heads?
A15. On January 29, 2004, at the previous earnings conference, assuming fiscal 2003 fourth-quarter sales volumes were 100, we expected fiscal 2004 fourth-quarter sales volumes to be 122, following 133 in the third quarter. However, actual sales volumes were 109 in the fourth quarter, the result of the internal manufacture of HDD heads by Western Digital as was previously mentioned. Making fiscal 2003's fourth quarter 100, we are forecasting 105 for the first quarter and 109 for the second quarter, with further increases of at least 10% in the third and fourth quarters, compared with the second quarter.
Q16. In the past, you didn't announce the ratio of sales accounted for by Western Digital, but for the current fiscal year you have announced that TDK is forecasting that these sales will represent 1% of total HDD head sales. If possible, would you give sales ratios for previous periods?
A16. The highest they have been is about 20%, and Western Digital represented about 10% of total HDD head sales in the fourth quarter of fiscal 2004.
Q17. Would you tell us your forecasts for fiscal 2005 for the composition of sales and prices of mainstay 80GB/P products with 3.5-inch platter capacity? Could you also give us this information for 40GB/P products with 2.5-inch platter capacity?
A17. We project that 80GB/P products will account for 88% of sales in the first quarter, 71% in the second, 48% in the third and 26% in the fourth. The remainder in each quarter represents 100GB/P products and above. Regarding prices, we expect prices to fall by 3-5% in every quarter. In the market for heads for 2.5-inch HDDs, while 30GB/P products are still available, we no longer manufacture these products. In the first quarter of fiscal 2005, 100% of our products for 2.5-inch HDDs will be 40GB/P products. In reality, however, due to product downgrades, the ratio of 30GB/P products will be about 10%. Until the end of the second quarter, 40GB/P products will continue to account for almost 100% of sales in this HDD category. In the third quarter, 50GB/P products will represent 20%, with the remainder accounted for by 40GB/P products. Even with the arrival of 60GB/P products in the fourth quarter, which will account for 10% of sales, we project 40GB/P products to account for approximately 50%, with the remainder represented by 50GB/P products. Because we expect all companies to enter the 2.5-inch market, prices are likely to fall by at least 5% from the second half of the fiscal year.
Q18. Would you tell us the market trends for 100GB/P products for 3.5-inch HDDs and 50GB/P products for 2.5-inch HDDs and TDK's position?
A18. TDK is almost number one in 50GB/P products for 2.5-inch HDDs. There are two other companies with 100GB/P products for 3.5-inch HDDs, but some customers are putting out 120GB/P products without using 100GB/P products. Others are extending their use of 80GB/P products and will skip straight to 160GB/P products without using 120GB/P products.
Q19. Would you outline your plan for fiscal 2005 with relation to capacitor production capacity?
A19. As of March 31, 2004, we were producing 11-12 billion units a month. Output will be approximately 13.0 billion from April. In the second half of the current fiscal year, we are planning to ramp up output at the Kitakami Plant, giving us monthly production capacity of 15.0 billion capacitors. TDK is increasing production volumes of high- and large capacitance capacitors without increasing volumes of general-use capacitors.
Q20. Would you tell us your sales and price forecasts for capacitors for fiscal 2005?
A20. We are projecting an approximate 10% increase in sales over the previous fiscal year. Discounts, taking into account the effect of exchange rates, are estimated at about 10% and volumes are expected to increase 20%.
Q21. What is demand like for capacitors? Regarding technological trends, would you tell us whether it is correct to assume that TDK is advantageously placed given its special dielectric materials, amid progress in making dielectric materials and electrodes thinner?
A21. As you know, demand for capacitors has been exceeding the supply since around April. While TDK has seen orders increase, one should be watchful because some companies are placing two orders for a single shipment due to the tight supply. On the whole though there is a shortage of products. While supply and demand dynamics are unclear looking forward, we plan to ramp up production capacity, but will focus on high- and large-capacitance capacitors. Because demand for eliminating electromagnetic noise has been increasing because of the growing number of functions in finished products, TDK's high- and large-capacitance capacitors have been widely used. To mass produce these capacitors, one must have technology to make materials finer. This is a core TDK competence and it is technology that should give us a competitive edge both in Japan and overseas.
Q22. It seems that the inductive device product mix has changed considerably. Would you tell us how TDK's position has changed and its profitability in this market?
A22. Orders have risen substantially for coils and multilayered products. Although prices have dropped, as you know, profitability has improved. In coils, we see this as the result of various steps we have taken, such as shifting production to China.
Q23. Would you tell us how you see profitability improving in low profit or unprofitable areas? Specifically, what measures have been implemented with respect to ferrite and magnets, high-frequency components and semiconductors, and when do you think these product sectors will become profitable? Also, you said that you were aiming for a double-digit operating margin in inductive devices. Have you achieved that?
A23. The shift from CRTs to flat-panel TVs has been faster than we had expected. As a result, we are downsizing our operations involving deflection yoke cores and flyback transformer cores, which are used in CRTs. However, because we have always commanded a high share of this market, we have a responsibility to supply these products. Production volumes of these cores have been halved based on market trends, but in the current fiscal year we plan to take charges for structural reforms relating to this business. With respect to magnets, prices have fallen sharply due to aggressive pricing by local manufacturers in South Korea and China. As a result, even previously profitable magnet products have become unprofitable. Our plan for the current fiscal year, therefore, is to try to increase earnings by placing emphasis on extremely small, high-performance products rather than low-priced products. Regarding inductive devices, we are still on track to achieve a double-digit operating margin thanks to extremely strong growth in sales. With high-frequency components, because of a weak performance, we have looked closely at our lineup and only kept products with comparably strong profitability. A good illustration of our success is our receipt of Intel Corporation's 2003 Supplier Continuous Quality Improvement (SCQI) Award. So we are making progress with rationalizing operations in an optimal way for TDK. While we can't expect this to help drive earnings growth for the company in the current fiscal year, losses were narrower in this area in the fourth quarter of fiscal 2004, compared with the third quarter. And indications are that earnings will improve in this area in the first and second quarters of the current fiscal year.

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