Investor Relations | IR Events | Performance Briefing

[ 1st Quarter of fiscal 2005 Performance Briefing ]Q&A

Q1. What is your outlook for net sales and operating income by product sector for the first half of the year?
A1. We are forecasting interim net sales of \90.8 billion in electronic materials, \57.6 billion in electronic devices, \102.2 billion in recording devices, around \10.0 billion in semiconductors & others, and \60.2 billion in the recording media & systems segment. We are thus projecting total net sales of \320.8 billion for the first half of fiscal 2005. We expect operating income for the second quarter, from July to September, of \14.0 billion, the same as in the first quarter.
Q2. TDK booked restructuring costs of roughly \0.4 billion in the first quarter. How much are you expecting to book for the first half and the full year?
A2. We are forecasting restructuring costs of approximately \0.9 billion for the second quarter and \3.6 billion for the full year.
Q3. Before you said that orders for electronic components in general would decline in the June-July period compared with spring. What applications and what areas will decline and when do you expect them to rebound?
A3. Orders for electronic components in general were buoyant through March, April and May, but dropped off in June. They are a little higher in July than in June. The question is whether they'll rise or not as we near the year-end holiday sales season.
Q4. Could you give us your sales plans for capacitors in terms of percentage increases by quarter? Is a change taking place in the supply-demand equation at present given the tight supply?
A4. Compared with the first quarter of fiscal 2005, capacitor sales in monetary terms are expected to rise around 3% in the second quarter. There should be a slight increase in the third quarter from the second quarter, with sales falling back to the first-quarter level of increase in the fourth quarter. In the first quarter, sales prices decreased about 10% compared with the same period last year. We expect this situation to continue. As we said at the previous earnings conference, we were capable of producing 13.0 billion units a month in the first quarter. We are now working to raise production capacity to 15.0 billion units. I believe that we have the capacity to meet current orders.
Q5. What is your fiscal 2005 outlook for capacitor sales and how did profitability in the first quarter compare with earnings from HDD heads?
A5. On a monetary basis, we expect capacitor sales in fiscal 2005 to be up 10% year on year. Profitability was about the same as HDD heads.
Q6. I believe that the HDD market share of a large customer has dropped considerably in recent times. Were the problems that occurred in April and June at this customer behind this decline in market share?
A6. Not necessarily. There is excess supply of 3.5-inch hard disk drives in the market as a whole, which has prompted companies to scale back production. This is one reason. We understand that there were some quality issues at a PC manufacturer but orders for our HDD heads haven't fallen much at all.
Q7. TDK and Fujitsu Limited announced a business alliance today. My guess is that TDK's strategy is to increase business with existing customers to respond to the in-house production of HDD heads at Western Digital. Will TDK's HDD head business strategy have to be revised in light of the decline in market share at a major customer?
A7. The alliance with Fujitsu is just one of our strategies and is intended to cement business ties with Fujitsu. TDK is implementing various measures and we have no thoughts of changing our original strategy at present.
Q8. Assuming HDD head shipment volumes in the first three months of 2004, the period from January to March, were 100, how do you see sales volumes trending by quarter in fiscal 2005?
A8. Our previous forecast was for the first quarter of fiscal 2005 to be 97, followed by 100 in the second quarter and then 110 in the third quarter and 111 in the fourth quarter of fiscal 2005. We have slightly revised this forecast and are now projecting 100 in the first quarter, and 104 in the second quarter. Forecasts for the third and fourth quarters are the same, 110 and 111, respectively.
Q9. What effect will the establishment of a joint venture with Fujitsu have on wafer processing? And what will the joint venture manufacture?
A9. There will be no change in wafer processing at either Fujitsu or TDK after the start of operations at the joint venture. In other words, wafer processing at both companies will be conducted as before. The joint venture will process sliders and manufacture HGA heads. Plans call for all output of the joint venture to be supplied to Fujitsu.
Q10. My question relates to TDK's second-half outlook for HDD heads. At TDK's previous earnings conference, it was explained that second-half sales would increase due to measures to win new business from drive makers that produce HDD heads in-house and by increasing TDK's share to existing customers. I'd be grateful if you could explain in more detail why you think it is possible to increase sales in the second half of the year. I think assembly will probably increase considerably at TDK in the second half, but how will that affect present profitability? There is a school of thought that the profitability of your overall HDD head business would decrease by increasing assembly.
A10. Regarding your question about why we think we can achieve higher sales in the second half, one factor is that we are seeing a steady increase in business with a major customer. Another reason is the launch of 100GB/P products. To be more specific, two models have been qualified by so-called captive manufacturers, companies that manufacture HDD heads internally. Another reason is the extremely strong sales of 2.5-inch products at Fujitsu. It is based on these factors that we said before we think it is possible to grow sales by around 10% in the second half. And that's why we do not intend to revise our sales strategy at this point.

You also asked about the profitability of head operations. As Mr. Seiji Enami, General Manager of our Finance & Accounting Department explained earlier, there have certainly been price discounts for 80GB/P products. However, we have made better-than-expected gains in improving production yields, when we had said previously that we thought this would be difficult. Because we think that there will be stronger pressure for discounts going forward, profitability will probably decline slightly, but we are determined to launch 100GB/P and 120GB/P products quickly.

We also believe that the HSA ratio will increase further as we approach the second half, leading to an increase in monetary sales. It is true that this will not help to improve profitability.
Q11. I'd like to know a little more about the planned joint venture with Fujitsu. First, will heads for 3.5-inch servers be included? How about 1.8-inch and 0.85-inch products? Next, when will the joint venture start contributing to TDK's consolidated results? Also, please tell us whether the sales of Fujitsu's head back-end processing operations will be included in the results of the joint venture, effectively being included in TDK's results through consolidation and whether they are included in second-half sales. Will this joint venture have any adverse effect on your relationships with other companies?
A11. The joint venture will allocate all the HDD heads it produces to HDDs manufactured by Fujitsu, not just for 3.5-inch drives but also 2.5-inch and other drives. Because full-scale operations won't start until around April next year, the joint venture will make virtually no contribution to fiscal 2005 results. The sales of this joint venture will be included in TDK's results under consolidation. We don't think there'll be any problem with our relationships with other customers.
Q12. Fujitsu was producing some HDD heads internally. Will those sales now be recorded in TDK's consolidated results?
A12. Yes.
Q13. In February this year, Maxtor announced an alliance with TDK. Could you tell us around when joint activities will commence?
A13. Sometime this year. However, I cannot give any details.
Q14. Could you please explain the direction of HDD head technology with reference to the head product launching schedule in the presentation materials?
A14. There are two possible technologies with respect to 160GB/P heads for 3.5-inch HDDs: the perpendicular recording method and upgraded GMR method. Naturally, the method with the best production yield will be chosen. With 60GB/P heads for 2.5-inch HDDs, qualification is now taking place mainly for TMR heads.
Q15. You said before that captive manufacturers have already qualified two new models. In total then, how many models have now been qualified? Could you tell us the applications they have been qualified for?
A15. Three models have been qualified. Basically, they have been qualified for servers and 3.5-inch HDDs.
Q16. Looking at TDK's securities report for the fiscal year ended March 31, 2004, monetary sales to Maxtor Peripherals (S) Pte. Ltd. were \79.6 billion. How much were sales in the first quarter of fiscal 2005 and what are your forecasts for the second quarter onward?
A16. On a yearly basis, we are forecasting these sales to be higher than fiscal 2004. I'm sorry, but I cannot give quarterly results.
Q17. What is your forecast for shipments of 100GB/P products as a share of total head shipments from the second quarter onwards compared with actual results for the first quarter?
A17. Actual shipments were 2% of the total in the first quarter of fiscal 2005. We are projecting 6% for the second quarter, 10% for the third quarter and 20% for the fourth quarter of fiscal 2005.
Q18. Around when do you expect HDD head sales to rise again?
A18. I think they bottomed out in June and will improve gradually month by month in July, August and September.