Investor Relations | R Events | Performance Briefing

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

Q1. Could you break down your projected consolidated operating income of ¥60.0 billion for fiscal 2005 between the electronic materials and components segment and recording media & systems segment?
A1.  We are projecting operating income of around ¥63.0 billion in the electronic materials and components segment and an operating loss of roughly ¥3.0 billion in the recording media & systems segment. Concerning optical media products in the latter segment, we have attempted to accelerate efforts to lower costs with respect to products we manufacture and shorten the time between purchase and sale with respect to products supplied by other companies. Assuming that sales prices of DVDs fall by 25% in the second half of fiscal 2005 compared with the first half, we think we will break even in the recording media & systems segment in the second half. Accordingly, the projected operating loss of around ¥3.0 billion for fiscal 2005 in this segment is the first-half operating loss.
Q2. What is your outlook for net sales and operating income in the third quarter of fiscal 2005, which is from October to December 2004?
A2.  We are estimating consolidated net sales of about ¥183.4 billion for the third quarter and approximately ¥177.8 billion for the fourth quarter. We are projecting fourth-quarter operating income to be around ¥2.0 billion lower than the third quarter.
Q3. We are estimating consolidated net sales of about ¥183.4 billion for the third quarter and approximately ¥177.8 billion for the fourth quarter. We are projecting fourth-quarter operating income to be around ¥2.0 billion lower than the third quarter.
A3. No. Income taxes swelled in the first half because there was an extremely large amount of dividends from overseas subsidiaries. The effective tax rate will fall in the second half of the year because dividends will return to the normal level in the absence of these dividends.
Q4. Second-half operating income in the electronic materials and components segment is estimated to increase by ¥4.0 billion, if not a little more, compared to the first half. Is this projected increase solely attributable to HDD heads? Or is it premised on increased earnings from electronic materials and electronic devices? Could you give us your outlook for sales and earnings given that demand is gradually declining?
A4. Electronic components were extremely strong in the first half of fiscal 2005 compared with the same period a year earlier because of the contribution of highly profitable products, notably capacitors, to earnings and a significant improvement in products that weren't that profitable. These two factors offset lower earnings from HDD heads in the first half. We expect the composition of earnings in the second half to be the same as in the first half. Basically, earnings should increase from electronic components as net sales increase. Our view is that sales volume of HDD heads will increase considerably but, due to severe discounting pressure on 80GB/P products, which account for the bulk of sales, earnings won't increase by the same extent as sales. So we are expecting challenging market conditions. In the recording media & systems segment, we want to at least break even.
Q5. As a member of the Blu-ray Group, would TDK no longer have to pay the huge patent fees it is currently paying in the optical media business if Blu-ray Discs become the industry standard? Would TDK in fact start receiving patent income? In short, what effect would widespread market acceptance of Blu-ray Discs have on TDK's optical media business? Furthermore, TDK has announced new tape-based data storage media products for computers. Please comment on the chances for success of these products.
A5. TDK is a first-generation Blu-ray Disc member company. Of course we would rather receive patent fees than pay them, but that is still not certain. By always being the first to bring out new products, we expect that Blu-Ray Discs will be more profitable than DVDs. Regarding tape-based data storage media for computers, we have lagged behind other companies, but we were first to obtain approval for third-generation LTO products. After considerable effort, we are now finally turning a profit from these products and have set our sights on double-digit earnings.
Q6. The recording media & systems segment recorded a ¥2.1 billion operating loss in the second quarter of fiscal 2005. How much of this loss represented losses on the purchase and sale of products from outside the company and how much was attributable to the disposal of inventories?
A6. The bulk of the ¥2.1 billion loss resulted from products purchased from outside TDK. An excess of inventory due to inadequate execution of purchasing and inventory management systems was the cause of the loss. Our systems were at fault. This loss is not something that we can eliminate quickly
Q7. TDK's initial sales target for capacitors was a 10% increase versus the previous year. Has there been any change to this plan? Also please give us your projected capacity utilization rate when output reaches 15.0 billion units a month.
A7. There has been no change to our sales plan. We are estimating a capacity utilization rate of between 80% and 85% when the monthly output is raised from the current 13.0 billion units to 15.0 billion units in the second half of fiscal 2005
Q8. What share of chip capacitor sales were accounted for by large-capacitance capacitors? What products do you expect will drive sales volume growth in the second half of fiscal 2005? Please comment in terms of capacitance and size.
A8. Large-capacitance capacitors accounted for a little less than 60% of total chip capacitor sales. Second-half volume growth will be driven by higher sales of these products. Capacitances of around 10fEF represent the primary demand of customers for large-capacitance capacitors. The size of general capacitors is 1005 but there is a substantial switch in demand to 0603.
Q9. My question is for Mr. Sawabe. Could you give us an image of the strategy for making ferrite cores, high-frequency components and the recording media & systems segment profitable as well as TDK's target profit margin? Please also talk timeframe and whether this will give rise to additional restructuring charges.
A9.  Ferrite cores returned to profitability in the second quarter of fiscal 2005. We are aiming for a double-digit operating margin in the second half of fiscal 2006 when a new low-loss ferrite material that we are currently developing will start contributing to our results. In China, we are currently manufacturing ferrite products used in CRTs, but we will downsize production while keeping a close eye on demand. This won't result in large restructuring charges though. Existing high-frequency products are almost at a break-even level, but some new high-frequency products are not. However, we expect high-frequency products to become profitable in the fourth quarter of fiscal 2005. With regards to the recording media & systems segment, we will streamline sales divisions in Europe and the U.S. to some extent. Again this won't cause large restructuring costs. We projected restructuring costs of ¥3.6 billion for fiscal 2005 and there is no change to this estimate at this point.
Q10. I believe that Maxtor's HDD shipment volumes recovered in the July-Sept. quarter compared with the Apr.-Jun. quarter. I also understand that Maxtor has formulated various plans, such as to expand in China next year. Could TDK comment on these points?
A10.  Because Maxtor is a customer, we cannot comment specifically on its business affairs. However, we believe there will be a second-half improvement, considering Maxtor's technologies and customer base. In fact, Maxtor's orders for TDK's HDD heads have rebounded.
Q11. A booth at Ceatec Japan 2004 the other day was showing a video on TDK's HDD head base in Changan, China. Could you please comment on progress TDK is making developing its head business in China, particularly with respect to front-end and back-end processing?
A11. Changan is a HDD head manufacturing base that was established to allow us to respond to severe pricing demands in the market. This facility has a totally integrated production system, from front-end wafers to back-end HGA and HSA. Plans call for the start of mass production early next year.
Q12. Please give us shipment volumes and profit margins from HDD heads by quarter.
A12. At our earnings conference on July 29 this year, I think we said that assuming shipment volumes in the first three months of 2004, the period from January to March 2004, were 100, shipments would be 100 in the second quarter, 104 in the third quarter and 110 in the fourth quarter of calendar 2004 and then 111 in the first quarter of 2005. We are now looking at 100, 104, 123 and 129, respectively. Because of particularly severe discounting, profit margins are declining slightly. That's all we can say.
Q13. What is your outlook for HDD heads through next year? TDK has initiated various strategies, such as establishing a joint venture with Fujitsu Limited and raising the proportion of HSA heads, but what is your outlook for sales and the profit margin in the HDD head business next year?
A13. We believe that the HDD industry itself will record near double-digit growth. And we also expect an increase in heads per HDD. This should naturally result in an increase in demand for HDD heads. The key point, however, will be whether TDK's customers are successful. Our profit margin will improve if they are indeed successful, and, if there is a shift to new products, such as 120GB/P and 133GB/P products, discounting should become less of a factor.
Q14. Could you tell us the discount rate and operating margin for HDD heads in the first half of fiscal 2005?
A14. The actual discount rate in the second quarter of fiscal 2005, compared with the first quarter, was approximately 7%. We expect the discount rate in the second half to be a little more than 10% versus the first half. The key point will be whether we can compensate for this with higher shipment volume. However, higher volume probably won't be sufficient to offset the fall in profit margin due to discounting.
Q15. You stated that HDD head shipment volumes in the first quarter of 2005, the period from January to March 2005, would be 129, assuming shipment volumes in the first three months of 2004, the period from January to March 2004, were 100. I understood that in a typical year shipment volumes dropped in this period because of a seasonal correction. Why then is TDK expecting sales volumes to increase? Also please give us your forecast for the profitability of 120GB/P heads for 3.5-inch HDDs.
A15. There are three reasons for our projection that HDD head sales volumes will increase in the first quarter of 2005. First is comparatively strong demand for 1.8-inch products. Second is strong demand for heads for servers. Thirdly, orders from new customers will increase. I cannot comment in detail on the profitability of 120GB/P heads, but I believe that we will get off to a good start.
Q16. Please give us the share of HDD heads by category.
A16. On a volume basis, 3.5-inch HDDs for desktop PCs account for around half of the total, 2.5-inch HDDs around one-third, servers about 8% and 1.8-inch HDDs and below for the remainder. In terms of products, mainstay 80GB/P heads accounted for 90% of the total in the first and second quarters of fiscal 2005, but this should decline in the third quarter as 120GB/P and 133GB/P products account for a higher share.
Q17. How many customers are there for TMR heads?
A17. Two companies have qualified our heads to date and two more companies are evaluating our heads at present.
Q18. What is TDK's share of the HDD head market? And how do you intend to increase your share next fiscal year and beyond?
A18.  In fiscal 2004, our market share was put at 33%. It was estimated at 29% in the first half of fiscal 2005 and we are projecting a share of 32% in the second half. In the fourth quarter, from January to March 2005, we are projecting a share of around 33%. Developing new customers will be key to expanding our share in subsequent fiscal years.
Q19.  My question concerns your joint venture with Fujitsu. Has the purchase price of wafers from Fujitsu been decided yet?
A19.  We think the purchase price will be about the same as the price at which we purchase wafers internally. However, it may change depending on the production yield of HGAs.
Q20. By what extent could the production yield fall when the switch is made to 120GB/P products? At what speed do you think the production yield will improve? Please compare this with your experience when 80GB/P products were launched.
A20. The pace of improvement will probably be better with 120GB/P products than it was for 80GB/P products.
Q21. On what are you basing your outlook for a slight increase in the number of heads per HDD? Furthermore, TDK is projecting a 13-14% increase in sales of HDD heads in the second half of fiscal 2005. Please comment on how that correlates with HDD demand.
A21. At present, there is strong demand for high-capacity 3.5-inch HDDs used in desktop PCs, including demand for use in hard disk video recorders and other consumer electronics. One prediction is that 400GB will soon give way to 500GB and 600GB HDDs. Furthermore, until now, the trend has been to lower costs by using fewer heads and discs. But due to reliability issues, there is a trend toward using more disks and employing established technology. These are the reasons for our prediction of an increase in heads per HDD.

Our expectation for an increase in the second half is premised on a higher market share as well as our customers releasing upbeat sales volume forecasts for the January to March 2005 period. In addition, server sales are strong and volumes are expected to increase from new customers.

Q22. What factors other than HDD heads are expected to drive sales growth in the second half of fiscal 2005?
A22.  In the third quarter, we expect higher sales from electronic components due to an increase in demand. Furthermore, in recording devices, higher sales volumes should offset the effect of lower sales prices. Moreover, in the recording media & systems segment, we expect to be able to sell more products by matching prices to market demand.
Q23. What share of HDD head sales are accounted for by captive manufacturers?
A23. On a volume basis, they accounted for about 27% in the first half of the year. This is projected to rise to around 32% in the second half. In fiscal 2006, we think it will rise a little more, but the figures don't support this outlook yet.

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