Investor Relations | IR Events | Performance Briefing

[ 3rd Quarter of fiscal 2005 Performance Briefing ]Q&A

Q1. Your fiscal year operating income forecast is ¥60 billion, but what are your operating income forecasts for the electronic materials and components segment and recording media & systems segment?
A1. We expect that the recording media & systems segment will report another loss in the fourth quarter. Since the segment loss in the first three quarters was ¥5.3 billion, we estimate the fiscal year loss will be about ¥6.0 billion. The electronic materials and components segment will counter this loss, bringing operating income to the ¥60 billion forecast.
Q2. Are there any differences between now and the first half in your thinking about restructuring charges?
A2. We initially expected these charges to total about ¥2 billion in the fourth quarter. But we have reduced this estimate by about ¥1 billion because current trends in our customers operations and our orders are preventing us from executing our restructuring program as planned.
Q3. Will the decline in expenses associated with the transfer of the substitutional portion of the Employees' Pension Fund liabilities contribute to higher earnings in the fourth quarter or the following fiscal years?
A3. In principle, this will contribute somewhat to earnings in the following fiscal years because the transfer has reduced our pension liabilities.
Q4. Foreign exchange movements reduced cash and cash equivalents by ¥5.26 billion in the third quarter. Please provide a breakdown by currency of the cash and cash equivalent balance of ¥235.3 billion at the end of December.
A4. About half is yen and most of the remaining half is U.S. dollars. So, while there are some other currencies, cash and cash equivalents are roughly divided 50-50 between yen and the U.S. dollar.
Q5. If the Chinese yuan were no longer pegged to the U.S. dollar and then appreciated 10% versus the dollar, what effect would this have on TDK's sales and operating income?
A5. We do business in yen and the U.S. dollar. Almost none of our transactions use the yuan. We use the yuan only for payroll and other expenses in China. So, because of this and other factors, I don't think an appreciation of the yuan would directly influence our sales or earnings.
Q6. Please provide more information about fourth-quarter operating income. Are you expecting operating income in the electronic materials and components segment to be the same as in the third quarter even though your plan calls for sales to decline?
A6. We expect that third- and fourth-quarter operating income will be about the same. The recording media & systems segment had a third-quarter operating loss of ¥2.3 billion. We expect the segment to improve in the fourth quarter, but still report a loss. However, due to a ¥1 billion increase in restructuring charges in the fourth quarter compared with the third quarter, we expect operating income to be about the same amid a decline in sales in the electronic materials and components segment.
Q7. Were there any expenses associated with the substantial decline in inventories during the third quarter?
A7. We recorded no expenses for reducing inventories. But we did incur various expenses for changes to our sales organization in the recording media & systems segment.
Q8. In the electronic materials and electronic devices sectors, it appears that the operating environment has become much more challenging since the first-half information meeting. When and to what degree will you see improvements in unprofitable product categories? Also, will you need to post additional restructuring charges next fiscal year because of these actions? Please provide information separately for these two business sectors.
A8. Regarding market conditions, there has been little change in sales of finished products since the first-half information meeting. Sales of large-capacitance capacitors are up almost 10% year on year. Therefore, we believe that the impact of current market conditions on sales and earnings of our core large-capacitance capacitor business will be small relative to the downturn in sales of finished products.

Turning to inductive devices, we are seeing a major contribution to sales and earnings in the current fiscal year from the initiatives that we started in the past year. One example is third-quarter growth in GLF sales to mobile phone manufacturers. In the next fiscal year, I want to focus even more of our energy on the initiatives now under way. Pressure for price discounts along with the yen's strength will pose significant challenges in the next fiscal year, too. However, there will be no changes in our sales policy.
Q9. Profitability of high-frequency components is improving in the second half because of a significant upturn in sales. Although you said that TDK plans to end losses in this product category in this fiscal year, I think this will be difficult to accomplish. What are your plans for the next fiscal year?
A9. There are still a number of product categories in the red, including high-frequency components and power supplies. I think that we can achieve a substantial improvement overall if we can make improvements in these categories now and in the next fiscal year. In the high-frequency component category, TDK's weaknesses and strengths are now becoming clearly evident. I don't think we can translate our initiatives into better operating results in this fiscal year. But I am determined to have these products begin contributing to earnings in the following fiscal year. I want to reduce losses as much as possible and make these product categories profitable.
Q10. You just stated that fourth-quarter earnings will be effectively about the same as in the third quarter. But won't there be product categories in the electronic materials and components segment that post higher earnings in the fourth quarter?
A10. We expect that earnings of electronic devices will increase from the third to the fourth quarter and that earnings from electronic materials will decrease slightly.
Q11. From the second to the third quarter, operating income in the electronic materials and components segment rose by about ¥4 billion, from ¥15 billion to ¥19 billion. How did earnings change between these two quarters in the electronic materials, electronic devices, recording devices, and semiconductors & others business sectors? Also, you said that fourth-quarter earnings in the electronic materials and components segment will be about the same as in the third quarter. Is this a realistic forecast?
A11. Regarding the question about what product categories achieved earnings growth from the second to third quarter, the biggest increase was in recording devices. Despite price discounts, there was a big increase in volume in the third quarter. This was the biggest cause of the growth in earnings in the electronic materials and components segment. Next, you asked if our projection for operating income to remain about level in the fourth quarter is realistic. This is an extremely difficult question. I think the probability of our earnings exceeding ¥60 billion is not very high. But I also think there is a low probability of earnings falling significantly below ¥60 billion. As I mentioned earlier, I believe that we will be able to meet our operating income forecast of ¥60 billion if we can achieve our sales projection of ¥660 billion without falling below our projections for sales of electronic components, HDD heads and other products.
Q12. Sales of electronic materials are weakening and earnings declined from the second to third quarter. Is this because of erosion in capacitor profit margins?
A12. To some degree, you can regard this as a decline in the profit margin.
Q13. Were third-quarter electronic devices earnings higher than in the second quarter?
A13. Yes.
Q14. Please provide information concerning HDD head shipment volumes in terms of an index. Also, what were third-quarter results in terms of HDD size and what is your fourth quarter outlook?
A14. Using first-quarter shipment volume as 100, volume was 104 in the second quarter, 146 in the third quarter, and is expected to be 142 in the fourth quarter. In terms of HDD size, about 50% of our shipments were for 3.5-inch drives, about one-third were for 2.5-inch drives and about 10% were for 1.8-inch drives and below. Servers accounted for about 10% of shipments. Heads for 3.5-inch drives are falling as a share of shipment volume, while shipments of server heads are climbing.
Q15. HDD manufacturer Maxtor recently announced that it was terminating its 2.5-inch drive development program. Since Maxtor buys heads from TDK, would you comment on the effect of this decision on TDK's head business?
A15. Maxtor stated that it was halting its 2.5-inch drive program prior to reaching the stage where the final details are determined. We thus regard this as a problem occurring prior to the point where we formulate a plan for supplying HDD heads. Consequently, this action will have no impact on our operations at this time.
Q16. How much of TDK's HDD head business comes from 120GB/P products now, and how will this share change by the end of 2005?
A16. 120GB/P products generated no sales in the third quarter and will probably account for 3% of our HDD head sales volume in the fourth quarter. I think the share will rise by the end of 2005 as these products are used in special applications. But the volume will still be lower than sales of 80GB/P products. I don't think that 80GB/P products will be replaced until 160GB/P products are introduced.
Q17. Where will heads for 160GB/P products be used?
A17. That will depend on what kinds of HDDs are used by mainstream desktop PCs when mass production of 160GB/P products begins. But if we can make a 160GB/P head, I think it will be possible to design a 80GB HDD that requires only a single head.
Q18. At the first-half information meeting, you provided a shipment index of 123 for third-quarter HDD heads. But the actual result was 146, which is about 19% higher than your forecast. Where did this increase come from?
A18. Strong sales in the HDD market led to growth in demand for heads. Growth was particularly strong for heads used in 3.5-inch drives for desktop PCs and servers. The share of total TDK HDD head shipments of 2.5-inch drive heads hardly changed. Although demand for 1.8-inch and smaller drives was strong, TDK did not capture much of this business.
Q19. You have stated that TDK wants to increase shipments of HDD heads to HDD manufacturers that produce their own heads. Is this still your policy?
A19. We believe that sales to these manufacturers will account for a higher share of head shipments in the second half than in the first half.
Q20. What are TDK's plans concerning the use of TMR technology for HDD heads?
A20. We are improving the specifications of TMR heads in terms of the MR ratio and MR ratio plus areal resistance. Our goal is to extend the applications for TMR heads to the high end of the HDD market.
Q21. Please tell us as much as you can about the Fujitsu business. Also, you stated at the previous information meeting that the start-up for 120GB/P and 100GB/P products is going well, and that they would be contributing to earnings. Did this happen in the third quarter? And, although this is looking far ahead, because customers have determined specifications for 160GB/P products, would you discuss the positive and negative aspects for next fiscal year's head business from the standpoints of your market positioning and earnings?
A21. I cannot provide details concerning the Fujitsu business because of a non-disclosure agreement. Regarding 120GB/P products, we are progressing as planned. Regarding 160GB/P products, you want to know if we think these products will be a positive factor for TDK once the technical specifications have been fixed and commercialization begins. The answer is yes.
Q22. You have provided a roadmap for HDD heads for 3.5-inch and 2.5-inch drives. If possible, please provide roadmaps for 1.8-inch drives, 30GB/P and 40GB/P products, and subsequent products. You said that you are experiencing difficulties in the 1.8-inch market. What is the outlook and your view of technological advances? Also, now that the technology for 3.5-inch drive 160GB/P products has been determined, can you provide us with a description of that technology?
A22. Currently, 1.8-inch drives use 30GB/P products. Once 2.5-inch drives with 60GB/P products appear, I think that 40GB/P technology will be within our reach. Concerning your question about 160GB/P technology, you can basically view this as TMR technology with some additional elements.