Mr. Hajime Sawabe
President & CEO
Good afternoon. Thank you for taking the time to come here today.
I would like to begin by reporting on our results in the past fiscal year. Consolidated net sales increased 20.9% to 795.2 billion yen, operating income increased 1.2% to 60.5 billion yen, income from continuing operations before income taxes increased 8.9% to 66.1 billion yen, and net income increased 32.4% to 44.1 billion yen.
Sales and earnings were both higher in the electronic materials and components segment. Net sales increased 26.1% to 687.8 billion yen and operating income was up 6.8 billion yen to 74.3 billion yen.
I will now discuss sales and earnings by business segment.
Sales increased in both the electronic materials and electronic devices sectors. One reason was higher demand resulting from unexpectedly strong growth in demand for mobile phones and PCs, product categories that have a big impact on the performance of these two business sectors. Rising demand for components used in digital home appliances also contributed to growth in sales of electronic components. This was, for example, a reflection of steep growth in shipments of flat-screen TVs and portable digital audio players. However, we were unable to fully benefit from solid demand for capacitors because of manufacturing problems that occurred during the fiscal year's first half. On the positive side, our acquisition of the Lambda Power Division in the past fiscal year reinforced our position in the power supply business. We will be taking a number of actions aimed at reaping concrete benefits from the integration of the Lambda and TDK power supply businesses.
In the recording devices sector, we achieved almost 40% growth in sales of HDD heads, raising our market share from 31% in the prior fiscal year to 36%. There was a big upturn in demand for HDD heads because of growth in the market for PC drives as well as increasing use of hard disk drives in consumer electronics. Overall, our sales in the recording devices sector were up 35%.
In the recording media segment, sales decreased 4.6% to 107.4 billion yen. The operating loss increased by 6.1 billion yen to 13.8 billion yen because we decided to conduct additional, unplanned restructuring activities. In all, we posted restructuring expenses of 11.0 billion yen in this segment during the fiscal year. As in the prior fiscal year, discounting of optical discs in response to falling market prices exerted severe pressure on segment profitability in the past fiscal year. The total impact of discounting, including the effect on sales composition, was 27.3 billion yen. In addition, we were unable to achieve planned reductions in the cost of manufacturing discs because of the much higher cost of crude oil and various materials. For these reasons, I announced last month that TDK will stop manufacturing blank and rewritable CDs and DVDs. The large segment loss in the past fiscal year includes the effect of one-time expenses associated with a factory closing due to this decision. However, I believe that our restructuring initiatives have brought about fundamental improvements in the profit structure of the recording media segment.
Because of the additional restructuring expenses, our operating income of 60.5 billion yen in the past fiscal year was only slightly higher than the 59.8 billion yen we recorded in the prior fiscal year. Operating income benefited from three factors. Sales growth and an improved product mix contributed 41.2 billion yen; rationalization activities, mainly discounts on material procurement expenses, along with manufacturing efficiency and other measures, contributed 48.4 billion yen; and the weakening of the yen from 108 to 113 to the U.S. dollar contributed 7.7 billion yen. On the negative side, the impact of reductions in sales prices was 80.9 billion yen, or 9.2% of total sales; restructuring expenses totaled 14.2 billion yen; and amortization of Lambda Power Division goodwill was 1.5 billion yen. The net result was a 0.7 billion yen increase in operating income.
We plan to pay a year-end dividend of 50 yen per share, which is 10 yen more than we had planned. Since we paid an interim dividend of 40 yen in December, the total dividend applicable to the fiscal year will be 90 yen. As I just explained, our earnings were held down in the past fiscal year by growth in one-time items like restructuring expenses. But our electronic components business is posting consistent growth in sales and earnings. Our decision to propose a higher dividend is also rooted in TDK's basic policy of placing priority on steady dividend increases. The annual dividend of 90 yen will be 20 yen higher than one year ago. In line with our basic policy, we plan to raise the annual dividend to 100 yen in the fiscal year ending in March 2007.
For the fiscal year ending in March 2007, our business plan calls for a 3.1% increase in net sales to 820.0 billion yen, a 35.5% increase in operating income to 82.0 billion yen, a 33.1% increase in income before income taxes to 88.0 billion yen, and a 38.3% increase in net income to 61.0 billion yen.
Market conditions remain favorable. The electronic components industry has seen double-digit year-on-year growth for eight consecutive months beginning in August 2005. We expect this growth rate to continue during the quarter ending in June 2006. Due to this situation, price discounting pressure is weakening, although this may be a short-term trend. We expect to see continued strength in markets for flat-panel TVs and other IT consumer electronics, mobile phones, PCs, automobiles, hard disk drives, and other products.
Despite this positive outlook, there are causes for concern from a macroeconomic perspective. Among them are the higher cost of crude oil and other basic materials and the future direction of the U.S. economy and foreign exchange rates. Interest rates are beginning to climb worldwide. Higher interest rates will probably bring an end to the period of excess liquidity, making it more difficult for the U.S. to attract inflows of capital. Japan will probably return interest rates to a normal level. If this occurs, there are fears that the yen will strengthen against the dollar due to the narrowing of the gap between Japanese and U.S. interest rates. This will further impede the flow of capital from other countries to the U.S. Despite widespread predictions of a downturn, the U.S. economy has been at the heart of global economic growth. But the U.S. economy may weaken in this fiscal year's second half if the dollar's value falls and the U.S. has difficulty attracting capital from overseas. Regardless of these macroeconomic concerns, TDK's survival will depend on our ability to sustain growth. I can say that we will grow again this fiscal year, although our growth rate will be lower because sales in the past fiscal year benefited from corporate acquisitions.
In the electronic materials sector, we are forecasting a 10% sales increase, based on the outlook for a continuation in the recovery in capacitor results and higher demand for metal magnets. In the electronic devices sector, we are forecasting a 27% sales increase. Growth will be driven by several factors. We foresee higher sales of high-frequency components and a contribution by new inductive devices. We also expect higher sales in the power supplies & other products category from products targeting IT consumer electronics and high-speed, large-capacity networks. A full-year contribution from the Lambda Power Division will contribute about 26.0 billion yen to sales growth. The past fiscal year included only six months of sales. Excluding the Lambda Power Division, our sales growth forecast for the electronic devices sector is 12%.
In the recording devices sector, we will inevitably feel the effects of Seagate's purchase of Maxtor and the subsequent merger of the two companies. Although we plan to offset a large part of the negative impact mainly by taking advantage of the expanding HDD market to increase sales to other customers, we are predicting a 9.8% drop in HDD head sales. Our plan for the entire recording devices sector calls for a 10.5% sales decline.
In the recording media segment, data storage tape sales are climbing. However, sales will reflect our adoption of a 100% external-procurement business model for the optical media business and our actions to remove unprofitable products from our lineup. As a result, we expect that segment sales will be down 5%.
Next, I would like to explain our strategies for the current fiscal year and the next several years. TDK achieved double-digit sales growth for the first time in many years in fiscal 2006. We must focus on three growth-oriented themes in order to continue raising sales at this pace. First is increasing and strengthening our workforce. Second is building a well-balanced earnings structure comprising three main pillars, each of which generates high earnings . And third is making TDK even more focused on the needs of customers as well as strengthening our operating base.
Presently, the HDD head, multilayer ceramic chip capacitor and inductive device categories account for a large share of our sales and earnings. In the past fiscal year, HDD heads posted big increases in sales and earnings. But it is becoming increasingly difficult to improve profit margins in this business. We must deal with constant and significant demands for price discounts along with the need to offer even better performance. What's more, following the merger, Seagate-Maxtor will surpass TDK in terms of market share. Obviously, we face a number of challenges. The good news is that the HDD head market is growing, with drives used in consumer electronics playing a part in this expansion. We will use our position as a company that makes only HDD heads, rather than entire drives, to maintain our technological edge and become even more cost competitive. Our initiatives are aimed at nothing less than returning TDK to the number-one position in the global HDD head market.
Capacitor sales struggled to grow in the first half of the past fiscal year because of manufacturing problems. However, we resolved most of these problems in the second half of the past fiscal year. In the current fiscal year, we aim to increase sales of high- and large-capacitance capacitors and to boost productivity. This represents both our strategy and our initial goal for the capacitor business. In the current fiscal year, we plan to increase capacitor sales primarily by targeting new applications.
Sales of inductive devices rose in the past fiscal year thanks to higher demand and the success of new products. Our compact, low-profile, high-performance devices generated a very strong response among our customers. However, I believe this business still has much more growth potential because TDK has not yet achieved full-fledged market leadership. I am convinced that we can achieve further growth by identifying customers' demands and launching new products in a timely fashion.
This fiscal year, we will be concentrating on reinforcing these three core product categories. But TDK will also take actions to strengthen other business units. For example, the Lambda Power Division became part of our power supply business in the past fiscal year. That means we will be working on capturing synergies from TDK's and Lambda's combined operations during the current fiscal year. TDK was established to produce ferrite, a material critical to the production of power supplies. We have immense know-how in the development of ferrite and other materials. The Lambda Power Division is a specialist in power supply technology. They rank number one in the industrial power supply market. Combining the resources of TDK and Lambda gives us a vertically integrated organization extending from ferrite to inductors, transformers and finished power supplies. We will take concrete actions this year to produce synergies, such as by introducing products using a unified TDK-Lambda brand.
In the magnetic products category, we are seeing growth in the market for metal magnets because of needs linked to environmental issues. That's because the high power of these magnets can offer better energy conversion efficiency. To retain our prominent position in this market, we must make these magnets even more efficiently. We are adapting to market expansion by rebuilding our product development and manufacturing organization. Our goal is to supply products that target emerging market needs.
Regarding high-frequency components, we have not yet established a framework that can take full advantage of our strengths. We stand on the doorstep of the ubiquitous information age. Many new markets are poised for significant growth, including the UWB, Wi-Fi and WiMAX markets. Determined to be a winner in these markets, we will expand our high-frequency components business by tightly focusing resources on strategic objectives.
Our goal is to achieve growth by building lineups of highly distinctive products. To accomplish this, we are leveraging our ceramics and process technologies to develop communication modules. And we are building on our thin-film formation technology to rapidly develop thin-film devices. Along with these measures, TDK will be executing the following medium-term initiatives in order to build a more powerful operating structure.
First is to develop technologies and products faster. We want to sell a larger number of distinctive products. Our goals are to generate more than 40% of sales from new products and more than 60% of sales from products that are number one in their respective markets.
Second is to upgrade our manufacturing skills. One way is by using production processes with short lead times. This will enable us to respond faster to shifts in market needs and changes occurring on a global scale. Another goal is cutting the cost of manufacturing by 10% through the establishment of a system of core factories.
Third is to establish a true supply chain management system. Building an integrated system that covers development, production, sales and distribution is our goal. All of our business units and functions must synchronize their supply chain management activities with market trends. By creating this system, we aim to reduce the level of inventories by half in terms of the number of months on hand.
By focusing more intently on the customer and building a better operating framework, we intend to fulfill the goals that I have just outlined. I believe this will allow TDK to achieve a 15% operating income margin by the end of our new medium-term plan. Driven by innovation, the electronics industry has enormous growth potential in the years ahead. TDK will target that potential by continuing to serve as an e-material solution provider. We want to be viewed as an exciting company by all our stakeholders.
Today's is my final information meeting as president of TDK. I am deeply grateful for the support you have provided during my eight-year tenure as president, and ask that you provide Mr. Kamigama, the new president, with the same support. As a member of TDK's management team, I will work with Mr. Kamigama to achieve further gains in TDK's corporate value.