Mr. Seiji Enami
Finance & Accounting Department
I'm Seiji Enami, General Manager of the Finance & Accounting Department. Thank you for taking the time to attend today's presentation of TDK's fiscal 2007 first-quarter results. Your interest in TDK is greatly appreciated. My presentation will follow the earnings release.
As the top of page 1 of the release shows, both sales and earnings rose in the first quarter. Consolidated net sales rose by more than ¥36.2 billion, or 21.6%, to ¥203,640 million. Operating income climbed by over ¥5.1 billion, or 39.8%, to ¥18,015 million. Income from continuing operations before income taxes rose 25.7% to ¥17,949 million. Net income increased 22.1% to ¥13,276 million. Basic net income per common share was ¥100.36, up from ¥82.22. Average first-quarter yen exchange rates for the U.S. dollar and euro were ¥114.50 and ¥143.82, respectively, compared with ¥107.73 and ¥135.47 in the first quarter of fiscal 2006. The yen depreciated 6.3% versus the U.S. dollar and 6.2% against the euro, compared with the first quarter of the previous fiscal year. This raised net sales by approximately ¥9.5 billion and operating income by approximately ¥2.6 billion.
I'd like to look at four main factors that affected our operating income. The first concerns HDD heads. Sales increased year on year as higher sales stemming from rising demand for HDDs used in PCs and consumer electronics absorbed the impact of lower orders from Maxtor. However, the steeper-than-expected decline in orders from Maxtor adversely affected our product mix, leading to a lower capacity utilization rate. This situation prevented us from generating the expected earnings from our HDD head business. The second major factor concerns the recovery in capacitors, a core electronic components product, that began in the latter half of the previous fiscal year. The first quarter of fiscal 2007 provided confirmation that this sector is recovering as planned. Indeed, due to strong market conditions for electronic components, capacitors, inductive devices and many other products recorded higher sales and earnings. A third feature of the first quarter concerns recording media. Due to deteriorating earnings caused by a sharp fall in DVD prices, we implemented structural reforms in the fourth quarter of fiscal 2006 and the first quarter of fiscal 2007. Some of the expenses associated with these reforms were recorded in the first quarter. While this segment posted an operating loss as a result of these expenses, profitability was considerably better than in the first quarter of fiscal 2006. The fourth major factor was our acquisition of a battery company and power supply business in the previous fiscal year. Sales and earnings from both these businesses made a definite contribution to our results.
Let's look now at a breakdown of sales, which is shown on the lower half of page 1. The breakdown shows our operating results for each segment, the share of sales for each segment and sector, and the year-on-year growth rate.
First, in the electronic materials and components segment, net sales rose 25.7% to ¥180.1 billion and accounted for 88.5% of total net sales. In the electronics market in the first quarter of fiscal 2007, conditions were extremely buoyant thanks in part to demand stimulated by the 2006 FIFA WORLD CUPTM Germany. There was year-on-year growth in demand in the markets for PCs, HDDs, flat-screen TVs and mobile phones. And the automotive-related market grew steadily, spurred by the increasing use of electronics in automobiles. So the electronics market was strong overall.
In the electronic materials sector of this segment, sales increased 11.6% to ¥47.7 billion and accounted for 23.4% of total net sales. Mainstay capacitors saw sales grow, the result of higher sales in the PC, flat-screen TV and car electronics markets as well as a weaker yen. Ferrite cores posted higher sales on the back of rising demand for general-purpose power supply cores used in flat-screen TVs and PCs. In magnets, metal magnets recorded healthy growth on increasing HDD demand, while ferrite magnet sales rose due to higher sales to the car electronics market. The net result was higher overall sales of magnets.
Overall, capacitor sales were up 19% year on year, accounting for 67% of sector sales. Ferrite cores and magnets accounted for the remaining 33%, with sales up 11%.
Sales in the electronic devices sector leapt 61.6% to ¥46.3 billion, and accounted for 22.8% of total net sales. Sales of mainstay inductive devices rose due to higher sales of SMD power line coils used in mobile phones and HDDs. Sales of high-frequency components were largely unchanged, with discounting negating growth in sales of wireless LAN components and components for third-generation mobile phones. In other products, sales of sensors and actuators rose for use in IT home electronics appliances. Sales of DC-AC inverters for amusement equipment and industrial equipment were also strong. First-quarter sales also included ¥12.2 billion in sales of the Lambda Power Division, which was added to the TDK Group on October 1, 2005.
Overall in the first quarter of fiscal 2007, inductive devices sales rose 29% and accounted for 39% of total net sales. High-frequency component sales were flat and accounted for 5% of total sector sales. Power systems and other products accounted for the remaining 56% and sales were up 109%.
In the recording devices sector, sales rose 7.8% to ¥73.8 billion and accounted for 36.2% of total sector sales. HDD head sales rose on higher HDD head shipments amid rising demand for HDDs used in PCs and consumer electronics. This higher volume outweighed lower sales to Maxtor and a drop in sales prices. Sales of other heads declined, mainly because customers reduced their inventories of optical pickups.
Overall, HDD heads accounted for 97% of total sector sales and sales were up 10% year on year. Other heads accounted for the remaining 3% and sales were down 33%.
In other electronic components, sector sales rose 140% to ¥12.3 billion, climbing to 6.1% of total net sales. Sales in this sector include sales of the battery business TDK acquired last year. This business was consolidated in June last year, so this was the first time that its sales have been in all three months of a first quarter. Besides this contribution, external sales of manufacturing equipment were strong and higher sales were recorded in new businesses. Together, these factors drove a sharp increase in sales in the other electronic components sector.
The recording media segment saw sales decrease 2.4% to ¥23.5 billion and accounted for 11.5% of total net sales. Sales of audiotapes and videotapes declined because of falling demand. Sales of optical media declined, as higher volumes of DVDs failed to offset a further decline in prices for CD-Rs and DVDs; CD-R demand has peaked and is now declining slowly. On the other hand, sales of tape-based data storage media for computers rose.
Sales of audiotapes and videotapes declined 17% year on year and represented 24% of segment sales. Sales of optical media were down 4% and accounted for 48% of segment sales. Other products sales rose 19% and accounted for 28% of segment sales.
Turning to sales by region, please refer to page 11. Sales in Japan decreased year on year by 7.1% due to lower sales in the recording devices sector and recording media segment. Sales rose 32.0% in the Americas, with sales up in all product sectors except the recording media segment. In Europe, sales climbed 20.8%, with sales up in all product sectors. In Asia and other areas, sales rose 33.9%, with sales up in all product sectors, with the exception of the recording media segment. As a result of the large increase in overseas sales, the ratio of these sales to consolidated net sales rose 6.2 percentage points from 73.7% to 79.9%.
Please turn to the consolidated income statements on page 8.
Operating income rose ¥5.1 billion year on year. The main positive factors were higher sales, including improvements in the capacity utilization rate and product mix, which contributed ¥12.3 billion; lower materials costs, which contributed ¥3.2 billion, and rationalization and cost cutting, which contributed ¥5.7 billion. Together with a beneficial effect of a weaker yen, which contributed ¥2.6 billion, positive factors lifted earnings by a total of ¥23.8 billion.
Turning to factors that negatively affected earnings, sales price discounts had a ¥12.9 billion effect, and selling, general and administrative expenses increased by ¥5.8 billion due to the inclusion in consolidated results of the battery and power supply businesses. This resulted in a combined negative effect on earnings of ¥18.7 billion. The net result of the positive and negative effects was a ¥5.1 billion increase in operating income. Price discounting pressure eased slightly due to a balanced supply-demand equation resulting from strong market conditions. Despite this improvement, we still face severe discounting pressures.
Structural reform expenses for the first quarter totaled ¥0.9 billion, around ¥0.4 billion more than the ¥0.5 billion recorded in the first quarter of fiscal 2006. The recording media segment accounted for ¥0.8 billion of these expenses, due to the posting of some expenses in the first quarter for restructuring measures initiated in Europe in the previous fiscal year. In the first quarter of fiscal 2006, ¥0.5 billion in restructuring expenses were booked in the recording media segment, so there was a year-on-year increase of around ¥0.3 billion in these expenses.
Looking at other income (deductions), under normal circumstances interest and dividend income and other income would have boosted income from continuing operations before income taxes by ¥1.5 billion for the quarter, but this income was offset by foreign exchange losses of ¥1.5 billion in the first quarter. This meant that there was little difference between operating income and income from continuing operations before income taxes. The foreign exchange losses related to fourth-quarter receivables that were booked at ¥117 when the yen was weaker versus the U.S. dollar. These receivables effectively declined in value during the first quarter as the yen strengthened to ¥110 at one point, but was mostly in the ¥114 to ¥115 range. This foreign currency fluctuation gave rise to a foreign exchange loss of ¥1.5 billion when these receivables were collected.
Please refer to the segment information on the upper half of page 11. Earlier I gave you a breakdown of sales and the highlights of our first-quarter earnings. Now I would like to talk about operating income by segment. The electronic materials and components segment recorded operating income of ¥19.7 billion, up ¥4.2 billion, on a ¥36.8 billion increase in segment net sales. The reason the increase in earnings didn't match the rate of increase in segment sales was due to the lower capacity utilization in heads, which I explained earlier. The recording media segment, meanwhile, posted an operating loss of ¥1.6 billion due to a ¥0.6 billion fall in sales and the booking of some restructuring expenses in the first quarter relating to measures initiated in the previous fiscal year. The segment operating loss was ¥0.9 billion less than the operating loss recorded in the first quarter of fiscal 2006. Operating income would have improved about ¥1.2 billion in the absence of the higher restructuring expenses.
Please look at the balance sheets on page 9 of the earnings report. The comparisons I will draw are with March 31, 2006.
Total assets declined ¥7.9 billion to ¥915.6 billion. The yen appreciated against the U.S. dollar from ¥117.47 as of March 31, 2006 to ¥115.24 at June 30, 2006, resulting in a ¥7.1 billion decline in overseas assets when converted into yen. This was the major reason for the decrease in total assets. Cash and cash equivalents, including the effect of exchange rate changes, increased by a net ¥3.7 billion.
Operating activities provided net cash of ¥30.6 billion. The main positive factors were net income of ¥13.3 billion, depreciation and amortization of ¥15.1 billion and a ¥10.2 billion decrease in trade receivables. Negative factors included a ¥3.3 billion increase in inventories. Cash was also brought down by payments of net income taxes payable and accrued bonuses.
Investing activities used net cash of ¥16.5 billion, mostly for capital expenditures.
Financing activities used net cash of ¥8.6 billion, more than in the first quarter of fiscal 2006. The bulk of this represented dividends paid of ¥6.6 billion, as TDK paid a year-end dividend of ¥50 per share, and a ¥2.2 billion decrease in net short-term debt, as borrowings of Densei-Lambda KK were repaid to external parties.
Compared with the first quarter of fiscal 2006, depreciation and amortization increased ¥2.1 billion and net income increased ¥2.4 billion. Trade receivables decreased ¥10.3 billion. In addition, cash flows one year earlier were reduced by ¥8.7 billion in cash outflows for the acquisition of a battery company, net of cash acquired. Contrastingly, there was a ¥3.5 billion increase in cash used for capital expenditures and a ¥1.3 billion increase in dividends paid. The net result was a ¥17.4 billion net improvement in cash flows over the first quarter of the previous fiscal year. Inventories increased by approximately ¥2.5 billion due to strong orders. However, we are well aware of the need for actions to prevent the growth of inventories, including measures involving how we accept orders from customers.
Finally, I would like to cover TDK's projections for fiscal 2007, ending March 31, 2007, on page 6 of the handout. In short, there has been no change to the consolidated projections for fiscal 2007 that we announced on April 27 this year. Just to confirm, we are projecting net sales of ¥820.0 billion, operating income of ¥82.0 billion, income before income taxes of ¥88.0 billion and net income of ¥61.0 billion. We believe that there will be no major change in our business environment that would cause us to revise our forecasts, compared to when they were announced on April 27. That said, our operating environment is filled with uncertainty, as regards crude oil prices, interest rates, foreign currencies, economic trends in the U.S., China and other countries, and other factors. Instead of possibly causing confusion by revising our forecasts now, we will wait until we announce our first-half results and make revisions then if necessary.
Just to reaffirm the assumptions upon which our forecasts are based, we still believe that sales of electronic materials and electronic devices will be higher than in fiscal 2006 due to robust demand for components from digital home appliance and mobile phone manufacturers. Regarding HDD heads, our projections factor in a decline in existing demand because of industry restructuring, but we are also projecting volume growth spurred by the increasing use of HDDs in consumer electronics and other applications. At the same time, however, TDK is still forecasting an overall drop in sales year on year. We expect that sales will decline throughout the year due to falling prices of HDD heads. As I said earlier, HDD head profit margins were adversely affected in the first quarter due to a decline in capacity utilization caused by the steeper-than-expected decline in orders from Maxtor. We believe that the impact of this drop will be restricted to the first quarter. In addition, we are still assuming an average exchange rate of ¥110 to the U.S. dollar.
This concludes my presentation of TDK's first-quarter results and projections for fiscal 2007.