Investor Relations | IR Events | Performance Briefing

[ 1st Quarter of fiscal 2008 Performance Briefing ]Consolidated Results

Mr. Seiji Enami
Director
Senior Vice President<br>
General Manager<br>
Finance & Accounting Department

Mr. Seiji Enami Director Senior Vice President
General Manager
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 2008 first-quarter results. Your interest in TDK is greatly appreciated. My presentation will follow the earnings release.

As you can see from the table on page 1, our consolidated net sales rose 1.5% to ¥206,699 million. Operating income, however, declined 10.5% to ¥16,129 million. Notwithstanding, income before income taxes rose 12.4% to ¥20,181 million and net income climbed 20.7% to ¥16,022 million. In summary then, we posted higher bottom-line earnings on only a slight increase in net sales. Basic net income per common share was ¥122.07. Average first-quarter yen exchange rates for the U.S. dollar and euro were ¥120.82 and ¥162.75, representing declines in value of 5.5% and 13.2%, respectively. Currency movements raised net sales by about ¥10.2 billion, representing about 5% of net sales. In terms of earnings, currency movements raised operating income by ¥3.0 billion.

I'd now like to talk about the main points of our first-quarter performance. The first concerns HDD heads in the recording devices sector. We saw sales volume increase on the back of growth in demand for HDDs used in PCs and widening applications for HDDs in consumer electronics. However, sales in this business still fell despite the positive effect of a weak yen. The main reason was the impact of sales price discounts. The second major factor concerns electronic components. Capacitors, inductive devices and other components registered sales growth, owing to strong demand for digital products. Considering that sales were inflated by the weak yen, however, the growth in sales was less than satisfactory. A third feature of the first quarter concerns recording media. Sales dropped sharply in this segment most likely as a result of the concern caused to salespeople by the announcement in April that we were selling our TDK brand recording media sales business to Imation Corporation. As a consequence of this, although the recording media business had been profitable in the second half of fiscal 2007, it again posted a loss in the first quarter. The fourth major factor was that foreign exchange gains from the weaker yen and higher interest income as interest rates remained high supported our earnings. A fifth point is that we received notice from the tax authorities in Japan that they were rescinding around ¥1.7 billion of the ¥12.0 billion in additional taxes assessed two years ago under the transfer pricing taxation regime. This partial rescinding of additional taxes resulted from our objection to that assessment. The effect of this was reflected in our post-tax income. These were the five main points of our first-quarter results.

Let's look now at a breakdown of sales, which is shown on 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.

Sales in the electronic materials and components segment were ¥185.4 billion, up 3.0% year on year. Sales in this segment accounted for 89.7% of total net sales. Looking at the electronics market, which has a large bearing on the TDK Group's performance, in the first quarter, production of mobile phones, notebook PCs, flat-screen TVs and other products increased year on year. This growth, together with an increase in the number of electronic components in finished products, driven by their increasing sophistication and features, led to higher demand for electronic components. The increasing use of electronics in automobiles also lifted demand for electronic components. Under these continued strong conditions in the electronic components industry, TDK's performance was generally strong as well. That said, we weren't entirely happy with our sales given this favorable environment.

In the electronic materials sector of this segment, sales rose 4.3% to ¥49.7 billion and accounted for 24.0% of total net sales. Mainstay capacitors posted higher year-on-year sales due to strong sales of capacitors for use in notebook PCs, LCD panels and other applications. Ferrite core sales declined due to the termination of some products, while magnet sales rose slightly.

Overall, capacitor sales were up 7% year on year and accounted for 69% of sector sales. Ferrite cores and magnets accounted for the remaining 31% on flat sales.

Sales of electronic devices rose 7.8% to ¥50.0 billion and accounted for 24.2% of total net sales. Sales of inductive devices increased year on year, mainly as a result of higher sales of thin-film common-mode filters for notebook PCs and mobile phones and of power line coils used in LCD panels and HDDs. Sales of high-frequency components increased year on year, mainly as a result of higher sales of wireless LAN components. In power systems and other products, although sales of sensors and actuators declined due to customer production cutbacks and lower sales prices, this was outweighed by higher sales of power supplies.

Overall in the first quarter of fiscal 2008, inductive devices sales rose 8% and accounted for 45% of total sector sales. High-frequency component sales rose 35% and accounted for 6% of total sector sales. Power systems and other products accounted for the remaining 49% and sales were up 5%.

Due to organizational changes, transformers, which were previously included in the power systems and other products category of this sector, are now included under inductive devices. A year ago we reported that the composition of sales in this sector was inductive devices (39%), high-frequency components (5%) and power systems and other products (56%). Restated figures for that quarter reflecting this change in classification are inductive devices (45%), high-frequency components (5%) and power systems and other products (50%). The growth rates for electronic devices products that were given earlier were calculated based on restated figures.

In the recording devices sector, sales declined 4.6% to ¥70.4 billion and represented 34.1% of total net sales. In HDD heads, sales decreased year on year. While our HDD head shipment volume increased on the back of growth in demand for HDDs for use in PCs as well as expanding applications for HDDs in other consumer electronics, sales in monetary terms were hurt by strong discounting pressure on HDD heads stemming from competition for market share among HDD manufacturers. Sales of other heads also declined year on year.

Overall, HDD heads accounted for 96% of total sector sales and sales were down 5% year on year. Other heads accounted for the remaining 4% and sales were down 2%.

In other electronic components, sector sales rose 24.5% to ¥15.3 billion and represented 7.4% of total net sales. This was the result mainly of higher sales of anechoic chambers, external sales of manufacturing equipment and products of new businesses.

The recording media segment saw sales decline 9.6% to ¥21.3 billion and account for 10.3% of total net sales. As we have said for some time, while we still command a high market share in audiotapes and videotapes, demand for these products has been declining as a whole. This falling demand led to lower sales of audiotapes and videotapes in the first quarter. Sales of optical media, on the other hand, rose slightly year on year, as higher sales volumes compensated for a fall in unit prices. In other products, sales decreased year on year, the result mainly of a fall in sales of accessory and application products.

Overall, sales of audiotapes and videotapes declined 27% year on year and represented 19% of segment sales. Sales of optical media were flat and accounted for 54% of segment sales. Other products accounted for the remaining 27% and fell 13% year on year.

Turning to sales by region, please refer to page 13. Sales in Japan decreased 5% year on year, with sales declining in all product sectors, except other electronic components. Sales edged up in the Americas by 0.9%, but were down in Europe by 5.3% due to lower sales in the other electronic components sector and recording media segment. In Asia (excluding Japan) and other areas, sales rose 4.9% year on year, with lower sales from HDD heads in the recording devices sector outweighed by growth in sales in the other sectors of the electronic materials and components segment. As a result, overseas sales were ¥167,756 million. The ratio of overseas sales to total net sales was 81.2%, up 1.3 percentage points from 79.9% in the first quarter of the previous fiscal year.

Please turn to the consolidated income statements on page 9. Operating income declined ¥1.9 billion compared with the corresponding quarter in the previous fiscal year. The main positive factors were higher sales, including improvements in the capacity utilization rate and product mix, which contributed ¥9.1 billion; rationalization and cost cutting, which contributed ¥2.0 billion; and the beneficial effect of a weaker yen against the greenback and euro, which contributed ¥3.0 billion. Together, positive factors lifted earnings by a total of ¥14.1 billion.

Turning to factors that negatively affected earnings, sales price discounts had a ¥15.5 billion effect, and selling, general and administrative expenses increased by ¥0.4 billion. Rising materials costs affected earnings by ¥0.1 billion. In previous periods, lower materials prices have had a positive effect on earnings, but in the first quarter of fiscal 2008 rising prices had a negative impact. In total, the combined negative effect of these factors on earnings was ¥16.0 billion. The net result of the positive and negative effects was a ¥1.9 billion decrease in operating income.

Comparing the first quarter of fiscal 2008 with the first quarter of the previous fiscal year, not only were customer calls for discounts particularly strong, especially in HDD heads, but also much higher materials costs negated the beneficial effect on results of the weaker yen. To overcome this situation, we recognized that it was important to increase sales without factoring in a weaker yen as well as improve capacity utilization, rationalize operations more and cut costs. That said, conditions in the first quarter were pretty much as we initially assumed they would be.

Please refer to the segment information on the upper half of page 13. The electronic materials and components segment, although recording a ¥5.3 billion increase in net sales due mainly to the effect of the weaker yen, posted a ¥2.0 billion decline in operating income to ¥17.6 billion. The recording media segment again posted an operating loss of ¥1.5 billion, due to a large drop of ¥2.3 billion in sales year on year.

Please look at the balance sheet to the right on page 8 of the earnings report. The comparisons I will draw are with March 31, 2007.

Total assets declined ¥7.5 billion to ¥981.8 billion. The yen depreciated against the U.S. dollar from ¥118.05 as of March 31, 2007 by ¥5.21 to ¥123.26 at June 30, 2007, and against the euro from ¥157.33 by ¥8.31 to ¥165.64 between the two dates. Both changes represented a sharp depreciation in the yen and inflated the value of overseas assets when converted into yen by ¥25.0 billion. Although the weaker yen inflated the value of assets, total assets declined ¥7.5 billion because of the payment of ¥39.2 billion for the purchase of the company's own shares.

Cash and cash equivalents declined ¥55.1 billion. As you can see from the cash flow statements on page 11, net income of ¥16.0 billion, depreciation and amortization of ¥16.2 billion and an ¥8.0 billion beneficial effect of the yen's weakness had a positive influence on cash. Negative factors on cash, however, included ¥22.2 billion for capital expenditures, ¥39.2 billion in payments for the acquisition of treasury stock, and ¥7.9 billion in cash outflows for the payment of dividends. In addition, a ¥13.8 billion net increase in short-term investments and a ¥10.4 billion increase in inventories, excluding exchange rate fluctuations, also negatively affected cash flows. Together with other factors, this resulted in a ¥55.1 billion decrease in cash and cash equivalents. So, while cash and cash equivalents increased ¥3.7 billion in the first quarter of fiscal 2007, they decreased ¥55.1 billion in the first quarter of fiscal 2008. The main reasons were the net increase in short-term investments of ¥13.8 billion, compared with none last year, and the purchase of the company's own shares, which used cash of ¥39.2 billion.

Inventories exceeded ¥100.0 billion for the first time. While to some extent this was due to rising sales, inventories rose ¥13.5 billion. The main reason for the increase was so that we could meet customer demands in the second quarter. However, we are determined not to let higher inventories result in nonperforming assets by watching levels carefully and thinking about how best to meet customer orders.

Now please look at accumulated other comprehensive loss under total stockholders' equity. You'll note that this account improved ¥16.9 billion compared with the end of March 2007. The reasons for this were a ¥16.8 billion improvement in the foreign currency translation adjustments account due to the weaker yen. While pension assets decreased ¥0.2 billion, there was a ¥0.3 billion increase in net unrealized gains on securities. As a result, in absolute amounts, foreign currency translation adjustments was a positive ¥0.1 billion, pension liability adjustments was a negative ¥3.1 billion and net unrealized gains on securities was a positive ¥2.1 billion. The net result was an accumulated other comprehensive loss of ¥0.9 billion.

Finally, I would like to cover TDK's projections for fiscal 2008, ending March 31, 2008, on page 4 of the handout. In short, there has been no change to the consolidated projections for fiscal 2008 that we announced on May 15 this year. While we expect a slight increase in first-half net sales to ¥423.0 billion, our projections for operating income, income before income taxes and net income are ¥45.0 billion, ¥48.0 billion and ¥36.0 billion, respectively. There has been no change for the full year-we are projecting net sales of ¥865.0 billion, operating income of ¥90.0 billion, income before income taxes of ¥96.0 billion and net income of ¥72.0 billion.

Basically, there has been no change in the assumptions upon which our earnings forecasts are based. We expect higher sales in electronic materials and electronic devices to continue to be supported by increasing demand for these products for use in digital home appliances, mobile phones and other products. In HDD heads, while we expect growth in volume terms, lower sales in monetary terms are probably unavoidable given severe discounting pressure stemming from fierce price-based competition in the HDD industry. In recording media, there has been no change in our assumption that the transfer of our recording media sales business to Imation Corp. will be closed sometime during the second quarter. Our projections are still premised on an exchange rate of ¥110.

This concludes my presentation. Thank you.

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