Investor Relations | Investor Relations | Performance Briefing

[ 1st Quarter of fiscal 2009 Performance Briefing]Consolidated Results

Mr. Seiji Enami Director Executive Vice President

Mr. Seiji Enami
Director
Executive Vice President

I'm Seiji Enami. Thank you for braving the heat and taking the time to attend today's meeting in large numbers. Thank you also for your ongoing support of TDK.

Let me report on our fiscal 2009 first-quarter operating results and fiscal 2009 projections. Today the Nikkei Shimbun published a scoop, which slightly upset our plans for the day, so you may notice a few things a little different from past presentations. We apologize for any inconvenience this may cause and ask for your understanding in this regard.

Now for an overview of our consolidated operating results. We posted consolidated net sales of \190,623 million, down \16,076 million, or approximately 7.8%, year on year. Operating income was \5,393 million, down \10,736 million, or approximately 66.6%, year on year. Income before income taxes was \5,577 million, down \14,604 million, or 72.4%. Net income was \4,446 million, down \11,576 million, or 72.3%. To summarize then, net sales fell and we saw large falls in operating income, income before income taxes and net income. As a result, basic net income per common share was \34.48, while stockholders' equity per share was \5,693.10.

Average first-quarter yen exchange rates for the U.S. dollar and euro were \104.56 and \163.44, representing an increase and decline in value of 13.5% and 0.4%, respectively. Because of the high weight of transactions in U.S. dollars, currency movements reduced net sales by \21.5 billion and operating income by \6.6 billion.

The reasons for this poor first-quarter performance depend on the business, but falls in sales prices and the yen's appreciation were largely within the range of our expectations. However, the subprime loan problem spilled over from the financial markets into the real economy, leading to soft spending. Furthermore, softening demand for high-performance models, led to falling demand for our components used in them. This meant that sales volume and therefore capacity utilization didn't reach the levels we expected. Because of this we were unable to fully absorb the negative effects of falling sales prices and the stronger yen.

Having framed the economic backdrop, let me look at how some of our businesses performed. Starting with recording devices, while shipment volumes were up on the first quarter of fiscal 2008, customer production cutbacks and other factors meant that capacity utilization in wafer processes didn't reach expected levels. As a consequence, this business couldn't absorb lower sales prices and the effect of the yen's appreciation.

Regarding electronic components other than recording devices, capacitors found business conditions extremely difficult. Larger-than-expected price falls and the yen's strength were compounded by higher fixed costs due to the construction of a new plant. While we managed to get the production line at this new facility on stream, this didn't contribute to production, so the fixed costs weighed heavily on earnings in the capacitor business. Meanwhile, in inductive devices, the third mainstay of our earnings, sales were flat overall, with demand up for some products but down for others. The downturn in semiconductors had a major impact on power supplies for this market. Furthermore, sharply higher materials prices had a particularly noticeable effect on rare-earth magnets and ferrite magnets. Among all these negative factors, energy devices, i.e., battery-related operations, were the only business to continue generating higher sales and earnings. Regarding recording media, due to the transfer last year of our consumer business, most of the remaining operations are B2B business. Because the materiality of recording media has declined in monetary terms, we now have only one segment, and no longer divide our operations between the electronic materials and components segment and the recording media segment. As a result of this change, we have also changed the name of the other electronic components sector, part of the former electronic materials and components segment, to simply others and recording media results are now included here.

Let me now talk about product sales. The electronics market, which has a large bearing on the TDK Group's performance, saw a year-on-year rise in production of main products such as flat-screen TVs, home game consoles, PCs, HDDs and mobile phones. Consequently, demand was also higher for electronic components. However, the Beijing Olympics and other events failed to produce the fillip expected and prices of electronic components continued to fall.

By sector, electronic materials saw sales decline 8.1%, the result mainly of lower capacitor sales. Electronic devices posted a 2.6% decline in sales, mainly due to the effect of lower sales of power systems and other products. While recording devices sales were up 2.9%, HDD head sales declined. The overall increase in sector sales was attributable to the inclusion in first-quarter results for the first time of HDD suspension assemblies manufacturer Magnecomp Precision Technology Public Company Limited, which TDK acquired last year. The others sector recorded a large drop in sales of 34.9%. This decline mostly reflected the inclusion of recording media sales, i.e., sales that were present in the first quarter of fiscal 2008 on a pro forma basis, weren't present in the first quarter of fiscal 2009. Sales of products classified as other products in the past increased.

Looking at the consolidated income statements, as I said at the beginning of this presentation, operating income slid \10.7 billion. In addition, other income declined \3.9 billion. One of the reasons for this decline was a \2.3 billion year-on-year change from a foreign exchange gain to a foreign exchange loss. Another factor was a decline in interest income in interest and dividend income due to lower interest rates and a decline in interest-generating investments resulting from the use of funds such as for corporate acquisitions last year.

Breaking down the \10.7 billion fall in operating income, the main positive factors were higher sales, including improvements in the capacity utilization rate and product mix, which contributed \1.2 billion; rationalization, cost reductions and purchased materials savings, which contributed \4.6 billion; and a decrease in selling, general and administrative expenses, which contributed \0.2 billion. Together, positive factors thus lifted earnings by a total of \6.0 billion.

Turning to factors that negatively affected earnings, exchange rate fluctuations has a \6.6 billion impact, while sales price discounts brought down earnings by \10.1 billion, resulting in a combined negative effect of \16.7 billion. The net result of the positive and negative effects was a \10.7 billion decrease in operating income. As I said at the beginning, the insufficient increase in the effect on earnings of higher sales, including improvements in the capacity utilization rate and product mix, was decisive. The boost to earnings of only \1.2 billion when exchange fluctuations and sales price discounts were what they were was the single biggest reason for the large drop in operating income in the first quarter.

Structural reform expenses were \1.3 billion compared with \0.2 billion in the first quarter of fiscal 2008. Looking at the \10.7 billion decrease in operating income by product sector, in electronic materials, capacitor prices fell more than expected and new investments also affected earnings. Electronic materials also include ferrite magnets, which were directly affected by sharply higher materials prices. Capacitors and ferrite magnets were thus the main reasons for lower earnings in electronic materials.

Turning to recording devices, despite the acquisition of facilities, know-how and patents from Alps Electric Co., Ltd., capacity utilization didn't reach expected levels, partly because of production adjustments at customers. We have also not yet been able to take full advantage in our production processes of the know-how we acquired. These were the reasons for lower earnings from HDD heads. In electronic devices, earnings fell slightly due to the impact of the semiconductor downturn on our power supplies business. Earnings in the other sector increased on the back of improved earnings in recording media, and a strong performance from batteries in energy devices.

What then for the second quarter onward after having posted a large earnings decline in the first quarter? Capacitors were the biggest reason for this decline, but the start-up of the new production line from July will result in lower fixed expenses and the production yield will improve with all products of an exceptionally high quality. This new line will also enable us to launch new products. Because we expect production to finally move into full swing after the Obon holiday period in Japan in mid-August, we think the only way is up from the first quarter in capacitors.

In terms of HDD heads, compared with the first quarter at least, we expect order volumes to increase over the second and third quarters and capacity utilization to improve as a result. The rationalization and labor saving know-how we have acquired from Alps Electric will be put to good use in production processes. As was reported in newspapers the other day, we expect this to yield significant improvements in production efficiency and reductions in consumables and so forth.

In the power supplies business, full integration with Densei-Lambda will be completed by October 1. All of TDK's power supplies business will be transferred to Densei-Lambda and run as one power supplies business. Densei-Lambda will change its name to TDK-Lambda Corporation. We expect to be able to capture actual synergies from the second half of the fiscal year onward.

In ferrite magnets, to respond to soaring basic materials prices, we are working hard daily to improve production yields, shorten processes and improve production methods. At the same time, we are trying to pass on these higher costs.

A common issue for all our businesses is to forthrightly deal with unprofitable products and businesses. Another issue concerns realignment and integration of production bases and subsidiaries due to our M&A activities. TDK now has more bases and subsidiaries, which it must ensure are well integrated into the Group. We will also review capital expenditures and operating expenses. A rapid economy recovery is a long shot, so we must take actions to improve our business operations in various respects.

Compared to the fourth quarter of fiscal 2008, sales declined \17.2 billion. And operating income was down sharply by \7.9 billion. Because exchange rates didn't change much during this time, other factors were to blame.

Recording devices experienced a large drop in sales of \15.5 billion. Sales of Magnecomp Precision Technology Public Company Limited for November and December were included in fiscal 2008 fourth-quarter sales; this suspension assemblies company was acquired in November 2007. Because the fourth quarter effectively included five months of sales, there was a large quarter-on-quarter sales decline. Just over one-third of the \15.5 billion decrease in sales from the fourth quarter was due to an actual decline in HDD head sales. While production adjustments by customers had an effect, the decline in earnings in comparison with the fourth quarter was mostly because of a decline in sales of high-margin heads.

Sales of electronic materials were largely flat quarter on quarter. As a result, lower sales prices, the higher yen, and increased fixed costs associated with installing the production line at the new plant, weighed heavily, dragging down earnings in electronic materials. Electronic devices saw sales in the power supplies business fall due to a sluggish semiconductor market, but earnings rose, as they did in the others sector.

Finally, a word on our consolidated forecasts, starting with the first half. Financial unease triggered by the subprime loan problem has spilled over from disrupted financial markets to affect the real economy, with a cloud hanging over consumption. This situation is not expected to reverse rapidly for the better in the second quarter, so we don't expect demand to increase as much as we initially expected. All of the negative factors in the first quarter had a telling effect on our performance. However, the full-scale commencement of operations at our new capacitor production line should make a positive contribution in the second quarter, albeit a small one. We also expect to see a recovery in HDD head volumes. Together with additional measures, while still not completely satisfactory, we believe we will perform better in the second quarter than the first. For the first half then, we are projecting net sales of \402.0 billion, operating income of \22.0 billion, income before income taxes of \23.0 billion and net income of \17.5 billion. This represents a substantial decline in both sales and earnings from our forecasts at the outset of the fiscal year, but the \16.5 billion operating income for the second quarter included in the \22.0 billion first-half projection would represent a considerable improvement on the first-quarter result.

For the full year, we are projecting net sales of \862.0 billion, operating income of \69.0 billion, income before income taxes of \73.5 billion and net income of \55.5 billion. We have thus lowered our forecasts, but only first-half revisions are reflected in these full-year forecasts. In other words, we have left our initial second-half projections unchanged. We have chosen to do this because of the difficulty in projecting results amid all the instability in the operating environment and because revising forecasts might cause confusion for investors. Instead, we have chosen to only revise our interim forecasts and we plan to look at our results against them in deciding on any revisions to second-half projections.

That concludes my presentation of fiscal 2009 first-quarter consolidated results and fiscal 2009 projections.

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