Mr. Seiji Enami
Executive Vice President
Good afternoon. I'm Seiji Enami. Thank you for taking the time to attend today's earnings release conference in large numbers and for your ongoing support of TDK.
Today, I would like to give you an overview of our fiscal 2009 consolidated first-half performance, an overview of our results for the second quarter only and our projections for the full year ending March 31, 2009. The Tokyo Stock Exchange has asked Japanese companies to prepare their earnings releases for the interim period on a year-to-date basis, so I will first explain our results for the first half of fiscal 2009, the six-month period ended September 30, 2008. After that, I will explain our results for the second quarter alone. My presentation will follow the projector slides on the screen, not the earnings release.
To the first-half results then. We posted consolidated net sales of \396,537 million, down \36,551 million, or approximately 8.4%, year on year. Operating income dropped \32,764 million, or 69.5%, to \14,381 million. Income before income taxes fell \33,536 million, or approximately 69.3%, to \14,826 million. Net income declined \22,758 million, or 65.7%, to \11,868 million.
The higher yen had a \38.3 billion negative impact on sales and price erosion reduced sales by \22.2 billion, meaning these two factors combined to lower sales by \60.5 billion. While we were able to limit the extent of the overall decline in net sales to \36.6 billion, we were unable to absorb the full impact in the absence of sufficient volume growth. As a result of the lower net sales, operating income, income before income taxes and net income all fell significantly year on year. Basic net income per common share was \92.02 and stockholders' equity per common share was \5,645.77.
While we generated earnings, albeit lower than the previous fiscal year, a number of areas declined year on year. There was a decline in foreign-currency denominated assets due to the yen's appreciation against the U.S. dollar from last year, pension assets decreased due to falling stock prices, accumulated other comprehensive income (loss) deteriorated and stockholders' equity per share fell.
Now let me look at the reasons for the \32.8 billion year-on-year decline in operating income. Breaking down the decline in operating income, higher sales, including improvements in the capacity utilization rate and product mix, boosted earnings by \4.5 billion. Rationalization, cost reductions and purchased materials savings contributed \9.8 billion, while a decrease in selling, general and administrative expenses contributed \2.8 billion. Turning to factors that negatively affected earnings, exchange rate fluctuations had a \12.7 billion impact, while sales price discounts brought down earnings by \22.2 billion. Furthermore, there was a \14.9 billion decrease related to the gain on business transfer to Imation Corp. in the previous fiscal year. The net result of these positive and negative factors was a \32.8 billion decline in operating income. Excluding the gain on the media business transfer, operating income fell \17.9 billion, or approximately 58%.
Regarding the effect of exchange rates in the first six months, the average yen exchange rate for the U.S. dollar was \106.12, representing an 11.1% appreciation. This had the effect of reducing net sales by \38.3 billion and operating income by \12.7 billion.
Let me make some observations about our first-half performance. The electronics market, which has a heavy bearing on electronic components, saw production of flat-screen TVs, home game consoles, PCs, HDDs, mobile phones and other finished products increase year on year. However, demand softened for finished products, particularly in industrialized nations. This was notably the case with products with sophisticated features, which had driven demand for electronic components. The result was that demand for electronic components fell further than would be suggested by volumes at finished product manufacturers. Besides this deteriorating supply-demand situation, prices also continued to fall. Because sales volume growth, in other words, capacity utilization fell short of our expectations, we were unable to fully absorb the negative factors I mentioned earlier.
In recording devices, we saw higher volumes and improvement in the product mix, but these were unable to compensate for the lower sales caused by falling prices and forex movements. Regarding electronic components other than recording devices, capacitor sales fell due to higher-than-expected prices falls and forex movements. The drop in sales in the PC field was particularly large. In inductive devices, demand was mixed across products and fields. Overall, inductive device sales were down slightly. Signal line coil sales fell in the auto market, multilayer products were down for flat-screen TVs, and transformers for home appliances declined. Power supply sales declined due to a sluggish semiconductor market. On the other hand, sensor and actuator as well as high-frequency components sales rose. Sales of energy devices (batteries) rose significantly year on year on the back of increasing demand. Recording media, which has been included in the "Others" segment from the current fiscal year, saw sales decline sharply, due to the business transfer on August 1, 2007. Rare-earth magnets and ferrite cores were affected by much higher raw material prices.
Next, I'd like to look at the balance sheet. Total assets exceeded \1 trillion for the first time, at \1,063.3 billion. The \127.8 billion increase in total assets was mostly due to an increase in borrowings to fund the EPCOS AG acquisition. The yen versus the U.S. dollar stood at \103.57 at the end of September, \3.38 weaker than at March 31, 2008. This led to an \11.8 billion increase in foreign currency-denominated assets, which is included in the overall increase.
Cash and cash equivalents increased \7.5 billion. The reasons for this were mainly the net income of \11.9 billion and increase in short-term debt of \110.0 billion, which covered \75.0 billion used to purchase EPCOS shares, \67.7 billion used for the acquisition of property, plant and equipment, capital expenditures exceeding depreciation of \38.8 billion by \28.9 billion, dividend payments of \9.0 billion and partial loan repayments of \1.5 billion. Inventories were \5.4 billion higher than at March 31, 2008, but only \0.3 billion up on the June 30, 2008 figure, meaning that inventories haven't increased that much. Investments in securities were up \75.8 billion. On the one hand, there was a \78.2 billion increase at the end of September associated with the purchase of an approximate 45% stake in EPCOS. This was offset somewhat, however, by \2.8 billion in write-downs of investment securities held for some time.
Looking at the other side of the balance sheet, liabilities and stockholders' equity, short-term debt increased \108.5 billion. As has been mentioned, this was due to the borrowing of \110.0 billion from the bank by TDK Corporation in anticipation of funds needed for the EPCOS acquisition. Accumulated other comprehensive income (loss), part of total stockholders' equity, improved by \8.4 billion. This was the result of a \9.0 billion improvement in the foreign currency translation adjustments account due to a weaker yen against the U.S. dollar. The other components of accumulated other comprehensive income (loss)-minimum pension liability adjustments and net unrealized gains (losses) on securities-had hardly changed at September 30. Share prices dropped markedly from the beginning of October, but the impact of this drop isn't reflected here.
Now for a word on the first-half cash flow statement. There is basically no change from my explanation of cash and cash equivalents earlier. On a year-on-year basis, there was a large drop in net income from the previous fiscal year, but overall net cash provided by operating activities increased from \42.2 billion to \45.8 billion. This was the result of smaller increases in trade receivables and inventories.
Investing and financing activities largely reflected cash inflows and outflows for investment in purchasing EPCOS shares and building the Honjo plant and financing these investments.
Let me now talk about consolidated second-quarter results only. Net sales declined \20,475 million, or 9%, to \205,914 million. Operating income dropped \22,028 million, or approximately 71%, to \8,988 million. Income before income taxes dropped \18,932 million, or 67.2%, to \9,249 million. Net income declined \11,182 million, or 60.1%, to \7,422 million. There was thus a marked decline in sales and earnings year on year. Operating income in the second quarter of fiscal 2008 included a \14.9 billion gain on business transfer to Imation Corp. Assuming fiscal 2008 second-quarter operating income excluding this gain was \16.1 billion, operating income dropped \7.1 billion, or 44%, year on year.
This slide shows the forex impact between July and September. The yen appreciated 8.7% against the dollar to an average rate of \107.66. This had the effect of reducing net sales and operating income by \16.8 billion and \6.2 billion, respectively.
Turning to sales by product, this slide shows sales for the second quarter alone, not figures for the six-month period. However, the latter can be found, if necessary, on page 13 of the earnings release. The company as a whole has four product sectors following the inclusion of recording media in "Others" from this fiscal year. I will also give you the sales composition by product sector.
Starting with the electronic materials sector, sales declined \6.5 billion, or about 12%, year on year to \46.5 billion, accounting for 23% of total net sales. Capacitor sales declined year on year, the result of lower sales of multilayer ceramic chip capacitors due to lower sales for use in PCs, AV products and home game consoles, as well as the impact of price erosion and the stronger yen. Ferrite cores and magnets saw sales increase year on year, with higher magnet sales compensating for lower ferrite core sales. Capacitor sales declined 18% year on year, while ferrite cores and magnets sales increased 2% during the same period. In terms of electronic materials sector sales composition, capacitors accounted for 66% of sector sales, with the remaining 34% accounted for by ferrite cores and magnets.
In the electronic devices sector, sales declined \4.4 billion, or 8%, to \50.1 billion and accounted for 24% of total net sales. Sales of inductive devices declined year on year, the result mainly of lower sales of signal line coils for the auto market. Sales of high-frequency components decreased year on year, chiefly reflecting lower sales for use in PC applications. Other products saw sales decline, too. Sensor and actuator sales were up, but this fell short of offsetting lower sales of power supply products due to the termination of some products and a downturn in the semiconductor market. Overall, inductive devices sales fell 4%, sales of high-frequency components dropped 24%, and sales of other products, including power supplies, were down 10%. In terms of sector composition, inductive devices accounted for 50% of sector sales, while high-frequency components and other products represented 5% and 45%, respectively.
Next to recording devices. Sales here dropped \8.9 billion, or roughly 10%, year on year to \77.6 billion. Sales in this sector accounted for 38% of total net sales. HDD head sales declined year on year. While the TDK Group's HDD head sales volume increased on the back of higher HDD unit production, overall sales were reduced by the impact of falling prices and the yen's appreciation against the U.S. dollar. Other sales increased year on year, reflecting the November 2007 acquisition of suspension assembly manufacturer Magnecomp Precision Technology Public Company Limited. HDD head sales declined 16% year on year, while other sales climbed 198% because of the inclusion of Magnecomp. In terms of composition, HDD head sales accounted for 91% of sector sales, with the remaining 9% accounted for by the other category.
Sales in the Others sector declined \0.6 billion, or roughly 2%, to \31.7 billion, and represented 15% of total net sales. While energy device sales increased, recording media sales fell.
Now for sales by major customer industry. This analysis is limited to electronic materials and components as in the past and excludes recording media. Sales in the IT Home Electronics field declined 4%, the result of lower sales for computer and storage device-related applications. Sales in this field accounted for 66% of the total. In the High-Speed, Large-Capacity Networks field, sales declined 12% because of lower sales to the communications sector. This field accounted for 10% of the total. In Car Electronics, sales were down 8% due to lower sales for automotive electronics applications. Sales in this field accounted for 8% of the total. The Others field saw sales decline 11% due to lower sales for industrial machinery applications. Sales in this field accounted for 16% of the total.
Next, a word on the consolidated statements of income for the second quarter. Operating income declined \22.0 billion. I'll explain this in more detail next, but there was a \3.1 billion improvement in other income (deductions). The main factors behind this improvement were a \2.6 billion improvement in foreign exchange gain (loss) due to a weaker yen, a \1.0 billion improvement in equity in earnings of affiliates and a \0.8 billion improvement in share write-downs. On the other hand, financial income declined \1.4 billion due mainly to a decline in interest and dividend income.
This slide breaks down the \22.0 billion decline in operating income in the second quarter of fiscal 2009. Increased sales, including improvement in the capacity utilization rate and product mix, boosted earnings by \3.3 billion. Rationalization, cost reductions and purchased materials savings contributed \5.2 billion, while a decrease in selling, general and administrative expenses contributed \2.7 billion. Against these positive factors, exchange rate fluctuations had a \6.2 billion negative impact, sales price discounts reduced earnings by \12.1 billion, and in the previous fiscal year TDK recorded a \14.9 billion gain on business transfer to Imation Corp. Looking at structural reform expenses, TDK incurred \1.8 billion compared with \4.2 billion in the previous fiscal year. The year-on-year drop in operating income was large at \22.0 billion, but if the gain on business transfer is excluded, the decline was \7.1 billion.
Looking at this by product sector, the decline in the electronic materials sector accounted for the lion's share of the overall earnings decrease. The main reasons were larger-than-expected price declines, the burden of new investments and sluggish sales volume growth in capacitors. Earnings also declined in recording devices despite the acquisition of facilities, know-how and other assets from Alps Electric. This was because capacity utilization didn't reach the expected level, partly because of production adjustments at customers. So we were unable to take full advantage of the know-how we acquired. The suspension assembly business achieved profitability. In electronic devices, earnings declined in the power supply business because of a sluggish semiconductor market and business integration costs. Inductive devices also saw earnings decline, partly on account of forex fluctuations. In Others, excluding the aforementioned gain on transfer, earnings improved in recording media. Earnings were higher in energy devices, which performed extremely well.
Next for a comparison between the first and second quarters. Operating income increased \3.6 billion between the two quarters on a \15.3 billion increase in net sales. This table includes results for recording media in Others. The average yen exchange rate versus the dollar was \104.56 in the first quarter and \107.66 in the second quarter, meaning that the latter benefited slightly more in terms of forex fluctuations.
Recording devices sales increased \5.2 billion from the first quarter. Sales in the Other category, which includes the suspension assembly business, were mostly flat. Despite falling short of our initial forecast, earnings were higher in line with increased HDD head sales. The Others sector saw quarter-on-quarter sales rise \7.9 billion, with a large increase in energy device sales, resulting also in higher earnings. Recording media sales rose approximately \0.6 billion. Sales of other products in Other fell. Electronic materials saw sales increase \0.8 billion from the first quarter. Ferrite core and magnet sales were largely unchanged, but capacitor sales rose slightly. This sector saw earnings remain mostly the same as the first quarter, with higher depreciation expenses offset by an easing of raw materials prices from their peak. Electronic devices recorded a quarter-on-quarter rise in sales of \1.4 billion. However, lower high-frequency component sales, demand for the impact of a sluggish semiconductor market in power supplies and termination certain power supply products associated with business integration brought down sales and earnings.
Next, a word on our consolidated forecasts. We are now projecting net sales of \795.0 billion, operating income of \35.0 billion, income before income taxes of \31.6 billion, and net income of \25.0 billion. We have thus substantially lowered our previous projections. When we released our first-quarter results, we revised only our second-quarter forecasts, and refrained from revising second-half projections because of the difficulty of making projections amid extreme instability in market conditions. We have lowered our forecasts further, however, against a backdrop of tumultuous change in the second quarter that has far exceeded our assumptions. Typically, September and October are very busy months for us, as is the year-end shopping season, but we have assumed no such boost this year in revising our second-half forecasts. Indeed, we are assuming that the electronic components market will contract year on year.
Regarding HDD heads, while we expect demand to increase on a volume basis, downward pressure on prices is also expected to increase. In non-operating areas, we have factored in exchange losses from the strong yen as well as write-downs of marketable securities due to falling share prices. Our revised forecasts assume an exchange rate of \100 to US$1. On October 17, EPCOS AG became a consolidated subsidiary of TDK, but no results from this company have been incorporated in our revised forecasts at all. Looking ahead, nobody knows just how much the real economy will decline. We have assumed no beneficial effect from this year's holiday shopping season, but we can't make assumptions beyond that. For the second half, we are projecting an approximate \6.2 billion increase in operating income from \14.4 billion in the first half to \20.6 billion on almost flat sales between the two halves. This projection is premised on higher capacity utilization as we expect a considerable increase in HDD head sales volume from the first half. Another factor is that we expect to generate higher earnings by capturing the benefits of know-how acquired from Alps Electric.
In electronic devices, we expect to see higher sales due to seasonal factors, including demand for UPS in the power supplies business. Also, earnings should increase because of a decrease in expenses incurred during business integration in the first half. With respect to inductive devices, we are forecasting an improvement as we make progress dealing with unprofitable products. Regarding electronic materials, high prices of raw materials used in ferrite cores and magnets are easing slightly. Furthermore, although raw materials prices have increased, we believe that efforts to improve production yields in respect of materials as well as processes will have benefits for our profitability. We're also projecting a slight improvement in capacitors, albeit small. In the Other sector, energy devices which generated profits in the first half of the fiscal year, are expected to see a drop-off due to seasonal factors in the fourth quarter. Nevertheless, an improvement in recording media should offset this. In the second half, we expect to incur structural reform expenses of \5.1 billion, \3.1 billion more than the \2.0 billion assumed at the start of the fiscal year, but this isn't attributable to any sector in particular.
Our full-year forecast is for operating income to drop to \35.0 billion. However, amid uncertainty about whether we can really achieve this forecast, we are determined to put TDK in a position this fiscal year and next to generate earnings as quickly as possible when the economy picks up. Naturally, we will strengthen our manufacturing and development capabilities to achieve this. But, above anything else, we will push ahead with efforts to improve our operations in the following ways.
One is by transferring production with the aim of optimizing locations. This will see us realign and integrate locations that grew too expansive during the IT bubble. We are not taking these actions because of the strong yen, but because there is a need to optimize production. A second initiative is to terminate or exit unprofitable businesses. We plan to terminate unprofitable lines, replace products, change specifications, request price increases and take other actions. Thirdly, we will thoroughly rationalize our operations, including human resources and facilities, due to the so-called "2009 problem" in Japan whereby manufacturing companies are obliged to take on temporary staff that have worked for more than three years on a full-time basis. Rising wages in China and elsewhere is another reason. Another initiative is to select R&D themes either to scale back or abandon, as R&D themes are too wide-ranging. We also want to recoup our investments which have yet to generate the expected benefits. I'm referring here to the investments we have made in the past couple of years such as the acquisition of a power supply business, the acquisition of assets from Alps Electric and the acquisition of Magnecomp. Moreover, we intend to pursue further complementary synergies with EPCOS. Some of these initiatives will be implemented during the current fiscal year, which explains why we have raised reform expenses.
Our predecessors used to say that favorable conditions are good but unfavorable conditions are even better. As implied by this saying, we are looking upon the tumultuous change in our business environment positively, seeing it as a good opportunity to improve our operations and we will therefore thoroughly implement the initiatives I have explained to do just that.
That concludes my presentation. Thank you.