Investor Relations | IR Events | Performance Briefing

[ Financial Results for Fiscal 2009 Performance Briefing ]Consolidated Results of FY March 2009 & Projections for FY March 2010

Mr. Takehiro Kamigama President & COO

Mr. Takehiro Kamigama
President & COO

Thank you for taking the time to attend this presentation. Today, I would like to report on TDK's consolidated operating results for the fiscal year ended March 31, 2009 and our projections for the fiscal year ending March 31, 2010. After that, I will look at two of the four key management issues for TDK in the fiscal year ending March 31, 2010. Later, Seiji Enami will look at our operating results in more detail. Following Mr. Enami, the general managers of two business groups will each look at the other two key management themes.

Consolidated Operating Results for the Fiscal Year Ended March 31, 2009

Now for our consolidated operating results for the fiscal year ended March 31, 2009. Please note that six-month results of EPCOS AG are included. Consolidated net sales were ¥727.4 billion, down 16% year on year. TDK recorded a consolidated operating loss of ¥54.3 billion, compared with operating income of ¥87.2 billion in the previous fiscal year. This represented a negative change of ¥141.0 billion year on year. We also reported a loss before income taxes of ¥81.6 billion, compared with income before income taxes of ¥91.5 billion, representing a negative change of ¥173.1 billion year on year. On the bottom line, TDK posted a net loss of ¥63.2 billion, ¥134.6 billion worse than the ¥71.5 billion net income in fiscal 2008. Unfortunately, as you can see, we posted large declines in net sales and earnings, which reflected lower demand for electronic products due to the global economic recession and a sharp drop in capacity utilization because of large inventory adjustments. The basic net loss per common share was ¥489.71, a large change from the basic net income per common share of ¥551.72 in the previous fiscal year. Foreign currency movements also affected our operating results. The yen appreciated considerably against the greenback and euro in terms of average rates for the fiscal year. This lowered net sales by ¥79.8 billion and operating income by ¥18.9 billion.

Consolidated Projections for the Fiscal Year Ending March 31, 2010

Turning to our consolidated projections for the fiscal year ending March 31, 2010, which include EPCOS AG's results for a full year, we are forecasting consolidated net sales of ¥717.8 billion, down approximately 1% year on year. However, we are projecting operating income of ¥13.5 billion, and income before income taxes of ¥6.9 billion. Furthermore, we are forecasting net income of ¥5.2 billion. These projections assume an average yen-U.S. dollar exchange rate of ¥90 and an average yen-euro exchange rate of ¥120 for fiscal 2010. We are assuming that market conditions will remain challenging. It is still very unclear when and to what extent conditions will improve, meaning that we don't expect to see higher demand for electronic components. That's why we are expecting a slight decline in net sales. The projected improvement in earnings reflects efforts to lower costs and break-even points through massive structural reforms in the previous fiscal year. In addition to the benefits of these structural reforms, we expect to improve margins with the launch of new products and to improve profitability in our HDD heads business. These are the reasons we expect to restore profitability in fiscal 2010.

Key Management Issues for Fiscal 2010

There are four key management issues for TDK in fiscal 2010. The first is the business combination with EPCOS AG. Second is improving our profit structure. Third is the capacitor business. Fourth is our HDD heads business. I will explain progress on the first two themes, but leave it up to the general managers of the respective business groups to explain themes three and four.

1. Business Combination With EPCOS AG

Business Combination Steps to Date

This slide shows the various steps required for combining the two businesses. You will note that the business combination agreement was inked on July 31, 2008. That's when we announced the acquisition of EPCOS AG. Thereafter, we conducted two tender offers. As of April 30, 2009, we held an almost 96% stake in EPCOS.

Two Important Procedures Going Forward

There are two important steps that haven't been completed yet. Because we have acquired an equity interest of more than 95%, we will soon be in a position to sign a domination agreement. The second remaining important step is a squeeze-out, whereby we acquire a 100% stake in the company. But first the approval of EPCOS' shareholders is required at the annual general meeting scheduled for May 20. This slide says that we want to accelerate the business combination. Making EPCOS a wholly owned subsidiary is important in the context of expediting the business combination.

Final Procedures

This slide shows the final procedures on TDK's side. TDK plans to carve out its four passive components businesses and will seek shareholder approval for this on June 26, 2009. Assuming this proposal is approved, TDK will establish a new company on October 1, 2009. There has been no change whatsoever in this regard from previous announcements and everything is going according to plan. EPCOS will become a subsidiary of this new company. Completion of all these procedures will position the new company to begin full-scale activities as a combined passive components business.

Carve-Out Diagram

Here's a diagram of the four TDK business divisions and electronic components marketing and sales divisions, as of now, that will be carved out to form the new company. At present, the headquarters function, affected business divisions and marketing and sales divisions, other divisions and the EPCOS Group and subsidiaries of TDK's carved-out businesses, and unaffected subsidiaries are under TDK as shown on the slide. After the carve-out, the four divisions and electronic component marketing and sales divisions will form the new company. The EPCOS Group will sit under this new company. The EPCOS name will remain intact, but bases and business divisions will form part of the new company. Subsidiaries of the carved-out businesses will also sit under the new company.

Aim of Carving Out Passive Components Businesses

I've been asked many times why we are carving out these businesses. As I've said previously, it's to accelerate the business combination and maximize synergies. I believe that being able to make quick decisions thanks to the carve-out is the biggest point. I also believe this will motivate people, including staff at EPCOS. You'll also see on the slide that our stated goal is to be the world's leading passive components supplier. By becoming the world's leading passive components supplier, one capable of supplying both commodity and customized products, we want to be able to supply all electronic components.

Progress With EPCOS Combination

Design processes for business and organization structures related to the combination of the new company and EPCOS have almost been completed. Simply put, we have created a design map. And we have ironed out the details, even as far as making personnel decisions. All that's left is to execute our plans. Because all that we have to do now is start the implementation process, after all the legal procedures. As much as I'd like to tell you more about our plans in concrete terms, I'll refrain from doing so today, as it is difficult to talk specifics before EPCOS holds its annual general meeting on May 20. I apologize in advance if I cannot answer your questions later on during the Q&A session for that reason.

Remaining Steps for Business Combination

In terms of the remaining steps for business combination, after EPCOS holds its annual general meeting on May 20, TDK will hold its annual general meeting on June 26. Thereafter, plans are for the new company to be established on October 1.

That's all I have to say at this juncture regarding EPCOS.

2. Profit Structure Reforms

The second major managerial task for fiscal 2010 as I said earlier is profit structure reforms. By lowering the cost of sales ratio and cutting selling, general and administrative (SG&A) expenses through rigorous implementation of various measures, we aim to move back into the black. Mr. Enami will give you specific figures later, but in the fiscal year ended March 31, 2009 we booked much larger charges for structural reforms than we previously announced. Structural reforms are now largely complete with the booking of these expenses. Some measures will carry over to the first quarter of fiscal 2010, but we're almost finished with restructuring. These measures should lower our cost of sales ratio and SG&A expenses and as a result we expect to restore profitability in fiscal 2010.

Summary of Progress With Structural Reforms

On February 9, we announced plans to log restructuring charges of ¥15.0 billion. However, this number swelled and we actually recorded restructuring expenses of ¥33.4 billion. There were two reasons for this. For one, we expected the termination of some unprofitable products to yield savings of ¥16.8 billion. However, because we had a responsibility to supply some products to customers and as a consequence couldn't terminate all the planned products during fiscal 2009, we were only able to generate savings of about ¥5.4 billion. We will continue with steps to terminate these products in fiscal 2010 though. Restructuring expenses swelled because we took other steps to make up for this difference of around ¥10.0 billion. We brought forward structural reforms and booked impairment losses on facilities. As a result of these actions, restructuring charges ballooned to ¥33.4 billion. However, we expect annual savings of ¥69.8 billion as a result. In fiscal 2010, we are planning restructuring charges of ¥3.3 billion due to the consolidation and closing of more bases. This is expected to yield annual savings of ¥2.2 billion. Therefore, in total we expect annual savings of ¥72.0 billion in fiscal 2010.

Asset Efficiency-Focused Management

The next topic is focusing more on asset efficiency. Up to the fiscal year ended March 31, 2009, we acquired HDD head assets from Alps Electric Co., Ltd., acquired Magnecomp Precision Technology Public Company Limited, made Densei-Lambda K.K. a wholly owned subsidiary, and acquired EPCOS AG. These moves represented considerable investments for TDK. We expect to begin reaping the benefits of these investments from this fiscal year. In fact, we expect to see benefits very soon from the HDD head assets we acquired from Alps Electric and from Magnecomp. Some benefits are expected from EPCOS this fiscal year, but we don't expect the major benefits until around next fiscal year. We also plan to raise the equity ratio by quickly repaying net debt. Since our financial position has worsened, one of the main focuses of management from now is to return to our former position as quickly as possible.

Dividend Policy for Fiscal 2010

I'd like to conclude my presentation by talking about our dividend policy. In principle, TDK pays dividends from net income for the fiscal period. Our basic policy is to try to continuously increase dividends over the long term since they are the most important way of returning profits to shareholders. There will be no change in this stance going forward. Having booked large restructuring expenses, we expect to move back into the black this fiscal year. While some businesses have seen results this month, market conditions are still very cloudy. Our underlying performance seems to be improving, but depending on who you listen to there could be a double-dip recession. Honestly, it's anyone's guess at the moment. For that reason, we haven't announced dividend forecasts for fiscal 2010 yet. We plan to announce them when we release our first-quarter operating results.

Thank you for your attention.

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