[ 1st Quarter of fiscal 2010 Performance Briefing ]Consolidated Results
Mr. Seiji Enami
Director
Executive Vice President
Good afternoon. I'm Seiji Enami. Thank you for attending this presentation in large numbers in the middle of the summer heat. Thank you also for your ongoing support of TDK. Let me report on our fiscal 2010 first-quarter operating results. I will be using slides as part of this presentation.
Fiscal 2010 1Q Consolidated Results
Let me start first with an overview of our consolidated results for the first quarter of fiscal 2010, compared with the first quarter of fiscal 2009. Consolidated net sales were ¥181,546 million, representing a ¥9,077 million, or 4.8%, decrease year on year. TDK recorded an operating loss of ¥3,645 million, ¥9,038 million worse than the operating income reported in the corresponding quarter of fiscal 2009. We also posted a loss before income taxes of ¥5,418 million, ¥10,995 million worse year on year. Furthermore, we recorded a net loss attributable to TDK Corporation of ¥3,216 million, ¥7,662 million worse year on year.
While our performance is improving following the sharp drop in demand witnessed in the aftermath of the collapse of Lehman Brothers, we unfortunately posted a loss for the first quarter. But this result actually exceeded our expectations at the beginning of the fiscal year. Average first-quarter yen exchange rates for the U.S. dollar and euro were ¥97.40 and ¥132.70, respectively, as the yen appreciated against both currencies. Currency movements reduced net sales by approximately ¥10.1 billion and operating income by ¥2.5 billion.
Consolidated Results-Supplementary Data
This slide shows some supplementary information for our first-quarter results, so you can see the contributions from TDK and EPCOS. TDK's net sales were ¥144.6 billion, 24.1% down year on year. However, TDK recorded operating income of ¥0.1 billion. When transitioning from a period of poor performance to a recovery, costs have a tendency to increase through inventories. Consequently, it becomes difficult to generate a profit. Thanks to the successful execution of structural reforms and a weaker-than-expected yen, however, we managed to generate a profit in the first quarter. EPCOS didn't perform very well in April and May due to the impact of a delayed recovery in Europe. Its June performance was much better though. In fact, for June only, we generated a profit on a consolidated basis, including EPCOS.
Operating Results Highlights
This slide shows the highlights of the first-quarter results. As you know, demand dropped off sharply in the wake of the housing bubble collapse and Lehman Brothers bankruptcy. This brought about the necessity to reduce inventories, which in turn led to a fall in capacity utilization. At the worst point in the January-March quarter, capacity utilization dropped below 30%, but was generally around 40% to 50% during that period. In the April-June quarter, capacity utilization rebounded to roughly 70% on average across the company, which was a better-than-anticipated improvement. As things stand at present, we expect a further slight improvement in the July-September quarter from the April-June quarter. I should mention also that HDD head sales volume exceeded our expectations in the first quarter.
Sales by Product (Year on Year)
Now for a comparison of sales by product with the first quarter of fiscal 2009. Incidentally, EPCOS' sales will be included in "Others" through the first half of the year. After the business combination, EPCOS' sales will be divided using the same segmentation as for TDK's sales.
Electronic materials sales declined ¥17.2 billion, or 38%, year on year to ¥28.5 billion, and accounted for 16% of total sales. Capacitors saw sales fall for use in PC, AV, game equipment, mobile phone and car electronics applications. In ferrite cores and magnets, sales of rare-earth magnets declined for use in the main application of HDDs, while sales of ferrite magnets and ferrite cores fell for use in automobiles and power supply transformers, respectively. As a result, capacitor sales declined 39% year on year and accounted for 64% of sector sales, while ferrite cores and magnets recorded a 35% decrease in sales, and accounted for the remaining 36% of sector sales.
Sales of electronic devices declined ¥14.7 billion, or 30%, to ¥34.0 billion, and accounted for 19% of total sales. In inductive devices, sales of coils and EMC products for flat-screen TVs, mobile phones and automotive electronics all declined. In transformers, higher sales for flat-screen TVs were negated by lower sales in other markets. Sales of high-frequency components declined for use in PCs. Sales of sensors and actuators included in other products dropped, with the exception of sales for mobile phone applications, and sales of power supplies also registered a drop due to decreased use in semiconductor and other manufacturing facilities and also due to the termination of some power supply products. Overall, sales of inductive devices dropped 27% and accounted for 49% of sector sales, sales of high-frequency components dropped 62% and accounted for 5% of sector sales, and sales of other products dropped 27% and accounted for 46% of sector sales.
Recording devices recorded net sales of ¥62.6 billion, down ¥9.9 billion, or 14%. Recording devices accounted for 34% of total net sales. In HDD heads, while sales volume increased year on year, lower sales prices and a stronger yen dragged down sales in monetary terms. HDD head sales dropped 13% and accounted for 91% of sector sales. Other head sales declined 22% and accounted for 9% of sector sales.
In the others sector, TDK's sales were ¥19.6 billion, down ¥4.2 billion, or 18%, year on year. These sales accounted for 11% of total net sales. Batteries recorded higher sales on the back of rising demand. Net sales of EPCOS, which are also included in the other sector, were ¥37.0 billion, representing a ¥37.0 billion year-on-year increase because these sales weren't included in the first quarter of fiscal 2009. EPCOS' sales represented 20% of total net sales.
Statement of Operations
This next slide shows the statement of operations for the first quarter of the fiscal year ending March 31, 2010. Consolidated net sales declined 4.8% year on year due to a large drop in orders, despite making EPCOS a consolidated subsidiary for about ¥170.0 billion. This decrease is an issue we must address. Also, comparatively, total assets are excessive and so too are fixed expenses included in selling, general and administrative expenses. Selling, general and administrative expenses increased by an additional approximate ¥8.0 billion. In this sense, we must pursue synergies. The first-quarter operating loss was ¥9.0 billion worse than the operating income recorded in the corresponding quarter of the previous fiscal year. I'll explain the reasons for this in detail a little later. Total other deductions were approximately ¥2.0 billion more than the total other income recorded in the first quarter of fiscal 2009. This was mainly because of a decrease in interest income and an increase in interest expense due a change in our cash position resulting from the EPCOS acquisition. Other-net included an approximate ¥0.8 billion decline in equity-method earnings of affiliated companies, reflecting these tough times.
Breakdown of Operating Income Changes (YoY)
I'd like to break down the ¥9.0 billion decline in operating income from the first quarter of fiscal 2009. First for the factors that had a positive impact on operating income. Rationalization, cost reductions and purchased materials savings contributed ¥13.7 billion; and a decrease in selling, general and administrative expenses contributed ¥4.1 billion. In terms of the factors that had a negative impact on operating income, lower sales, including the capacity utilization rate and product mix, had a ¥13.5 billion negative effect on operating income. Furthermore, exchange fluctuations, namely the yen's appreciation, had a ¥2.5 billion negative impact on operating income, sales price discounts had a ¥7.1 billion negative impact too. Moreover, the consolidated operating loss included EPCOS' operating loss of ¥3.7 billion.
While I stated earlier that capacity utilization is improving, its low level relative to the first quarter of fiscal 2009 had the largest impact on operating income. Structural reform expenses were ¥1.7 billion, including the ¥1.4 billion booked as restructuring cost on the statements of operation. Structural reform expenses also included costs of ¥0.9 billion related to EPCOS. These are structural reform expenses incurred in the course of business combination that were not included in the planned restructuring charges of ¥3.3 billion that we discussed at the beginning of the fiscal year. Structural reform expenses in the first quarter of fiscal 2009 were ¥1.3 billion.
Consolidated Balance Sheets
The next few slides show our balance sheet as of June 30, 2009, compared with March 31, 2009. Total assets increased ¥18.6 billion. The yen appreciated ¥2.22 against the U.S. dollar and depreciated ¥5.69 against the euro, a reversal from the situation in March. However, because the dollar exchange rate has a strong impact, foreign currency-denominated assets declined approximately ¥7.7 billion. Cash and cash equivalents declined ¥7.6 billion.
Looking at the main items on the cash flow statement, the net loss of ¥3.7 billion had a negative impact on cash. The difference between depreciation and amortization and capital expenditures had a ¥4.8 billion positive impact on cash, while a decrease in inventories had an ¥8.0 billion positive impact. The net result of increases in trade receivables and trade payables due to business expansion of ¥3.7 billion had a negative impact on cash. Furthermore, the transfer of cash into short-term investments had a net ¥11.6 billion negative impact on cash. The payment of dividends, meanwhile, used cash of ¥7.7 billion. A net increase in debt had an ¥11.0 billion positive effect on cash. Exchange rate changes reduced cash by ¥1.8 billion. On the balance sheet, cash on hand increased ¥3.3 billion, including short-term investments. On the other hand, short- and long-term debt increased ¥13.0 billion. The increase in debt was prompted by the payment of dividends while we posted a loss. Retained earnings, a component of total stockholders' equity, declined ¥11.4 billion, reflecting the first-quarter net loss of ¥3.7 billion and dividends of ¥7.7 billion.
Comparison of Net Sales and Operating Income (1Q vs. 4Q)
Now for a comparison of net sales and operating income for the first quarter of fiscal 2010 with the fourth quarter of fiscal 2009. In the fourth quarter of fiscal 2009, we implemented structural reforms to improve our earnings structure and adjusted capacity utilization to trim inventories in the face of a rapid and sharp drop-off in demand, while in the first quarter of fiscal 2010 a recovery was evident.
Overall, consolidated net sales increased ¥42.4 billion and as a result operating income improved ¥60.0 billion. For just TDK, total sales increased ¥37.6 billion and as a result of this operating income improved ¥52.8 billion. Structural reform expenses declined from ¥29.8 billion to ¥0.8 billion, a ¥29.0 billion improvement. The weaker yen resulted in a ¥4.5 billion increase in net sales and had a ¥1.2 billion positive impact on operating income. Actual sales increased even if this ¥4.5 billion boost from forex fluctuations is deducted from the total sales increase of ¥37.6 billion. The net ¥33.1 billion increase generated ¥16.6 billion in operating income. The substantially improved operating income was also the result of improvements to our operations from structural reforms, and reductions in manufacturing-related fixed costs and fixed costs in selling, general and administrative expenses. EPCOS, for its part, saw sales and operating income improve ¥4.9 billion and ¥7.2 billion, respectively, between the two quarters. Structural reform expenses increased ¥0.6 billion from ¥0.3 billion to ¥0.9 billion.
Fiscal 2010 Consolidated Projections
Here are our projections for fiscal 2010. At the beginning of the fiscal year, we released projections only for the full year and not the interim period. While it is still difficult to make projections even now, we have provided first-half guidance based on our first-quarter performance and expectation that results in the July-September quarter will be similar to, if not slightly better, than that.
For the first half of fiscal 2010, we are projecting net sales of ¥370.0 billion, operating income of ¥3.5 billion, income before income taxes of ¥0.5 billion and net income of ¥2.5 billion. While we think first-half results will be better than we initially expected, we have left our full-year forecasts unchanged from the figures we initially announced because we don't feel that it is appropriate to revise them when forecasting is still difficult and a second-half downturn cannot be ruled out.
Progress With Profit Structure Reforms (1)
To conclude my presentation, I would like to report on the progress we are making with structural reforms at TDK. In the previous fiscal year, we raised a large sum of money through corporate bonds, bank borrowing and so forth. However, we also conducted structural reforms, which resulted in a large loss. For that reason, we feel that we have an obligation to report on what progress we have made with structural reforms. This was discussed last time, but we incurred structural reform expenses of ¥33.4 billion during the third and fourth quarters of fiscal 2009. This should result in benefits of ¥69.8 billion over the course of this fiscal year. Of this ¥69.8 billion, estimated cost savings in the first quarter were ¥15.9 billion.
Progress With Profit Structure Reforms (2)
As we stated when we announced revised forecasts on January 8 this year, for each month during November and December of 2008 we incurred an operating loss of ¥3.9 billion on sales of ¥45.0 billion, excluding EPCOS. Based on the recognition that we had to be able to generate earnings with sales of only ¥45.0 billion, we set about implementing structural reforms in the past fiscal year that centered on reducing fixed expenses and unprofitable products. The cost savings from those structural reforms in the first quarter of fiscal 2010 were ¥15.9 billion, which equates to ¥5.3 billion per month. Consequently, we have made it our goal to generate operating income of ¥1.4 billion per month, the net result of the monthly loss of ¥3.9 billion in November and December 2008 and ¥5.3 billion in savings from structural reforms per month.
Let's look at the first-quarter result against this target. Excluding restructuring cost, which is a one-time expense, and adjusting for our assumed exchange rate of ¥90 for the quarter, operating income was zero on net sales of ¥44.2 billion per month in the first quarter of fiscal 2010. Therefore, we didn't achieve our operating income goal of ¥1.4 billion. Selling, general and administrative expenses at ¥9.6 billion were less than our target of ¥10.0 billion.
There are two reasons why we didn't achieve the ¥1.4 billion per-month operating income. One was an increase in costs incurred in the course of the recovery, specifically an increase in unrealized profit of ¥0.6 billion per month. The second reason was a ¥0.7 billion impact per month from sales price discounts. Of these two factors, the first is a temporary factor that occurs during a recovery, while the second wasn't considered in the target because we thought we could compensate for it with cost reforms. Let's look at our monthly performance in light of these two factors. If the sales price discounts of ¥0.7 billion are added to the actual sales of ¥44.2 billion, net sales would have been ¥44.9 billion. And if the ¥0.6 billion cost increase incurred in the course of recovery is deducted from actual cost of sales of ¥34.6 billion, cost of sales would have been ¥34.0 billion, giving a cost of sales ratio of 75.7%. Because actual selling, general and administrative expenses were ¥9.6 billion, operating income would have been ¥1.3 billion, close to our initial target of ¥1.4 billion.
However, the fact that we didn't achieve this goal is an issue. Of the two reasons for non-achievement, the increase in costs incurred in the course of recovery will disappear naturally as markets stabilize and the relationship between our production and shipments stabilizes as a result. The problem is monthly price discounts. The issue for us then is to what extent we can compensate for this through production yield improvements, rationalization, materials discounts, further cost cutting and improved capacity utilization.
That concludes my presentation. Thank you.
