Investor Relations | IR Events | Performance Briefing

[ 2nd Quarter of fiscal 2011 Performance Briefing ]Consolidated First-Half Results and Full-Year Projections for Fiscal 2012

Mr. Takehiro Kamigama President & CEO

Mr. Takehiro Kamigama
President & CEO

Good afternoon. I’m Takehiro Kamigama, President & CEO of TDK. Thank you for taking the time to attend today’s presentation in large numbers. I would like to summarize our consolidated performance for the first half of fiscal 2012, and our full-year projections for fiscal 2012.

Consolidated Results for First Half of Fiscal 2012

Let me start by summarizing our consolidated results for the first half of fiscal 2012, the year ending March 31, 2012.

First-half net sales were ¥417.2 billion, ¥25.1 billion less than the ¥442.2 billion recorded in the corresponding period of the previous fiscal year. Operating income was ¥13.8 billion, ¥23.4 billion less than the ¥37.2 billion recorded in the first half of fiscal 2011. This was a very disappointing performance. The operating income margin was 3.3%, 5.1 percentage points lower than the 8.4% recorded in the previous fiscal year’s interim period. Income before income taxes was ¥10.7 billion, ¥24.0 billion less than the ¥34.6 billion recorded a year earlier. As a result, net income fell ¥19.4 billion year on year from ¥26.1 billion to ¥6.7 billion. This is a disappointing result for shareholders.

First-half earnings per share was ¥52.09 compared with ¥202.46 a year earlier. The average first-half yen exchange rate for the U.S. dollar was ¥79.84, against ¥88.89 for the same period last year, and for the euro was ¥114.00, against ¥113.80 for the same period last year. These exchange rates lowered net sales by approximately ¥33.2 billion and operating income by approximately ¥10.9 billion. The Great East Japan Earthquake negatively impacted our net sales by around ¥5.7 billion and operating income by around ¥3.6 billion.

Highlights of 1H Fiscal 2012 Results

Next, let me talk briefly about the main features of our first-half performance for the fiscal year ending March 2012.

Looking at trends in the electronics market, at the moment we are seeing a recovery mainly in the Japanese automobile-related market following production adjustments precipitated by the Great East Japan Earthquake. Production of smartphones and tablet devices is increasing year on year. Meanwhile, production of flat-screen TVs, notebook PCs, and HDDs remains at mostly the same level as the corresponding period last year.

Next, I would like to say a few words about the performance of each of our segments in this market environment.

First is the passive components segment. This segment posted net sales of ¥201.6 billion, down 5.6% year on year. Sales of ceramic capacitors and inductive devices for home information appliance applications declined, while aluminum electrolytic capacitors and film capacitors recorded higher sales mainly for industrial equipment applications. High-frequency components posted lower sales for use in mobile phones. Magnetic application product net sales declined 13.2% year on year to ¥167.2 billion. The main factor behind this decline was a 20.8% year-on-year decrease in recording device sales due to the yen’s appreciation and falling sales prices. Although sales volume was mostly unchanged, sales price discounts took a heavy toll, pushing down the segment’s net sales. The other segment recorded a 33.4% year-on-year rise in sales to ¥48.4 billion, on higher rechargeable battery sales, particularly for use in tablet devices.

Current Status of Damage Caused by the Flooding in Thailand

Next, I would like to briefly look at the status of damage caused by the flooding in Thailand.

In Thailand, TDK has four plants in two industrial areas. The first industrial area is Rojana, and the other is Wangnoi. As you know, TDK Thailand Co., Ltd., which is located in the Rojana industrial area, operates a plant that carries out back-end processes for metal magnets, specifically processing and plating, for use in HDDs. Almost all of the plant’s operations involve back-end processes for metal magnets. It is safe to assume that the plant handles only a very small portion of TDK’s recording media and sensors. This plant has suspended operations for now following inundation by more than 2 meters of floodwater. The Wangnoi plant assembles metal magnets and voice coil motors (VCMs) for HDDs. While this plant has not been flooded yet, production has been suspended because employees are unable to come to work.

Magnecomp Precision Technology Public Co., Ltd. produces HDD suspension assemblies in Thailand. It operates plants in Wangnoi and Rojana. The Wangnoi plant is the company’s main plant, accounting for around 80% of total production. The Rojana plant is a branch plant. Fortunately, the Wangnoi plant has escaped flood damage. The plant faces no major problems at this time, thanks to a variety of countermeasures. However, plant operations have also been suspended here because employees are unable to come to work. The Rojana plant transferred equipment to Magnecomp’s Wangnoi plant at an early stage, so we don’t expect any major damage. As soon as the floodwaters recede, we expect that both plants at Wangnoi should be able to resume operations.

Looking at the entire market though, our customers have also sustained flood damage. HDD-related companies have been particularly hard hit by the flood. TDK’s magnet business has been directly impacted by the flood. Moreover, we have yet to obtain a clear picture of the situation faced by our client finished-product manufacturers in the supply chain, particularly in the automobile, camera, copy machine and television sectors. Factoring in the potential for more negative impacts ahead, we are projecting that flood damage will negatively impact our net sales by ¥23.0 billion and operating income by ¥10.0 billion in the second half of the March 2012 fiscal year.

Projections for Fiscal 2012

Taking into account the aforementioned factors, let’s now look at our projections for the full year ending March 31, 2012.

We have lowered our net sales forecast to ¥820.0 billion from our initially forecast ¥890.0 billion. The revised forecast represents a decrease of ¥55.7 billion year on year. The operating income forecast has also been lowered from ¥67.0 billion to ¥35.0 billion. This revised forecast is also down on the previous fiscal year. We have reduced our projection for income before income taxes to ¥30.0 billion, from our initially forecast ¥65.0 billion. Our net income projection has been reduced from ¥50.0 billion to ¥20.0 billion. We deeply regret these changes. In response, we have lowered our capital investment budget by ¥5.0 billion to ¥80.0 billion, compared with ¥85.0 billion previously. We have also reduced depreciation and amortization from ¥85.0 billion to ¥80.0 billion. Research and development expenses have been cut by ¥1.0 billion to ¥52.0 billion.

We have revised our assumptions for the average yen exchange rates from the third quarter of the fiscal year ending March 2012. We are now assuming average yen exchange rates of ¥76 and ¥105 against the U.S. dollar and euro, respectively. This compares with our previous assumptions of ¥80 against the U.S. dollar and ¥110 against the euro. As I just explained, our initial business projections have been reduced taking into account the general outlook for electronics and finished products, the yen’s appreciation, and the negative impact of the floods in Thailand, among other factors.

Dividend Projections for Fiscal 2012

Regrettably, under these conditions, we have decided to maintain the year-end dividend at ¥40, the same level as last year. Combined with the interim dividend of ¥40, we now plan to pay an annual dividend for fiscal 2012 of ¥80. Previously, we had planned to pay a year-end dividend for fiscal 2012 of ¥50. Although we deeply regret the impact of this change on shareholders, the decision reflects management’s strong determination to regain lost ground next fiscal year and takes into consideration the Company’s full-year projections and dividend policy.

Initiatives for 2H Fiscal 2012 and Beyond

This slide says “Implement initiatives for strengthening manufacturing capability and improving earnings power.” Considering current market conditions, the impact of the flood in Thailand, the yen’s appreciation and various other factors, we believe that TDK will face extremely challenging market conditions going forward. We must remain vigilant, given the concerns about steady deterioration in the operating environment. In this context, we must rapidly improve our earnings power, while taking steps to strengthen our manufacturing capability as quickly as possible. Accordingly, the slide provides a short list of five of our priorities. Each priority is complex in nature, but sums up what we have set out to accomplish.

We will work to optimize production sites, reduce approximately 11,000 jobs in the TDK Group worldwide, and implement measures targeting unprofitable businesses and products. One example of the latter is the sale of the organic EL display business we announced at the end of September. I believe that we must undertake more and more of these sorts of initiatives going forward. Reducing fixed costs is only natural. We also need to produce results by divesting unutilized assets globally within the next 1 to 2 years.

That concludes my presentation. Thank you for your attention.

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