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[ 1st Quarter of fiscal 2014 Performance Briefing ]Consolidated 1Q Results of FY March, 2014

Mr. Takakazu Momozuka

Mr. Takakazu Momozuka
Corporate Officer

Consolidated 1Q results of FY March 2013

For the Consolidated 1Q results of FY March 2014, net sales were 236 billion yen, up 27.9 billion yen year-on-year, recording an increase of 13.4%; operating income was 4.0 billion yen, down 5.2 billion yen year-on-year, registering a decrease of 56.8%; income before income taxes was 4.5 billion yen, down 4.3 billion yen, down by 48.9%; current net income was 400 million yen, down 4.1 billion yen, down by 91.7%; and EPS was 2.96 yen. This relatively low figure can be explained by the breakdown of income held by the minority shareholders and also the net income generated in low tax countries declined, impacting our overall tax expenses. In terms of exchange rate, it was 98.74 yen to the dollar, depreciated by 23%, and the euro was at 128.96 yen, depreciated by 25%. Net sales increased by about 40 billion yen and operating income increased by about 5.9 billion yen.

Features in 1Q results of FY March 2014

For the 1Q results of FY March 2014, consolidated sales increased by 13.4% and operating income decreased by 56.8%. Sales in the automotive and industrial equipment markets continued to increase after bottoming out in 3Q of FY March 2013. Regarding passive components, for the first time in 6 quarters, we were able to end in a profitable tone, especially with sales in the automotive, industrial equipment, and communication equipment markets having increased. With ceramic capacitors, we were able to reap the fruit of our restructuring and also benefit from the yen depreciation. In terms of consolidated sales of magnetic application products, it declined by 2.3% year-on-year, and operating income dropped by 68.5%. This is due to the decline for HDD heads ? in 1Q of March 2013 there was a special demand generated by the result of the Thai floods, but that is no longer the case ? and in terms of magnet sales ? because of the decline in price of rare earth materials, the sales of magnets decreased very sharply.

Breakdown of Operating Income Changes

Next on the decremental profits of 5.2 billion yen, it is related to the decrease in net sales. The value of net sales has increased but particularly due to the depreciation of the yen, we have the impact of the currency. We also have the decrease of the selling price of rare earth. When you look into each of the products, sales of passive components increased but recording device sales have dropped substantially so that all-in-all we have 1.8 billion yen of decremental effects and profits. Also with the HDD heads, we now have a loss of the special demand due to the flood in Thailand last year and also the utilization of capacitors lowered as well as the magnet business. When we implemented the consolidation of those production bases, and due to that we have increased inventory and that will lead to that declining capacity utilization and for the total we have 3.2 billion yen of decremental profit factors; as well as -7.9 billion yen due to the selling price decline; and 5.9 billion yen, a positive factor due to depreciation of Japanese yen. But due to the price fluctuation of rare earth, it was -1.6 billion yen of effects. For the cost reduction for rationalization and the labor costs in Asian areas including China, we have to deal with the raise of wages but that can be more than offset with the reduction of material costs; for the total we have 2.6 billion yen of incremental effects and profits. We also expect 2.4 billion yen of positive effects on profits due to restructuring efforts, particularly in passive components due to the consolidation of production bases. We have also included positive effects due to the reduction of the head count in overseas operations. When it comes to the increase of SG&A, this was a negative effect of 1.6 billion yen, and we have included 700 million yen of the restructuring costs. Last year it was 200 million yen so this is the 500 million yen or more of restructuring costs that were recognized. The other was the R&D cost increase, mainly for the developments of the secondary battery.

Segment Information

When it comes to net sales and profits from the last 4Q to this 1Q, for restructuring costs we have recognized several 100 million yen; and as we explained in the previous guidance meeting, the total restructuring costs this year will be 10 billion yen; and the rest of the restructuring costs will be recognized in the second half. Next, for the net sales and operating income for each segment. The net sales of passive components was an increase of 12.6 billion yen, a 12.1% increase from 104.4 billion yen from the last 4Q, at 117 billion yen. The sales of the capacitor business was increased by 3 billion yen from the 30.7 billion yen over the last 4Q, a 9.8% growth to 33.7 billion yen. The Japanese yen depreciation to the dollar and the euro have had impacts and I would say it was favorable to the automotive and industrial equipment. The 1Q net sales of inductive devices have increased by 3.8 billion yen from the last quarter’s 31.2 billion yen, a 12.2% growth to 35 billion yen. This is due to the favorable business and sales for automotive and communication equipment. The other passive components net sales increased by 5.8 billion yen from the previous 1Q’s 42.5 billion yen, a 13.6% growth to 48.3 billion yen. The reason for that is the camera module for smartphones have been growing substantially as well as the sales of high frequency products have also been very favorable, particularly for the emerging markets ? the smartphone market. The operating income for the passive components has improved by 6.7 billion yen from the 3.9 billion yen of loss in the last 1Q, currently at 2.8 billion yen; profitable for the first time in the past 6 quarters. Also the restructuring costs have decreased to 700 million yen. It was a 1.9 billion yen decrease from the last quarter’s 2.6 billion yen. When it comes to goodwill for EPCOS, it was 900 million yen. It had been flat from the last quarter. Thanks to the effects of the restructuring efforts of the last year, now profitability of the ceramic capacitors and the capacitor business as a whole has been substantially improved. Also for inductive devices and other passive component businesses have been favorable and growing both in sales and income.
For the magnetic application products segment, it has increased by 4.1 billion yen from the last quarter’s 82.1 billion yen, a 5.0% growth to 86.2 billion yen. The recording device business was lower than our expectations for the sales of HDD heads but it had grown by 2.6 billion yen from the last 1Q’s 57.6 billion yen, a 4.5% growth to 60.2 billion yen. The other magnetic application products sales have increased and magnet sales have increased in automobiles, 6.1% growth, a 1.5 billion yen increase from the last quarter. For magnetic application products’ operating income, it had increased by 2.8 billion yen, 155.6% growth from the last quarter’s 1.8 billion yen to 4.6 billion yen. The major positive factors were that although we lost the insurance benefits due to the floods in Thailand but now we also don’t have to spend 2.3 billion yen of the costs recognized last year; that will more than offset. Also we have very good profits and recording devices. On the other hand, in the magnet business, we now have an incremental inventory due to the consolidation of the product bases, we suffered from the lowered capacity utilizations, and we spent more for costs than expected for the new facilities. But due to the progress of the inventory I just mentioned, this situation will improve from the 2Q and after that.
For film application products, net sales have been flat from last quarter’s 28.6 billion yen. Due to the sales of secondary batteries having declined, due to the production adjustment of our primary customers, we can expand the business to clients other than the primary customers and we have some very favorable factors in foreign currency. The 1Q sales of film application products decreased by 100 million yen from the 1.7 million yen of last quarter to 1.6 billion yen, a 5.9% decrease. For other products, it has decreased. The net sales have increased by 13.0% to 700 million yen and operating income increased to 500 million yen from the loss of 300 million yen of the first quarter last year so this is an improvement due to more R&D costs and sales of existing products. The total of the operating income was 4.2 billion yen, including the cost for humidifiers.

Financial Position

Next for the Financial Position, the total asset was 1 trillion 224 billion yen, 54.4 billion yen more than the end of March. The stockholders’ equity was 588.7 billion yen, 27.5 billion yen more than the end of March. The comprehensive income was 127 billion yen, a decrease of 32 billion yen, a minus margin from last year. This is due to the Japanese yen depreciation with an increase of 28.9 billion yen of foreign currency adjustment accounts. All in all, now we have 244.8 billion yen of cash and cash equivalents, an increment increase by 21.3 billion yen from the last year. On the other hand, interest-bearing debt was 304.4 billion yen, 8.8 billion yen more than last year. Net cash was a 12.5 billion yen improvement from the end of March and -59.6 billion yen. Due to cost reduction of equipment and also due to foreign currency, the cash position has been substantially improved.

Full Year Projection of FY March 2014

Last, for Full Year Projections of FY March 2014, net sales were 930 billion yen; operating income, 30 billion yen; pretax income, 28 billion yen; and net income, 13 billion yen. These numbers have not changed since we have presented you the numbers in April. FX forecast for 2Q and onward is the same with 90 yen to the dollar and 118 yen to the euro. In 1Q, the yen was weaker than planned, leading to a positive impact on our income. If the weak yen trend continues, it should improve our results. However, since the second half foreign exchange direction is not clear, we have not changed our full year projection. Regarding our prospects for the second half, including 2Q, sales of high frequency components should grow given the increasing demand for new smartphone and tablet model applications. Not only high-frequency components, we believe that inductive passive components will increase as well. As per our rechargeable battery business, we predict sales of our major clients to increase while we expand our business to new clients as well.

Next, regarding the HDD head business, we forecast an increase in demand for data centers and game device applications. Positive restructuring impacts will continue to be demonstrated, especially around our passive component business.

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