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 April 28, 2009
Management Explanation Meeting for Fiscal 2010, |
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| Date and Time: | April 28, 2009 (Tuesday) 14:10-15:10 | |||||||||||||||
| Place: | Akihabara UDX 6F UDX Conference | |||||||||||||||
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| Agenda: |
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The information provided herein is only an overview and not a word-for-word transcription of the briefing. The following is a summary of the details of the accounts briefing and the question and answer session that followed.
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1. Basic Management Policies for Fiscal 2010 |
Looking at our basic management policies for fiscal 2010, the first element of the policies is that we will be implementing urgent performance improvement measures aimed at ensuring our profitability with respect to operating income and ordinary income. In addition, we will begin undertaking business structure improvement measures mainly focused on business related to semiconductors and automobiles.
Regarding individual business segments, particularly in the Sophisticated Materials segment, which is suffering from deteriorating profitability, we will be working to implement business structure improvement measures centered on business related to semiconductors and automobiles. In the Wires and Cables segment, which accounts for approximately half of our net sales, we will be striving to further strengthen our operations in business sectors where we already have strong products so that we can realize overwhelmingly strong operations. In the Information and Telecommunications Networking segment, which generated a profit in fiscal 2009, we are moving forward with measures that are aimed at propelling operations upward to the next stage.
Our companywide policy objectives include those focused on the themes of "Cultivating Market Acumen" and "Further Advances in Manufacturing" We believe it will be increasingly important to closely examine markets to discern trends and develop products in line with those trends. Moreover, as a manufacturer, we intend to proactively take measures that further bolster our fundamental manufacturing capabilities.
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2. Forecasts of Business Performance for Fiscal 2010 |
In fiscal 2009, our net sales amounted to approximately 493.2 billion yen, and we ultimately recorded a net loss of about 53.8 billion yen. That was a considerable net loss, and we also had a negative free cash flow of roughly 5.3 billion yen.
In fiscal 2010, we are projecting that we will generate approximately 370 billion yen in nominal net sales and that a drop in average copper prices reduce nominal fiscal 2010 net sales by approximately 400 thousand yen per ton. On a real sales basis, adjusted to offset the effect of copper price changes, our net sales in fiscal 2010 are projected to amount to approximately 420 billion yen. Compared with the fiscal 2009 level, this forecast represents a decrease of roughly 50 billion yen, or 10%. We are also projecting that we will restore our profitability in fiscal 2010, generating approximately 1 billion yen of both operating income and ordinary income. As for net income, we are forecasting a loss of roughly 3 billion yen, which is expected to result from the recording of extraordinary losses associated with the expense of business structure improvement measures implemented during fiscal 2010. However, we are confidently projecting that we will restore our positive free cash flow. We are anticipating approximately 2.5 billion yen in positive free cash flow.
We are anticipating a gradual recovery in our net sales from the first quarter through the fourth quarter. Our forecast is for quarterly increases in net sales ranging from 3% to 5%. Moreover, because the benefits of our business structure improvement measures will be emerging along with the passage of time, we are projecting that we will restore our profitability at the operating income and ordinary income levels during the latter half of fiscal 2010.
As for the expense of our business structure improvement measures, we plan to record approximately 3 billion yen in such expenses as extraordinary losses during the latter half of fiscal 2010.
Looking at our ordinary income by individual business segments, it is particularly noteworthy that the Sophisticated Materials segment recorded a large loss of approximately 17.3 billion yen. During fiscal 2010, we are projecting that we will be able to shrink this segment operating loss by about 10 billion yen and thereby generate 1 billion yen of ordinary income on a Companywide basis.
We are forecasting that the Wires and Cables segment will generate fiscal 2010 sales of approximately 85% of the fiscal 2009 level. In other words, we anticipate a year-on-year decrease of about 15%. Compared with the relatively strong performance in the first half of fiscal 2009, net sales in the first half of fiscal 2010 are expected to be 80% of that level, for a year-on-year drop of 20%. Because of such factors as a cooling down of private-sector capital investment- and construction-related demand, the performance recovery of products centered on industrial cables is expected to be somewhat delayed; so, we are forecasting a decrease in business volume during fiscal 2010.
Regarding the Information and Telecommunications Networking segment, we are forecasting that fiscal 2010 sales will be 90% of the fiscal 2009 level, and fiscal 2010 first-half sales will be 90% of the level in the first half of fiscal 2009. In other words, we anticipate a year-on-year decline of 10% for the interim period and for the year as a whole. In wireless systems operations related to information network equipment and mobile phone base stations, we are expecting a slight decline in net sales compared with the fiscal 2009 level. Because operations in this field are centered on telecommunications carriers' infrastructure business, they are likely to remain relatively stable. We have sustained a strong performance in optical submarine cables business but, in view of current economic conditions, we are projecting that our sales in that field will decline from the latter half of fiscal 2010.
Our forecast for the Sophisticated Materials segment is that net sales in fiscal 2010 will be 85% of the fiscal 2009 level. In other words, we anticipate a 15% decrease for the year as a whole. Compared with the relatively strong performance in the first half of fiscal 2009, net sales in the first half of fiscal 2010 are expected to be 70% of that level, for a year-on-year drop of 30%. While the situation is extremely harsh, we are currently seeing a recovery in demand centered on China and certain other countries, and there are increasing signs that a portion of customers has completed their inventory adjustments.
Looking at individual fields, we are forecasting that net sales in Tape Automated Bonding (TAB) and compound semiconductors business during the first half of fiscal 2010 will be about 70% of the fiscal 2009 level—a decrease of 30%. Regarding TAB, our M&A activities have led to the acquisition of a new consolidated subsidiary that began contributing to consolidated net sales in June 2008. On a real basis that adjusts for these factors, our net sales in the first half of fiscal 2010 are expected to be approximately 60% of the level in the same period of fiscal 2009—a year-on-year drop of 40%. In addition, automotive component sales in the first half of fiscal 2010 are expected to be approximately 75% of the level in the same period of fiscal 2009—a year-on-year drop of 25%.
Companywide, we are forecasting that our net sales during fiscal 2010 will be 87% of the fiscal 2009 level—a decrease of 13%—and we project that net sales in the first half of fiscal 2010 will be 78% of the level in the same period of fiscal 2009—a year-on-year drop of 22%.
If, based on our fiscal 2009 ordinary loss of approximately 20 billion yen, we analyze the prospective increase and decrease factors, we will note that we recorded considerable revaluation losses on inventory assets associated with the drop of copper prices in fiscal 2009; the lack of such losses during fiscal 2010 is a positive factor boosting ordinary income by approximately 8.3 billion yen. On the other hand, we also have to consider such negative factors as the approximately 50 billion yen prospective drop in net sales, which is expected to reduce ordinary income by approximately 12.3 billion yen; changes in selling prices and in merchandise mix, which are expected to reduce ordinary income by approximately 1.8 billion yen; and the trend of yen appreciation and other factors, which are expected to reduce ordinary income by approximately 3.5 billion yen.
Among other important positive factors are the elimination of aggregate losses of equity method affiliates, which is expected to augment ordinary income by 5.3 billion yen, and the benefits of productivity increases and materials procurement expense reductions along with a drop in prices of plastic materials and other materials associated with the fall in crude oil prices, which we anticipate will boost ordinary income by approximately 7.5 billion yen.
We are projecting that our fixed cost reduction measures will have the effect of increasing ordinary income by 17.5 billion yen. Of these measures, the portion completed during fiscal 2009 and expected to generate benefits beginning from fiscal 2010 is approximately 8.5 billion yen, and the portion associated with additional measures implemented during fiscal 2010 is approximately 9.0 billion yen.
As a result, we are forecasting that ordinary income will amount to approximately 1 billion yen in fiscal 2010.
Our fixed cost reduction measures include those aimed at lowering personnel expenses, which are as follows.
First, we introduced the "2009 work sharing days off" system, which gives ordinary full-time employees one unpaid day off each month. The one day off corresponds to about 5% of the roughly 20 work days in each month. Plans call for implementing this system from May 2009 through March 2010.
Second, as an emergency salary measure, we reduced the salaries of management-level employees by 5% from November 2008, and the margin of reduction has now been increased to 10% for the period from April 2009 through March 2010. In addition, the regular salary increases ordinarily implemented each spring have been postponed six months so that they will take effect from the second half of the fiscal year.
Third, as a means of reducing personnel expenses in response to changes in orders and corporate performance, we are reducing bonus payments. In addition, we are diligently working to optimize the size and allocation of our personnel and reduce the amount of overtime hours worked.
We anticipate that these personnel expense reduction measures will have the effect of increasing our ordinary income in fiscal 2010 by approximately 15.5 billion yen.
We made capital investments in a steady manner during the period from fiscal 2005 through fiscal 2007, but our investments were greatly expanded during fiscal 2008 and fiscal 2009. As a result, our depreciation expense rose to approximately 25.3 billion yen in fiscal 2009. Because of measures taken in fiscal 2009—including the impairment treatment of assets and a partial freeze on capital investments—we forecast that our depreciation expense in fiscal 2010 will be limited to approximately 23.4 billion yen, or roughly 2 billion yen lower than the fiscal 2009 level. In addition, we have considerably tightened the focus of our capital investments slated to be implemented during fiscal 2010, which are projected to amount to approximately 12.5 billion yen.
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3. Targets for fiscal 2010 |
In TAB operations, we anticipate that the annual profit enhancement benefits achieved during fiscal 2010 will amount to roughly 4 to 5 billion yen, but we will proceed with the implementation of additional business structure improvement measures aimed at restoring profitability.
Specifically, during the first half of fiscal 2010, the COF operations of three manufacturing bases are to be consolidated at the Yamanashi pref., facility of Hitachi Cable Film Device, Ltd. In addition, we will begin full-fledged mass production of our new TAB products for memory. Regarding the current condition of our TAB business, this business has finally bottomed out and begun an uptrend, but we will continue giving due attention to market trends and our own capabilities as we proceed with the implementation of various necessary measures, such as those to optimize the assignment of human resources and retire or modify facilities.
On the other hand, in our compound semiconductors business, we are tightening our focus on a smaller number of products while emphasizing our mainstay business in such products as those for IC-related electronic devices for mobile phones and for LEDs. We are also comprehensively revising distribution of production responsibilities within the group units, including a Taiwan-based subsidiary, and we will take the steps needed to optimize this allocation.
In the electronic wires and wiring devices business, we are reducing the number of Group companies involved from 11, as of March 2009, to 7, as of March 2010. Specifically, while we will complete the construction of factory buildings currently under construction for a Vietnam-based manufacturing subsidiary, we are postponing the start of operations at that facility. Having dissolved a Hungary-based manufacturing subsidiary in February 2009, we will continue moving ahead with various other measures to further consolidate our overseas manufacturing operations.
In the field of lead frames, we are rebuilding our manufacturing systems. In Japan, we will complete the consolidation of all our mold- and press processes at a single facility in Yonezawa, Yamagata, during the first half of fiscal 2010. Overseas, we currently have four bases, and we are considering the consolidation of these bases.
Regarding the market environment of our business in automotive components, this business faces a fairly harsh situation, particularly in North America. In view of this, we had been planning to implement measures to consolidate our automotive component bases in North America during fiscal 2012, but we have advanced the time period for those measures to the first half of fiscal 2011. These measures will reduce the number of bases to three, from the current number of five, and they also provide for the progressive rationalization of operations within the remaining three facilities.
As for marketing bases, we will close a Korean base in the first half of fiscal 2010, and we will also be reorganizing our domestic marketing base network.
Our Information and Telecommunications Networking segment has continued to be robust, and we are planning measures to propel those operations upward to the next stage.
Our net sales in the information and telecommunications infrastructure field, excluding transactions among Group companies, was approximately 56 billion yen in fiscal 2009, and we intend to increase this figure to 85 billion yen by fiscal 2013.
We are expecting particularly large growth in information network business. Our ranking regarding shares of the Japanese market for Ethernet switch products has been alternating between second and third, but we are intent on ensuring that we have a solid grasp of the second position in that market. We also intend to expand our share of usage by communications carriers. In the past, our switches were used for specialized data transmission lines. Recently, they have begun to be used by mobile phone carriers, and we intend expand our presence in this new sector going forward.
Regarding Ethernet related private- and public-sector markets, we intend to expand our partner sales business involving marketing distributors.
Furthermore, while our domestic sales of information network products have almost stalled, we are preparing to establish a full-fledged entry into overseas markets.
On the other hand, regarding wireless systems operations related to mobile phone base stations, we are aiming to be the top antenna producer in Japan.
We are intent on ensuring we can make the most of mobile phone system operators' capital investments going forward, including investments related to Long Term Evolution (LTE) and Super 3G systems, and we are also preparing to respond to future needs associated with 4G systems.
Regarding the overseas expansion of our information network business, the first phase was associated with our previous efforts to promote greater sales of Apresia-series Ethernet switches based on the needs of Japan-based telecommunications carriers who were developing business overseas.
Currently, the second phase of our expansion campaign involves our efforts to promote greater sales of Apresia products to local telecommunications carriers and data center providers that are overseas connection counterparts of Japan-based telecommunications carriers. The first step in these phase II operations was our delivery of a data center to a subsidiary in Vietnam. Going forward, there are already plans for the employment of our products in numerous locations in Southeast Asia.
In the future, the third phase of our strategy will entail measures to promote greater sales of Apresia products to all kinds of local telecommunications carriers and data center providers in overseas markets. To this end, we make a full-fledged entry into overseas markets with Apresia 16000 series products and other products that meet global standards.
The Wires and Cables segment is the main pillar of Hitachi Cable's operations, and we are aiming to make our business operations overwhelmingly strong in this field. To further reinforce our operations in this field, we are moving forward with R&D programs related to segments of the field where we have strengths.
In noteworthy growth sectors of the wires and cables business fields—probe cables for medical applications and micro coaxial cables—we are striving to further upgrade our superior technologies related to alloys and processing methods. Going forward, we also plan to promote greater sales of products related to clean energy and other environmental protection themes.
We currently have high market shares regarding such products as cables for train cars and MLFC flame retardant polyflex insulated wire products, and our plans call for further expanding the market share of these products while also broadening the array of such products.
Moreover, we have been applying the "Hitachi Cable Just-in-time Production System" for the past three years, and we intend to further promote the progress of this system so that we can reduce lead times and otherwise reinforce other manufacturing capabilities in ways that enable us to better meet customers' needs.
Throughout the Wires and Cables segment, we will be taking various kinds of strategic initiatives, including those to eliminate and consolidate bases in ways that promote rationalization and efficiency and those to reappraise unprofitable products.
We have been increasing our R&D expenses during the period from fiscal 2007 through fiscal 2009. In fiscal 2010, we will reduce R&D expenses to below the fiscal 2009 level, but the level as a share of net sales will increase to 2.9%. Our plans call for keeping the level of R&D expenses as a share of net sales at roughly 3%.
Important themes in this area are increasing R&D efficiency (increasing the ratio of new product sales to total R&D expenses), increasing the allocation of personnel to such fields as environment/energy and information infrastructure, and advancing overseas patent applications to support global business expansion. We consider further increasing development strengths and personnel capabilities to be a particularly important theme, and we will be giving priority to it.
Going forward, reevaluating our business portfolio will be an important task.
From Hitachi Cable management's perspective, emphasizing business in fields characterized by low levels of market fluctuation and high levels of opportunities for product differentiation is a good way to increase the stability of our operations and enable the earning of high levels of profit.
Automotive business is a field that enables product differentiation, but related markets are currently being rocked by considerable fluctuations. The most questionable final market fields are those for digital consumer products and home appliances, and most of our semiconductor products that recorded deteriorating performances in fiscal 2009 relate to those markets. We are currently considering the project promotion initiatives and other means of shifting our operations in ways that facilitate greater product differentiation.
Now and in the future, the Hitachi Cable Group will relentlessly promote CSR activities and other programs aimed at making special contributions to society.
In fiscal 2010, we are aiming to restore our ordinary profitability through the resolute implementation of urgent business performance improvement measures centered on measures to reduce fixed costs. We are also powerfully moving ahead with business structure improvement measures designed to ensure that we can reap considerable benefits in fiscal 2011.
As mentioned earlier, Hitachi Cable's fundamental policies include those focused on the themes of "Cultivating Market Acumen" and "Further Advances in Manufacturing," and we also have an important fundamental policy of emphasizing the concept of "Keep to the Straight and Narrow." We will be giving consistently thorough emphasis to all these policies going forward.
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Questions and Answers |
| Q. | What is the projected timing of the emergence of benefits from cost reductions? |
| A. | Since we have been implementing such measures as the "2009 work-sharing days off" system and emergency salary measures from April or May of 2009, their benefits should be appearing during the first half of fiscal 2010. Such measures as those to boost productivity and reduce materials procurement costs will take some time to produce visible results, because of such factors as the time required to complete inventory adjustments; so, we expect the benefits of those measures to increase gradually throughout the year, particularly during the second half.
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| Q. | Is it possible that you are being too optimistic in projecting that changes in selling prices will have the effect of reducing ordinary income in fiscal 2010 by approximately 1.8 billion yen? |
| A. | Because prices have already fallen considerably at this point, we believe there is a low likelihood of additional price drops. Rather than price drops, what we are expecting is for a movement of prices toward recovery.
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| Q. | What is your view on the supply-demand situation for COF products? |
| A. | We estimate that demand has recovered to roughly half the level of production capacity. Because we are moving forward with the consolidation of manufacturing bases, the supply-demand balance is continuing to improve.
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| Q. | Are you confident in your ability to successfully expand your information network business overseas? |
| A. | Our target is telecommunications carriers' networks of specialized lines. In this field, layer-2 switches are the main type of switch used in Japan, but the main type of switches employed throughout the world are modified layer-3 switches referred to as multi-protocol label switching (MPLS) switches. However, as traffic increases going forward, we think the modified layer-3 switches will prove to be relatively expensive to use. Consequently, we expect a progressive shift overseas toward layer-2 switches that are easy to speed up and offer superior performance. In view of this, we think that we see an excellent opportunity to meet related needs. In addition, we will be leveraging the strengths of Japan-based telecommunications carriers and moving into overseas markets in cooperation with those companies. We are aiming to ensure that we earn market share overseas.
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| Q. | Could you provide a breakdown of your figures for fixed cost reductions in fiscal 2010? Also, how much do you think fixed costs might increase again in fiscal 2011? |
| A. | Of the approximately 17.5 billion yen of projected fixed cost reductions, roughly 15.5 billion yen relates to personnel cost reductions, while the remainder represents amortization expense reductions. Of the roughly 15.5 billion yen of personnel cost reductions, about 5 to 6 billion yen will be achieved through urgent measures. When we terminate such urgent measures as the "2009 work-share holiday" system, that portion of the fixed cost reductions will return to normal in fiscal 2011.
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| Q. | What are the prospects for recovery in demand for Sophisticated Materials segment products? |
| A. | The demand recovery period will be different for different products. Overall, however, we are expecting to find that demand bottomed out in the period from the latter half of the third quarter of fiscal 2009 through the fourth quarter of fiscal 2009. In semiconductor-related business, inventory adjustments have been completed, and we expect demand to begin increasing from the first quarter. Even regarding other products, we are anticipating a gradual recovery.
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| Q. | Could you explain how you will reap the benefits of performance enhancement measures in concrete terms? |
| A. | When consolidating manufacturing bases, it takes some time for the benefits to emerge due to the time required for such processes as the relocation of facilities, but we intend to be reaping the benefits by the start of fiscal 2011. In addition, our business structure improvement measures include selection-and-concentration measures with respect to products. Thus, depending on the product, we may be considering such options as the discontinuation of production or the continuation of production in partnership with other companies.
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| Q. | What kind of business portfolio would you like to build as a means of reducing exposure to market risks? |
| A. | Regarding products for industrial infrastructure applications, we are aiming to further magnify our strengths related to highly profitable products. Regarding products for applications related to digital consumer products and home appliances, we will rigorously assess our products' viability in terms of whether we have sufficiently differentiated those products and whether we have advantages over other manufacturers of those products.
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| Q. | How have you differentiated your new memory-related TAB products? |
| A. | Our TAB products for memory offer a high level of reliability; so, they are superior for such applications as servers, but they face challenges with respect to cost. Because of the use of wider sheets, our efforts regarding manufacturing methods, and other factors, the new products we announced today offer performance specifications equal to previous Hitachi Cable products but at a lower cost. We hope to leverage the launch of these products to expand our share of the DRAM market.
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| Q. | Could you explain the prospects for recovery in compound semiconductor business as well as prospects for business in gallium nitride substrates going forward? |
| A. | We believe it will be difficult for the gallium arsenide market to recover to the level seen in the first half of fiscal 2009, although we do expect demand to recover to roughly double the level seen in the fourth quarter of fiscal 2009. Regarding gallium nitride substrates, we are not anticipating a large increase in demand during fiscal 2010, but we do expect demand to move toward a gradual increase in the future. Currently, we are ranked second in terms of shares of the gallium nitride substrate market, and we have set ourselves the goal of shrinking the gap that separates us from the company with the top share of that market.
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| Q. | What is the meaning of Hitachi Cable's fundamental policy theme, "Building Marketing Power"? |
| A. | We believe that the fundamental source of marketing power is the ability to make good decisions based on a clear understanding of the market. The word "market" is not synonymous with the word "clients." Making good decisions requires understanding how much a market may grow as well as knowing the strengths of a client and what kind of needs may stem from those strengths. Because technological trends are also related to good decisions, it is important to promote fluent communications and wide-ranging discussions among technical teams, R&D teams, and marketing teams. This is the key to how we intend to augment our marketing power.
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