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5. Hitachi Metals, Ltd. Business Report FY ended Mar. 2017

Hitachi Metals, Ltd. Business Report FY ended Mar. 2017

-The Company starting using IFRS since the fiscal year that ended in March 2015.

Factors (Automotive sector)
1) Operating Profit
-Along with earning other income, the Company posted a profit of JPY 30,232 million yen as a result of transferring 51% of the outstanding stock shares of Hitachi Tool Engineering Co., Ltd. (currently Mitsubishi Hitachi Tool Engineering, Ltd. ) to Mitsubishi Materials Corporation on April 1, 2015.

2) Precious metal products
-The amount of revenue increase year-over-year fell due lower sales and due to an extraordinary profit gained from reorganizing the business in the previous consolidated fiscal year, of JPY 25,931 million, that resulted from transferring the stock of Hitachi Tool Co., Ltd. (currently Mitsubishi Hitachi Tool, Co., Ltd.).

3) Magnetic materials
-Sales of rare-earth magnets were robust due to strong demand for automotive electrical components for electric power steering systems and hybrid cars.
-Sales of ferrite magnets were robust due to strong demand in and outside Japan for automotive electrical components and parts for electric appliances.

4) High-grade performance parts
Sales of automotive cast products for pickup trucks in North America were high. Demand for agricultural equipment and construction equipment in emerging countries fell due to the economic slowdown in that region and the depressed prices of grains and cost of goods. As a result, overall business performance was lower for the year, being further impacted by the effect of negative currency translation due to the high valuation of the yen.

5) Wiring materials
-Sales of automotive electrical products and brake hoses were strong.

Business Developments in Japan

-The company announces the establishment of “Hitachi Metals Advanced Machining, Ltd.” following the merger scheduled for April 1, 2017 between Moka Technos, Ltd. and Auto-tech, Ltd. which are both Hitachi Metals Group companies engaging in the functional components machining (cutting) business. The new company will play a part as a core company in the Hitachi Metals Group that engages in the functional components machining (cutting) business, and also take the processing of functional components other than cast iron into consideration as a new business field to be pursued. The stated capital is JPY 80 million, wholly owned by Hitachi Metals, Ltd. The number of employees is approximately 100. (From a press release on March 31, 2017)

-The company and SNT Corporation announced that they have entered into an agreement to transfer all the stocks of Seitan Inc., subsidiary of Hitachi Metals, to SNT Corporation. Seitan manufactures and sells forging parts for automotive industry, with sales of JPY 3,757 million in fiscal year ended in March 2016. Transfer of shares is scheduled to run in January 11, 2017. (From a press release on November 14, 2016)

-The company will introduce an innovative production line for neodymium magnets and ferrite magnets at its Kumagaya Works for magnet materials in Kumagaya City, Saitama Prefecture. This move is a response to active demand for magnets used in drive motors of hybrid vehicles and electric vehicles, as well as for electric motors. The new line will be operational within fiscal year 2018 (ends in March 2019). Hitachi Metals will invest about JPY 18 billion to construct a new plant building and introduce an innovative line for neodymium and ferrite magnets. The company intends to enhance productivity at the plant by adopting a high-efficiency production process and Internet of Things (IoT) technologies. (From an article in the Nikkan Jidosha Shimbun on October 19, 2016)

-The company announced that it will boost its capacity to produce the Hercunite series of heat-resistant cast components for turbocharged gasoline engines. Its monthly capacity is expected to increase to 1,200 tons, a 60% increase from the current level of 750 tons. Downsized gasoline engines with turbochargers are increasingly adopted in the global market due to the popularity of fuel-efficient vehicles. The company will enhance the casting line and processing equipment and streamline the sand mold manufacturing process at its Kyushu Works (Kanda, Fukuoka Prefecture) in the second half of 2016. The Hercunite series heat-resistant cast components are used in the turbine housing that seats the turbo and in the exhaust manifold that collects engine exhaust. These products are highly resistance to cracking and distortion from heat. (From an article in the Nikkan Jidosha Shimbun on May 13, 2016)

-The company announced that it will make an investment in its Kyushu Works to increase production capacity, in order to meet growing demand for Hercunite heat-resistant cast steel for use in turbocharged gasoline engines. The investment includes the enhancement of casting lines and processing facilities to increase Kyushu Works’ production capacity of Hercunite by 60% to 1,200 tons per month from current 750 tons. (From a press release on April 25, 2016)

Business Developments outside Japan

-The company and Beijing Zhong Ke San Huan Hi-Tech Co., Ltd. announced that they have completed the establishment of Hitachi Metals San Huan Magnetic Materials (Nantong) Co., Ltd., their new joint venture to produce neodymium-iron-boron magnets in China. The new company is capitalized at CNY 450 million, of which 51% was provided by Hitachi Metals and 49% was provided by Beijing Zhong Ke San Huan. Mass production is scheduled to start in FY 2017 ending in March 2018 with an annual production capacity of approximately 1,000 tons. The joint venture will continue to enhance its facilities in order to increase its production capacity to 2,000 tons per year. Annual sales are expected to reach approximately JPY 10 billion by March 2019. (From a press release on September 2, 2016)

-The company announced that its Chinese subsidiary, Baosteel Hitachi Rolls (Nantong) Ltd., will discontinue production as of September 1, 2016. Baosteel Hitachi Rolls, which was jointly established with Bao Steel Engineering & Technology Group Co., Ltd. in 2006, has been manufacturing and selling high-speed steel (HSS) rolls. As the HSS rolls market did not expand as expected and the excess supply from iron and steel manufacturers is forecast to continue globally, Hitachi Metals has decided to stop production at Baosteel Hitachi Rolls. Sales at the subsidiary reached approximately CNY 139 million (JPY 2.6 billion) in the fiscal year ended March 2016. Hitachi Metals and Bao Steel Engineering & Technology Group are starting procedures for dissolving their joint venture. (From a press release on August 31, 2016)

-The company announced that it will postpone the establishment of Hitachi Metals San Huan Magnetic Materials (Nantong) Co., Ltd., its new Chinese joint venture to produce neodymium-iron-boron magnets, to July 2016. In accordance with this, mass production is scheduled to start in March 2017. Hitachi Metals announced this establishment of the new company in June 2015. The new company will be owned 51% by Hitachi Metals and 49% by Beijing Zhong Ke San Huan. (From a press release on June 9, 2016)

-The company announced that its two automotive casting subsidiaries in the U.S. merged as of April 1. The management of related operations was integrated to improve production system efficiency. Hitachi Metals sees the merger as one important step forward for the growth of its group's operations in the global market. Waupaca Foundry, Inc. (WFI, headquartered in Wisconsin), which produces automotive iron castings, acquired Hitachi Metals Automotive Components USA, LLC (HMAC, headquartered in Pennsylvania). WFI is a major local iron foundry company. In November 2014, Hitachi Metals Group acquired WFI and gained a controlling stake in the company. Since April 2015, WFI's executives have served concurrently as HMAC's directors and the two companies have enhanced cooperation. (From an article in the Nikkan Jidosha Shimbun on April 8, 2016)

>>>Financial Forecast for the Next Fiscal Year (Sales, Operating Income etc.)

Fiscal Year 2018 Mid-term Management Plant

-The Group set the following business-performance targets for the fiscal-year 2018 management plan that ends in March 2019.

Sales: JPY 1 trillion
Adjusted Operating Profit: JPY 100 billion
EBIT: JPY 91.0 billion
Net profit attributable to shareholders of the parent company: JPY 61 billion
ROE: 10% or higher

*Exchange rate assumed for the fiscal year: USD $1=JPY 110
(Announced on April 28, 2017)

-Key words for the mid-term management plan are “changes for a winning enterprise” and “challenge new performance targets”, with the action plans outlined below.

1) Speed up setting and implementing growth strategies
2) Build an operating structure with muscle and effective business operations
3) Set the framework that makes a long-term, sustainable operating structure possible

R&D Structure

-R&D Organizational Structure:

• Based on a divisional laboratory program the Company introduced, each business unit is responsible for developing its own products in line with its own strategy.
• Collaboration between Hitachi Ltd. and all the R&D sections is undergoing, with the aim of developing the next-generation, major, new products; new production methods, and fundamental technology.
• The Company is collaborating with external organization such as universities, including ones outside Japan, in order to sow the seeds for developing new materials and technology that lead to future, new products.

-The company announces that it establishes Global Research & Innovative Technology center (GRIT) as of April 1, 2017. GRIT is a new corporate research center, and aims at promoting medium-to long-term R&D target regarding advanced materials which could achieve sustainable growth and contribution to the society behind FY 2018 Medium-Term Management Plan. (From a press release on March 30, 2017)

-The company announced that it will transfer R&D facilities of soft magnetic material within Yamazaki Manufacturing Department located in Mishima-gun, Osaka to Hitachi Ferrite Electronics, Ltd. located in Tottori City, Tottori Prefecture. The company will concentrate the research facilities on Hitachi Ferrite Electronics working on soft magnetic materials. The aim is the acceleration of developing technologies on the basis of close cooperation between manufacturing and R&D, to meet customer’s needs. The investment amount is JPY 1.4 million. (From a press release on March 15, 2017)

R&D Facilities

Technology Licensed out Agreements

Development of Products and Materials

-High-grade metal products: Development of high-grade special steel, amorphous metal materials, nano-crystalline soft magnetic material, rolled metals, and ceramics for structural use in various business sectors, including dies, tools, industrial equipment, aircraft, energy, and electronics.

-Magnetic materials: Development of applied products such as high-performance magnets, high-megahertz products and materials for information terminals, and soft magnetic materials.

-High-performance parts: Development of high-grade automotive cast products and related manufacturing technology and design evaluation systems; parts for pipe fittings, valves, and other piping; and total piping systems, including related technology such as production methods.

-Wiring materials: Development of automotive wires and wires used in the industrial field, chassis, telecommunications, and devices. Development of electric wiring production technology and fastening technology for windings/coils. Development of automotive electrical parts, hoses, industrial rubber, information-network devices, and antennae for broadcasting and mobile-phone base stations.

-The company announced that it has developed a new current-collecting clad foil for high-capacity lithium-ion batteries (LiBs). The new clad foil offers higher tensile strength than conventional electrolytic copper foil and rolled copper foil, and supports the use of alloy materials for negative electrode active materials. The new foil has already gained recognition from public research institutes and battery manufacturers. Mass production is scheduled to begin in 2019. (From an article in the Nikkan Jidosha Shimbun on February 10, 2017)

-The company has developed "ML29D," a new soft ferrite core material for automobile applications, which can be used in a wide range of temperatures. The company expects that ML29D will contribute to size and weight reduction, and improvements in efficiency and reliability for transformers, inductors, and other automobile electronic components. The company is ready for mass production and aims to receive orders at an early stage. The new material is a manganese-zinc ferrite material designed for use in vehicles that has low loss properties in a wide range of temperatures. Hitachi Metals used its proprietary powder metallurgy processing and heat treatment technologies to significantly reduce magnetic core losses compared to conventional materials, even at temperatures as high as 140 degrees centigrade. (From an article in the Nikkan Jidosha Shimbun on April 12, 2016)

-The company announced that it has developed a new soft ferrite core material called "ML91S" that offers excellent high-frequency performance. ML91S reduces core loss at high frequencies and helps electronic components like transformers and inductors to operate stably. Hitachi Metals is aiming to expand sales of the ML91S as a high-function material that contributes to the production of smaller, lighter, and more energy-saving components for use in in-vehicle communications devices and other products. ML91S is a Mn-Zn ferrite material that features low-core losses at 1 to 5 MHz frequencies. The new material, which incorporates the company's proprietary powder-metallurgy and heat treatment technologies, achieves higher saturation magnetic flux density than traditional Ni-Zn ferrite materials, and offers reduced core loss at high frequencies. ML91S also restrains core losses under high temperatures between 80 and 100 degrees centigrade, which are similar to actual use conditions. This offers both reduced heat generation and power consumption. (From an article in the Nikkan Jidosha Shimbun on April 7, 2016)

Capital Expenditure

(in million JPY)

-Capital investment in the fiscal year that ended in March 2017: