Annual Report 2007

Index >A Message From the President
A Message From the President
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Fiscal 2007 Results
Operating Overview
Capital Expenditures and Investment in R&D
Outlook for Fiscal 2008
Initiatives for Sustainable Growth
Returning Profits to Shareholders
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Koichi Fukaya
President and CEO
 

Fiscal 2007 Results

In fiscal 2007, the year ended March 31, 2007, consolidated net sales increased 13.2% year on year to ¥3,609.7 billion. Operating income rose 13.7% to ¥303.1 billion, and net income climbed 20.9% to ¥205.2 billion. All were record figures for the Company. This strong performance reflected steady growth in sales to Japanese automakers, for whom domestic and overseas production remained firm. Sales to automakers in Europe and the United States also rose. Operating income, meanwhile, was supported by higher output, as well as cost reductions, improved productivity, and other benefits from efforts to rationalize operations and enhance management efficiency across DENSO. These factors successfully offset the impact of escalating prices for raw materials during the year under review.

   
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Remote security ECU





















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Manufacturing training seminar


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Kota Plant


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DENSO SISTEMAS TERMICOS ESPANA S.A.


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DENSO OTOMOTIV PARCALARI SANAYI ANONIM SIRKET

 

Operating Overview

In our push to realize DENSO VISION 2015, the DENSO Group took actions during the year guided by a policy with two key goals—contribute to the creation of an advanced automotive society, and evolve into a truly global corporation. For the first goal, we worked to strengthen quality assurance systems to ensure customer trust and satisfaction. To this end, we went back to basics, inspecting and reviewing every aspect of DENSO operations, from development and design through to volume production and shipments, to establish a rock-solid base for quality.

In product development, we created a host of new technologies and products, including several world firsts, across the areas of the environment, safety, comfort and convenience. These innovations were all incorporated in the Lexus LS460 unveiled in September 2006.

With respect to the environment, DENSO developed the world’s first electric variable cam timing control system. Linked to the running of the motor, this system helps to reduce both fuel consumption and the emission of hazardous substances in exhaust gases. In the area of safety, we developed four different products, among them a stereo image-processing electronic control unit (ECU) and driving assistance ECU, both of which were incorporated into a new pre-crash safety (PCS) system. In terms of innovations that enhance comfort, DENSO developed a new air-conditioning system with the world’s first matrix infrared sensor, which detects surface temperature distribution at the rear of the vehicle cabin. This allows the new air-conditioning system to provide more ideally conditioned air for individual vehicle occupants. In the area of convenience, we developed another world first, this time a remote security system equipped with a remote immobilizer function. In addition to product development in these four key areas, DENSO also launched a new power supply management ECU in response to the growing number of vehicle information displays that now require electrical power. The Lexus LS460 has also been equipped with this ECU.

On a different note, the Ejector Cycle®, another world first developed by the DENSO Group in 2003, was awarded the U.S. Environmental Protection Agency’s 2006 Climate Protection Award. The award recognized the contribution made to combating global climate change by its innovative heat exchange cycle, which enables revolutionary improvements in energy efficiency. This is achieved thanks to the use of a compact refrigerant injector already used in refrigeration units found in refrigerated trucks, as well as in home-use hot-water supply systems.

As growth in China, India, and other newly emerging markets continues, we took steps to enhance DENSO’s capacity to develop products tailored to local needs with the decision to establish a new technical center in Thailand. A similar center has already been set up in China.

To evolve into a truly global corporation, we worked to build a powerful manufacturing framework and raise awareness of workplace safety with the promotion and entrenchment of the DENSO way of manufacturing worldwide. Specifically, this entailed manufacturing training seminars at the Daian Plant in Japan for Group employees from overseas as a means of ensuring that our unique approach to manufacturing is properly conveyed to all parts of the Group. We also worked to bring a sense of shared values to the Group on a global scale by conducting activities to enhance understanding and awareness of the “DENSO Spirit,” aiming to take full advantage of the knowledge and teamwork of Group employees. This step was coupled with measures to boost motivation and the level of collaboration through a more structured approach to workforce training.

With respect to DENSO global manufacturing framework, operations came onstream at the integrated circuit (IC) wafer facilities that we recently added to the Kota Plant in Japan. These new facilities will help DENSO meet growing demand for ECUs due to an increase in the number of air bag and other safety systems and energy-saving systems such as electric power steering fitted to vehicles.

Amid growing awareness of environmental issues, we have also decided to boost production capacity at DENSO Manufacturing Hungary Ltd. to meet increased demand for diesel common rail systems in Europe. In Japan, we started producing essential components for injectors, one of the key products for diesel common rail systems, at DENSO Manufacturing Kitakyushu Co., Ltd. This is in support of full-scale operations already under way at the Zenmyo Plant in Japan and Siam DENSO Manufacturing Co., Ltd. in Thailand to strengthen the DENSO supply system for diesel common rail systems anchored by three bases worldwide.

In Europe, where DENSO is working to expand the car air conditioner business, we complemented the launch of operations at DENSO SISTEMAS TERMICOS ESPANA S.A. with the start of construction on new facilities at DENSO OTOMOTIV PARCALARI SANAYI ANONIM SIRKET in Turkey.

In rapidly growing China, where local production by Japanese automakers has increased sharply, full-scale operations are now under way at 20 production companies established in the north and south of the country. This development has given DENSO a wide-ranging manufacturing framework for supplying products to these automakers.

   
   

Capital Expenditures and Investment in R&D

Capital expenditures rose 8.2% during fiscal 2007 to ¥312.5 billion. We are planning to increase capital expenditures to ¥353 billion in fiscal 2008 to respond to automakers’ aggressive plans to increase output and to support their global business operations. In particular, we intend to increase output of heat exchangers, diesel common rail systems, and automotive electronics.

Investment in R&D totaled ¥279.9 billion, or roughly 8.0% of consolidated net sales. To pursue broad technology development activities in the four areas of the environment, safety, comfort, and convenience, we are budgeting the same ratio to net sales of 8.0%, or ¥305 billion, for investment in fiscal 2008. Going forward, we plan to maintain investment at 8.0% of net sales. This is a level that we believe will ensure DENSO can continue to deliver sustained growth as an automotive components supplier capable of consistently proposing new value to automakers.

   
   

Outlook for Fiscal 2008

Although Japanese automakers are likely to continue to raise output, we anticipate a major drop-off in growth in sales to automakers in the U.S. and Europe. Accordingly, we are forecasting consolidated net sales of ¥3,800 billion, an increase of 5.3% year on year, for fiscal 2008, ending March 31, 2008. We are projecting slightly higher earnings, with operating income up 1.6% to ¥308 billion, and net income up 0.9% to ¥207 billion. We are only forecasting a marginal increase in operating income as we expect prices for raw materials to remain high and an increase in depreciation accompanying amendments to Japan’s tax system.

   
   

Initiatives for Sustainable Growth

The DENSO Group is working toward the completion of a long-term plan for 2010, first formulated in fiscal 2006. To realize this vision, the Executive Vice Presidents and Senior Managing Directors have taken the initiative in setting key promotion goals and identifying the medium- to long-term issues facing the Group. These efforts notwithstanding, DENSO today faces a far more severe business environment than initially anticipated, one characterized by intensifying cost competition, high prices for raw materials, and growth in the low-budget vehicle market, among other factors. In an environment of this kind, accelerating the pace of measures for realizing the long-term plan will be critical to preserving stable business growth.

For example, aggressive product development in the environmental area will be important for attaining future growth. As fuel efficiency and emissions standards grow more restrictive worldwide, automakers are responding by developing vehicles powered by diesel, hybrid systems, biofuel and a variety of other power sources. Here, DENSO will work hand in hand with automakers to develop technologies compatible with an array of power sources.

At the same time, we are pressing ahead with activities to reduce costs. Among other actions, we are encouraging the sharing of raw materials and components, as well as common standards in these areas; pushing to implement successful examples of costcutting across the Group; paring back fixed costs particularly at Group companies overseas; and improving capital expenditure efficiency not only at processing and assembly facilities, but also at supply and transportation facilities.

In sum, these are the ways in which we are powerfully promoting product development that will be the source of future growth and broad cost reductions. By leveraging the stronger earnings base forged in the process, we will ensure that DENSO meets the fiscal 2011 goals of consolidated net sales of at least ¥4 trillion and ROE of 10%.

   
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Returning Profits to Shareholders

At DENSO, we consider the proactive return of profits to shareholders to be one of the Company’s most important management concerns. Specific strategies in this regard are a combination of dividends and share buybacks.

We view dividends as a means of paying stable returns to shareholders over the long term. The fundamental policy with respect to dividends is to consistently increase the cash dividend per share over the long term, giving due consideration to a comprehensive range of factors that include consolidated business performance and the dividend payout ratio. For fiscal 2007, the dividend applicable to the year was ¥45 per share, or ¥7 more than the previous fiscal year.

We view share buybacks as a means of flexibly using retained earnings to return profits to shareholders, with the amount of funds used for share buybacks based on our business plans and cash flows. During the year under review we repurchased 7.5 million shares, with a total value of ¥33.0 billion.

For fiscal 2007, the consolidated payout ratio was 18.0%. While slightly lower than the previous year’s ratio of 18.6%, the total return ratio, which takes into account dividend payments and share buybacks, was 34%, or roughly 4 percentage points higher than a year earlier.

Improved business performance and ensuring steady earnings growth are both critical to raising shareholder value. For this reason, we effectively utilize retained earnings for investment in R&D to develop new products, and for capital expenditures designed to boost productivity and respond to growing output by DENSO customers.

As we look to the future, the continued support and understanding of our shareholders and other investors will be vital to DENSO’s success.

   
    Koichi Fukaya
Koichi Fukaya
President and CEO
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