[ 1st Half of fiscal 2002 Performance Briefing ]Strategies to Respond to Changing Markets

Hajime Sawabe
President & CEO

[ Slide 1 - Opening ]

Thank you for taking the time to attend today's meeting. I will begin my remarks with a brief overview of our consolidated operating results for the interim period ended September 30, 2001. I will leave it up to Seiji Enami, General Manager of the Finance and Accounting Department, to talk in more detail about TDK's interim financial results later.

[ Slide 2 - Interim Consolidated Results for Fiscal 2002 ]

TDK posted consolidated net sales of \272.6 billion, down 22.6% year on year, and an operating loss of \2.8 billion, compared with an operating profit of \36.4 billion in the same period of the previous fiscal year. Furthermore, TDK posted a loss before income taxes of \3.1 billion, compared with income before income taxes of \47.8 billion in the same period of the previous fiscal year. Net income dropped 94% year on year to \1.8 billion.

Both the electronic materials and electronic devices sectors saw sales fall in all markets with the exception of products used in automotive applications and video game systems. Most notable were communications-related areas, where sales dropped 47%. Sales fell 30% in the recording devices sector because of the sluggish PC and server markets as well as the delay in launching 40GB/P products. In the recording media & systems segment, sales increased marginally, with optical media and software making up for declining demand for audiotapes and videotapes.

The operating loss was TDK's first since it began reporting consolidated results in November 1975. The average U.S. dollar-yen exchange rate during the interim period was \122, compared with \107 in the same period of the previous fiscal year. TDK estimates that this had the net effect of lifting net sales by \19.1 billion and reducing the operating loss by \4.9 billion. The \79.4 billion drop in net sales and accompanying deterioration in the capacity utilization rate, however, negatively affected earnings by \40.9 billion. Also, sales price reductions of approximately 7% had a negative impact of \20.1 billion on earnings. These negative factors outweighed rationalization, cost savings and other actions.

At today's meeting of TDK's board of directors, an interim dividend of \30 per share of common stock was approved.

[ Slide 3 - Fiscal 2002 Full-Year Projections ]

Now I would like to turn to our projections for fiscal 2002. Assuming a U.S. dollar-yen exchange rate of \120, we are projecting net sales for the full year of \560.0 billion, down 19% year on year. We also forecast an operating loss of \1.3 billion, compared with operating income of \56.3 billion in fiscal 2001. Furthermore, we project a loss before income taxes of \2.6 billion, compared with income before income taxes of \64.5 billion in fiscal 2001, and for net income to break even, representing a \44.0 billion decline from fiscal 2001. We expect results in electronic materials and electronic devices to be largely flat, mirroring their first half performances. In recording devices, we don't anticipate any growth in the PC or HDD market, but we do expect to capture a higher market share with increasing sales of 40GB/P products. Recording media sales should rise due to seasonal factors.

The deterioration in our performance stemmed from our slowness to recognize and act upon changes in our markets. We are aiming, however, to implement structural reforms, which I will talk about next, to our earnings framework as soon as possible so as to increase our corporate value.

We have already moved to lower our break-even point and improve asset efficiency. In the interim period, we began a program to trim our consolidated workforce. In addition to these measures, we are considering further structural reforms. Because the exact details of these reforms haven't been finalized, their associated costs cannot be estimated. As such, costs of further restructuring have not been factored into our projections for the current fiscal year. We will disclose details in a timely manner, including expected costs, as soon as decisions are made.

[ Slide 4 - Lowering the Break-Even Point(1) ]

Next I would like to talk about the reforms to our earnings structure that are factored into our profit forecasts mentioned earlier. The worsening economic conditions have taken on a different form from a usual recessionary climate. They are more severe and are dragging on. Conditions at present are characterized by a sluggish U.S. economy, which strongly influences the electronics industry, post-IT bubble corrections, an influx of products from China and the stronger emphasis on China as an economic force. Consequently, our first priority is to generate profits in a market without growth in sales.

To lower our break-even point we are targeting a \30.0 billion reduction in fixed expenses in the fiscal year ending March 31, 2003. We aim to reduce labor costs by \16.0 billion by cutting 8,860 jobs. We plan to reduce our workforce in Japan by 2,360. Overseas, we plan to eliminate 6,500 jobs; a total of 1,500 jobs have already been eliminated. Of the total planned layoffs, we expect to cut 6,380 jobs during the current fiscal year, with the remaining 2,480 eliminated in fiscal 2003. The planned layoffs include part-timers, employees at production subsidiaries and full-time employees. Furthermore, we aim to achieve a 10%, or \14.0 billion, reduction in fixed expenses of approximately \140.0 billion, excluding labor costs.

[ Slide 5 - Lowering the Break-Even Point(2) ]

Lowering variable expenses is also part of our strategy. We plan to reduce the \200 billion in annual purchasing costs by 10%, or \20 billion, in the year ending March 31, 2003. Another immediate concern is raising the production yield. This particularly relates to HDD heads.

[ Slide 6 - Improving Asset Efficiency ]

Regarding asset efficiency, we plan to restructure production bases producing mature products and production bases where market changes have created a market imbalance with respect to the products they are producing. We plan to restructure these production bases before the end of March 2003. We will integrate 18 production subsidiaries in Japan and 31 overseas. We will also trim inventories from \116.4 billion as of March 31, 2001 to under \100.0 billion as of March 31 2002. Our target is to hold inventories to the equivalent of 1.5 months of net sales.

[ Slide 7 - Growth Strategy(1) ]

Now I would like to talk about our growth strategy. The deterioration in our operating environment is the consequence of the factors you see in this slide. Consumers' demands are shifting from simply wanting to buy a product such as a TV or video to what they want to do with that product and what services they want to receive by buying that product. This trend is gaining momentum.

As you know, a growing number of services are being offered through the Internet, and data and communications volumes are expanding rapidly as a result. As various broadband communications systems find their way into every home, communications capacity is increasing rapidly. We are on the verge of an era in which various communications formats will connect seamlessly.

Although it would seem that growth in the mobile phone market has reached a plateau, I think that we will see the emergence of wireless communications other than mobile phones, offering consumers added convenience.

One example is wireless LAN "hot spot" services that offer high-speed Internet access across a wide area.

As use of these wireless services rapidly advances, I think we will see greater environmental concerns raised about electromagnetic waves. This will present us with another opportunity to play a vital role as a Total EMC Solution Provider.

[ Slide 8 - Growth Strategy(2) ]

Our medium-term technology strategy is to develop a solutions-driven components business. TDK will also focus on electronic components in the medium term. One approach will be to beef up marketing, looking at the market in the same way as our set manufacturer customers. We will use our knowledge of circuitry from the initial stages of IC development so as to have TDK's components, including multilayer chip capacitors and inductors, chosen as the preferred products. We want to increase the use of these products in reference circuits. Our strategy is to sell functionality rather than individual products and the modules made from them.

Next, I would like to talk about how TDK will intensify its focus on core technologies. Raising the storage density of multilayer chip capacitor units and increasing the recording density of heads are examples of how we will clarify the objectives of product development. To develop such products and stay ahead of the pack, we will draw on nano-scale micro process technology and other advanced process technologies in addition to sophisticated circuit design and materials technologies.

To build up the core technologies needed, we intend to allocate more resources than in the past.

[ Slide 9 - Growth Strategy(3) ]

Let me move on to the restructuring of China operations. Up until now, TDK has used China predominantly as a production base. Business has gone relatively smoothly there. We have 7 production and 4 sales bases that generated sales of approximately \200 billion in the fiscal year ended March 31, 2001. Of those sales, \40 billion were generated from sales in China and the rest from exports. TDK has invested a total of approximately \100 billion in Chinese operations.

However, the levels of quality and technology in China have increased exponentially and the market has also expanded considerably. With this in mind, it is time to go beyond our initial view of China as a production base to a new stage in which we increase our involvement. We must now view China as a giant market, as a competitor and as a source of skilled employees. That's why we have established the China Business Development Group to spearhead the collective development of business.

People have already been posted to China and are working on formulating specific goals. I should be able to report in more detail in the near future.

That concludes my presentation. Thank you for your attention.