[ Financial Results of fiscal 2002 Performance Briefing ]Fiscal 2002 Consolidated Results and Fiscal 2003 Projections

Hajime Sawabe
President & CEO

[ Slide 1 ]

Thank you for taking the time to attend today's presentation of TDK's consolidated results for the fiscal year ended March 31, 2002. Your continued support for TDK is greatly appreciated.

Let me now look at our results. After my presentation, the general manager of the Finance & Accounting Department will cover our results for you in more detail.

[ Slide 2 ]

Firstly, I would like to take a brief look at our consolidated results for fiscal 2002, as shown on this slide.

Net sales fell 16.7% to ¥575.0 billion. We posted an operating loss of ¥42.1 billion, compared with operating income of ¥56.3 billion a year earlier. We also posted a loss before income taxes of ¥42.1 billion versus income before income taxes of ¥64.5 billion in fiscal 2001. And we recorded a net loss of ¥24.8 billion, compared with net income of ¥44.0 billion a year ago.

The operating loss included ¥36.1 billion in structural reform expenses.

At our third-quarter earnings announcement on February 5, we estimated that structural reform expenses would be in the vicinity of ¥25.6 billion. I will go into this in more detail later, but for now I just want to explain why these expenses increased ¥10.5 billion over our earlier estimate. The parent company had expected to cut 400 jobs, but in actuality 853 jobs were cut, accounting for most of the increase. At that time, we had expected net sales of ¥565.0 billion and an operating loss of ¥36.0 billion. Net sales and operating loss actually improved by ¥10.0 billion and ¥4.4 billion, respectively, over our third-quarter announcement.

That said, even with the support of our stakeholders, our results were disappointing.

The deterioration in our operating results in fiscal 2002 is due in no small way to the massive drop-off in demand. But it is also the result of TDK being slow to recognize and react to market shifts. I am fully aware that fiscal 2003 marks a critical juncture for TDK. It will determine whether we will remain a company of value. Based on this recognition, I feel that we must first lower our break-even point to return to profitability as soon as possible. We must also grow by developing innovative products quicker, not letting our competitors get the better of us. And we must wisely spend the money that is entrusted to us by shareholders. I am determined to carry out these imperatives in tandem and with the utmost speed.

[ Slide 3 ]

Sales in the electronic materials and components segment decreased 22% to ¥433.0 billion. By market, sales fell 51% in the communications sector, 11% in AV products and 15% in office equipment. All markets recorded year-on-year declines, with the exception of automobiles and amusement, where sales increased.

The relatively small fall in the office equipment sector can be put down to a rebound in sales of HDD heads. With 40 gigabyte/disk HDD heads accounting for an increasing share of the market, we also recovered lost market share. Our market share in HDD heads increased from 20% in the first half to 27% in the fourth quarter. Sales of recording devices, after bottoming out in the second quarter, grew at a pace of about 20% quarter on quarter thereafter. In the fourth quarter, sales were up 18% year on year.

Sales to the communications infrastructure industry and industrial machinery manufacturers show virtually no signs of recovery. But sales in the AV product component, automotive component, PC component and other parts sectors hit a low point in the second quarter and office equipment, mobile phones and home electronics and appliances sectors also bottomed out in the fourth quarter.

In the recording media & systems segment, sales increased 3% year on year as higher sales of optical media, data tapes and software overcame lower demand for audiotapes and videotapes. The percentage of audiotape and videotape sales fell to 43% of the segment's total. Our plan was to increase sales with data tapes, high-density optical discs and other products. But in fiscal 2002 we fell into the red in this segment due to a sharp drop in CD-R sales prices and structural reforms. In the current fiscal year, we aim to move back into the black in this segment by pushing ahead with the restructuring of bases, including liquidating a subsidiary in Germany and halting production at Tamagawa TC, and rationalizing operations to lift the production yield of data tapes.

By region, sales in Japan fell 26%, while sales in Europe fell 21% due to the sluggish communications market. Overseas sales declined by 12% in total, relatively less than the drop in domestic sales. Consequently, overseas sales increased from 67.8% to 71.3% of total sales.

[ Slide 4 ]

Our operating loss of ¥42.1 billion was our first such loss since we started reporting consolidated results in 1975. Effectively, our results deteriorated ¥94.8 billion, as we posted operating income of ¥56.3 billion in the previous fiscal year. I'd like to give you a breakdown of this change. Exchange fluctuations had the beneficial effect of lifting net sales by ¥40.8 billion and operating income by ¥9.8 billion. The U.S. dollar strengthened from ¥111 to ¥125 and the euro appreciated from ¥100 to ¥110. However, three items in particular hurt our results. One was lower sales, including a lower capacity utilization rate, which had a ¥66.6 billion negative effect on our earnings. Next was sales price discounts of 8% on average, which had a ¥50.2 billion negative effect on earnings. Thirdly, we incurred ¥36.1 billion in expenses to reform our profit structure. These three items totaled ¥152.9 billion. Offsetting them to some degree was a ¥44.7 billion in cost savings and other benefits derived from rationalization measures, including reductions in the cost of purchased materials and production yield improvements. Nevertheless, our earnings effectively worsened by ¥98.4 billion from the previous fiscal year.

[ Slide 5 ]

Next I would like to give you a breakdown of expenses to reform our profit structure. When we announced our results for the third quarter, we estimated these expenses at around ¥25.6 billion-¥15.1 billion in additional early retirement expenses and ¥10.5 billion for equipment disposal and other items. Actual expenses to reform our profit structure, however, were ¥36.1 billion-¥20.6 billion in additional early retirement expenses and ¥15.5 billion for equipment disposal and other items.

At our third-quarter earnings announcement we estimated that a total of 7,280 jobs would be cut, 2,780 in Japan and 4,500 overseas. The actual number of job cuts was 7,768, 3,257 in Japan and 4,511 overseas.

For fiscal 2003, we estimate expenses of ¥8.5 billion to reform our profit structure. We will close 3 plants-2 in Japan and 1 overseas-as announced at the end of March. In addition, we are considering either closing or downsizing 3 more plants in Japan and 5 overseas.

[ Slide 6 ]

The reforms we carried out in fiscal 2002 are expected to have beneficial effects in the current fiscal year. We expect a ¥29.0 billion reduction in fixed expenses in fiscal 2003. We hope to see a ¥23.0 billion saving in labor costs, compared with those before cost cutting, and a ¥14.5 billion reduction in other operating expenses. These gains will be offset by the ¥8.5 billion in additional restructuring costs.

We are also targeting a ¥20.0 billion reduction in the cost of purchased materials.

Dividends
TDK plans to pay a year-end dividend of ¥20 per share. Combined with the interim dividend, the dividend per share applicable to the year is ¥50. This is a ¥10 per share reduction on the previous year's dividend. We decided that it was in the best interests of shareholders to reduce the dividend and divert the funds to restructuring so as to improve earnings and raise the dividend yield as soon as possible.

[ Slide 7 ]

Now I would like to present our projections for fiscal 2003. These are predicated on a US dollar exchange rate of ¥120.

We are projecting consolidated net sales of ¥580.0 billion, slightly up by 0.9% on fiscal 2002. We are also projecting operating income of ¥20.0 billion, income before income taxes of ¥17.0 billion and net income of ¥13.0 billion. Orders for electronic components are trending upward across the board, but I think the rebound will be slight, as the recovery in the U.S. economy, which is deeply intertwined with the electronics industry, is intrinsically weak. The period of inventory corrections is coming to an end, but there don't appear to be any products that will stimulate new demand and sustain a full-fledged recovery in demand for electronic components and semiconductors. As a result, the outlook for the second quarter onward is still difficult to predict.

The electronic components industry still faces many difficulties created by the speed and intensity of competition in the network society, the growing presence of China, the presence of EMS, the implications on the industry of ICs and a supply glut. As such, we don't expect to see any significant growth in sales of electronic materials and electronic devices in fiscal 2003.

Sales in the recording devices sector are expected to remain at about the same level as in fiscal 2002. We expect to see a slight increase in demand for PCs and HDDs. But this positive factor is likely to be outweighed by a decrease in the number of heads used per HDD. On the other hand, TDK expects to gain market share.

In the recording media & systems segment, we are forecasting sales largely on a par with fiscal 2002. We have based this forecast on the expectation of lower demand for audiotapes and videotapes, and higher demand for optical discs and increased sales of data tapes that were verified in fiscal 2002.

[ Slide 8 ]

We are forecasting a ¥62.1 billion improvement in operating income from an operating loss of ¥42.1 billion in fiscal 2002 to operating income of ¥20.0 billion. Let me tell you where we expect to make gains. We are estimating a ¥27.6 billion decrease in expenses to reform our profit structure, from ¥36.1 billion to ¥8.5 billion; a ¥37.5 billion reduction in fixed expenses; and a ¥54.6 billion beneficial effect from rationalization measures and efforts to reduce the cost of purchased materials. These gains will be partly negated by exchange fluctuations-we are predicting the yen to appreciate to ¥120 from ¥125 against the dollar, resulting in a ¥5.0 billion negative effect on earnings-and sales price discounts to lower earnings by ¥52.6 billion.

[ Slide 9 ]

We intend to create a structure that can generate earnings without sales growth and shift resources from unprofitable, low-growth fields to more-profitable, high-growth fields.

First we are attempting to lower our break-even point to move into the black. We will also improve cash flows. In fiscal 2003, we aim to lower inventory turnover from 1.9 months in fiscal 2002 to 1.7 months. We also aim to increase fixed assets turnover from 2.1 times to 2.5 times in fiscal 2003. Moreover, we hope to reduce trade receivables turnover from 3.1 months to 2.9 months.

[ Slide 10 ]

We intend to define units that have produced negative TVA for the past two years as critical business units, and conduct thorough, multidimensional reviews of their business plans based on Net Present Value (NPV). We will withdraw from critical business units that are not expected to return to positive NPV within three years. Where we expect a turnaround within three years to positive NPV, we will conduct semi-annual reviews.

We are in the process of identifying critical business units based on results in fiscal 2002 and business plans for the current fiscal year. We have started to take specific actions to withdraw from product segments in the first half of the current fiscal year that account for ¥6.2 billion in sales.

In addition, other products worth about ¥60.0 billion in sales annually are also being looked at, but in no way does this necessarily mean that we will exit all these product segments. I want to determine clearly whether we should continue or withdraw from these businesses in the second and third quarters.

[ Slide 11 ]

We are determined to grow as an e-material solution provider by continuing to produce products that emit the "fragrance of TDK." In the medium term, we expect IT home electronic appliances, high-speed, large-capacity networks, and car electronics to grow in market size, becoming important markets alongside mobile phones and PCs, which have driven demand to now.

Let's take a closer look at these markets that are growing in importance. First is IT home electronic appliances. It is predicted that we will see increasing convergence of PCs and AV equipment that are compatible with broadband internet, including moving pictures, as MPUs get faster. I refer here to digital broadcasting-compatible TVs, HDD recorders and DVD recorders.

The second future growth market is high-speed, large-capacity networks. We predict expanding markets for equipment compatible with new services, products like IP phones that use IPv6 as well as set-top boxes, and ADSL and CATV modems that connect with broadband internet. In addition, we are seeing the beginnings of the widespread use of wireless LANs. In particular, wireless LANs using the 5-GHz band that enable the transfer of video and 2.4GHz wireless LANs that are already relatively popular are markets to watch.

The third growth market is car electronics. Demand for components used in car electronics devices is increasing as more electronics find their way into cars to help improve safety, such as ABS, and for engine control to lessen environmental impact. In addition, magnets for motors, as well as metal magnets and DC-DC converters for motors in electric cars, are enjoying ever-increasing demand. ITS is another important area. In addition to high-frequency components used in ETC and other wireless applications, high hopes are held for new product fields such as electromagnetic wave-absorbers that prevent ETC gates from malfunctioning.

[ Slide 12 ]

This slide shows a list of TDK's strategic products for the growth fields I have just mentioned.

In IT home electronic appliances, we have products such as HDD recorder heads, DVR Blue high-capacity optical discs and noise-reduction components for high-frequency clocks.

For high-speed, large-capacity networks, we can offer modular components and substrates for 5-GHz band wireless devices; multilayer high-frequency components; components compatible with high-speed interfaces, including USB2.0; highly efficient DC-DC converters for servers and communication equipment; large-capacity data storage tapes; and other products.

In the car electronics field, we have electromagnetic absorbers for the 5.8GHz band that are suitable for ITS applications; CANBUS-compatible noise-reduction components; power modules for 42V/14V dual power supplies; DC/DC converters for electric and hybrid cars; and high-performance magnets for motors.

[ Slide 13 ]

Let me now turn to our efforts to promote greater management efficiency. We have five main themes in this regard: Education of leaders and key personnel, clarifying performance evaluation and remuneration systems, strengthening IP functions, raising the productivity of the staffs and introducing a corporate officer system. Let me just explain more about the last of these themes.

In June, TDK will introduce a corporate officer system, subject to approval at a Board meeting after the June annual general meeting. Our aim in doing so is to improve execution of day-to-day operations and to strengthen the soundness of the company. This system will clarify responsibility and authority for day-to-day operations. At the same time, we will establish a Remuneration Committee. I expect both of these moves to bolster corporate governance at TDK.

As I said before, TDK stands at an extremely important cross road. The current fiscal year will determine our standing in the industry in the future. With that in mind, we are determined to improve our earnings structure and reenergize TDK.

On that note, I would like to conclude this presentation. Thank you.