[1st Half of fiscal 2003 Performance Briefing]1st Half of FY03 Consolidated Results and Fiscal 2003 Projections

Mr. Hajime Sawabe
President & CEO

[ Slide 1 ]

Thank you for taking the time to attend today's presentation. I will begin my remarks with a brief overview of our consolidated operating results for the interim period ended September 30, 2002.

[ Slide 2 ]

TDK posted consolidated net sales of ¥296.4 billion, up 9.5% year on year, and operating income of ¥10.0 billion, reversing an operating loss of ¥2.8 billion in the same period of the previous fiscal year. Furthermore, TDK posted income before income taxes of ¥7.6 billion, turning around a loss before income taxes of ¥3.1 billion. Net income soared 153.5% to ¥4.6 billion and net income per common share was ¥34.98. Stockholders' equity per common share was ¥4,257. Note that operating income included structural reform expenses of ¥5.1 billion.

During the interim period, we had to endure stronger calls for discounts from customers, amid a supply glut in the electronics industry as a whole, and an increasingly uncertain macroeconomic situation. Moreover, the PC and mobile phone markets, current mainstays of the electronics industry, moved closer to saturation point. Despite these and other challenging external factors, we made progress, as planned, with measures to reform our profit structure. These efforts, begun in the previous fiscal year, have enabled us to deliver the results we had originally forecast.

[ Slide 3 ]

I would now like to look at results by reporting segment.

Electronic Materials and Components Segment In the electronic materials and components segment, net sales rose 11.8% to ¥234.3 billion. Sales, however, fell slightly in the second quarter relative to the first quarter. Orders had been increasing from early 2002, but peaked in May and began to taper off in June. First-quarter sales were ¥118.2 billion and second-quarter sales were ¥116.1 billion.

Electronic Materials
Sales in the electronic materials sector increased 9.3% to ¥88.9 billion on the back of strong capacitor sales-by application, sales of capacitors for use in automobiles and PCs and peripherals rose 40% and 15%, respectively, and demand for use in audio and visual products, such as DVD players, was strong. In ferrite cores and magnets, overall sales of ferrite cores fell slightly year on year. Demand failed to recover for cores used in IT-related information and communications applications. This negated firm demand for magnets used in automobiles, and cores used in LCD backlights and power supplies.

Electronic Devices
In the electronic devices sector, sales rose 9.3% to ¥59.3 billion. In inductive devices, demand rose for devices used in PCs and peripherals and automobiles, but fell in the communications market. Sales of high-frequency components edged down slightly overall, despite a recovery in sales volumes from the second half of the previous fiscal year. Sales revenues were hurt by stronger calls for discounts from customers. In other products, demand was buoyant for products like DC-DC converters for video game systems and sensors for PCs and peripherals.

Recording Devices
Recording devices sales climbed 22.1% to ¥78.2 billion thanks to an approximate 30% year-on-year increase in sales of HDD heads, which account for 90% of sector sales. TDK's well-received 40 gigabyte/disk HDD heads, which have become a mainstay product, saw their market share rebound from 20% to 29%.

Semiconductors & Others
Semiconductors & others sales dropped 20.8% to ¥7.9 billion. This reflected a sharp drop in sales of semiconductors for WAN/LAN and set-top box modems due to the continuing low levels of investment in communications infrastructure equipment.

[ Slide 4 ]

By customer industry in the electronic materials and components segment, we saw a 20% year-on-year increase in sales of components for PCs and peripherals. Automotive component sales rose 24%, and audio and visual product component sales increased 5%, while sales in the communications industry dropped 18%.

[ Slide 5 ]

Recording Media & Systems Segment
In the recording media & systems segment, sales edged up 1.5% to ¥62.1 billion. Higher sales of tape-based data storage media for computers and software offset lower audiotape sales. Optical disc sales were largely the same year on year, with higher demand for CD-Rs and DVDs offsetting falling demand for MDs and lower CD-R sales prices.

[ Slide 6 ]

By region, sales in Europe declined 9% owing to a lackluster communications market, and sales in Japan decreased 1%. On the other hand, sales in Asia (excluding Japan) and others and the Americas climbed 24.8% and 11.6%, respectively, on strong demand in the electronic materials and components segment, particularly for HDD heads. Overall, overseas sales accounted for 71.6% of consolidated net sales, up from 68.5% in the same six-month period a year ago.

[ Slide 7 ]

Now I would like to look at TDK's consolidated earnings. We posted operating income of ¥10.0 billion, a ¥12.8 billion improvement over the operating loss of ¥2.8 billion in the fiscal 2002 interim period. This change can be explained by five factors. First is exchange rate fluctuations-the yen weakened slightly against the U.S. dollar from ¥122 to ¥123, which had the net effect of lifting operating income by ¥0.5 billion. Secondly, higher sales drove earnings up ¥11.7 billion. Thirdly, efforts to rationalize our operations yielded savings of ¥34.0 billion-including in respect of the cost of purchased materials, operating expenses, and labor costs. These positive factors were offset in part by sales price discounts averaging 9% that negatively affected earnings by ¥29.4 billion and a ¥4.0 billion increase from a year earlier in expenses to reform our profit structure. We incurred a total of ¥5.1 billion in these structural reform expenses during the interim period. This was made up of ¥1.0 billion in labor costs- ¥0.4 billion in Japan and ¥0.6 billion overseas-¥2.5 billion in facility-related expenses, inventory-related restructuring costs of ¥1.1 billion, and other costs of ¥0.5 billion. In the same period of the previous fiscal year, we incurred ¥1.1 billion in expenses to reform our profit structure.

[ Slide 8 ]

Let me now look at operating income by industry segment. Electronic materials and components posted first-half operating income of ¥10.7 billion, a ¥11.4 billion year-on-year improvement, thanks mainly to a strong performance by HDD heads. Recording media & systems posted an operating loss of ¥0.7 billion, which was lower than the fiscal 2002 interim operating loss in this segment of ¥2.1 billion, despite reaping the benefits of profit structure reforms carried out in the previous fiscal year. Dragging down earnings was a ¥1.0 billion expense related to the cessation of MD production in Europe as part of structural reforms in the second quarter.

[ Slide 9 ]

I will now explain how we have improved our cash flows. Free cash flows were a negative ¥14.6 billion in the fiscal 2002 interim period, but improved to ¥30.7 billion. Several factors contributed to this turnaround. Inventory turnover, which was 1.9 months at the end of March 2002, improved to 1.7 months in the past September, the same as our target for the end of March 2003. Having already achieved this target, we are now challenging ourselves to lower the inventory turnover further, to 1.5 months by the end of fiscal 2003. Inventory turnover was 2.6 months in the corresponding interim period of fiscal 2002. Our fixed asset turnover has improved, too. It has risen from 2.1 times at the end of March 2002 to 2.3 times at the end of September 2002. Our target is 2.5 times by the end of March 2003. Fixed asset turnover was 1.9 times in the corresponding interim period of fiscal 2002. Equally, trade receivables turnover improved from 3.1 months at the end of March 2002 to 2.8 months at the end of September 2002. Since we have already bettered our March 2003 target of 2.9 months, we have set a new target for March 2003 of 2.5 months.

[ Slide 10 ]

Now I will cover progress we have made with Selection and Concentration of resources. At our earnings presentation in May 2002, I said that we were going to use TVA and NPV to identify Critical Business Units; that we planned to withdraw from some products that account for a combined ¥6.2 billion in sales annually in the first half of fiscal 2003; and that before the end of 2002 we would decide on the course of action we will take in respect of other products accounting for a combined ¥61.0 billion in sales annually.

We ceased production in the first half of fiscal 2003 of products accounting for combined sales of ¥6.2 billion as planned. We intend to withdraw from other products in fiscal 2003 worth a combined ¥5.0 billion of the ¥61.0 billion in other product sales I have just mentioned. We have also improved the profitability of products representing ¥15.0 billion in sales as planned. And by the end of March 2003, we will have either improved the profitability of or withdrawn from products accounting for ¥41.0 billion in sales. We intend to make quick decisions in respect of these products based on progress made in improving profitability and financial results.

[ Slide 11 ]

Turning to our growth strategy, I said in May that we were going to focus resources on three strategically important fields-IT Home Electronics Appliances; High-Speed, Large-Capacity Networks; and Car Electronics. In these three fields, we have narrowed down our R&D activities to select themes that leverage our ultra-fine process technologies, such as nanotechnologies gained over many years in HDD head operations, as well materials technologies-our forte. Of course, these themes will lead to solutions demanded by customers. We have also cancelled about 10% of our existing R&D projects for various reasons, such as the goal having become obsolete or finding the R&D project lacking in uniqueness.

We will integrate manufacturing, sales and development resources based on the themes we select after setting specific targets and deciding on strategy and timing for each.But due to the many uncertainties, including demand, in the second half of the year, I will leave it until we announce our plan for next fiscal year to give you specific numbers.

TDK declared an interim dividend of ¥25 per share. As I said when we released our full-year results for fiscal 2002, we feel that diverting funds to current restructuring efforts is in the best interests of shareholders at the moment. Consequently, we will require some time before we restore the dividend to ¥30 or increase it.

[ Slide 12 ]

The consolidated projections for fiscal 2003 are largely unchanged from those announced at our first-quarter earnings presentation. However, we have revised upward our net sales forecast by ¥50.0 billion. Given the effect of price discounts and other factors, we have not changed our projections for operating income and net income.

Orders for electronic materials and electronic devices picked up steadily from early 2002, but peaked in May and started to taper off in June. Given falling stock prices, particularly in the U.S., and growing macroeconomic uncertainty, we feel that a recovery in demand is extremely unlikely.

We expect second-half sales of HDD heads, the mainstay product in the recording devices sector, to remain as strong as in the first half of the year. This is based on the number of inquiries we have had from customers and the strong support the product has enjoyed. However, there are certain risks relating to the complexities of the technology and a possible fall in demand due to an economic downturn. Overall demand is also falling in line with the increasingly high density of HDD heads.

Although I think that difficult economic conditions will continue in the second half of the year, we will create a structure in the current fiscal year that is capable of delivering profits without an increase in sales so as to generate operating income of ¥20.0 billion. And we will further bolster our profit structure for fiscal 2004.

We also aim to speed up progress with R&D themes, with fiscal 2004 positioned as the start of a period of renewed growth at TDK.

I ask for your continued support and encouragement.
Thank you.