[ Financial Results for Fiscal 2003 Performance Briefing ]Fiscal 2003 Consolidated Results and Fiscal 2004 Projections

Mr. Hajime Sawabe
President & CEO

Thank you for taking time to attend today's earnings conference. Your continued support for TDK is greatly appreciated.

Today, I would like to provide an overview of TDK's consolidated results for the fiscal 2003, ended March 31, 2003.

Consolidated net sales rose 6.7% to ¥608.9 billion. Operating income was ¥22.1 billion, compared with an operating loss of ¥43.7 billion in the previous year. Income before income taxes was ¥18.1 billion, as we reversed a fiscal 2002 loss of ¥43.7 billion. And our bottom line moved back into the black as well. We posted net income of ¥12.0 billion, turning around a fiscal 2002 net loss of ¥25.8 billion.

Net income per common share was ¥90.56 and stockholders' equity per common share was ¥4,176.

Operating income included expenses accompanying structural reforms of ¥7.2 billion.

By segment, the electronic materials and components segment posted net sales of ¥472.5 billion, up 9.2% year on year. Sales were strong in this segment at the start of the fiscal year, but fell slightly after peaking in June. Behind the increase in sales was a strong performance in HDD heads, where TDK won back market share. The increase also reflects key trends such as the digitalization of audio and visual products and the greater use of electronics in automobiles.

Within this segment, the electronic materials sector saw sales rise 4% to ¥168.9 billion. In capacitors, prices were pressured by calls for discounts from customers, but we worked to generate sales and earnings by improving our product mix to capitalize on trends such as the digitalization of audio and visual products and increasing use of electronics in automobiles mentioned earlier. Magnets turned in a solid performance on brisk demand for use in automobiles, micro motors and other applications. However, sales of ferrite cores slipped due to discounting which couldn't be made up for with sales growth.

In the electronic devices sector, sales increased 6% to ¥112.7 billion. Selling well were inductive devices for digital home appliances, such as digital TVs, DVD recorders, digital still cameras and other products, as well as for automotive applications. Sensors and actuators for office equipment and DC-DC converters for video game systems also did well. In high-frequency components, sales volume recovered following a period of parts inventory reductions by customers, but sales in monetary terms did not rise to the same extent because of demands for price reductions.

Recording devices sales climbed 20% to ¥176.0 billion. HDD heads, which account for 90% of sales in this sector, posted 24% sales growth. TDK's market share rebounded to 30% on the back of brisk demand for 40, 60/80 and 80 gigabyte/disk HDD heads. In the fourth quarter, TDK grabbed a market share of 33%. Mr. Nakano, who is responsible for this area, will explain more about this performance later.

Sales in the semiconductors & others sector dropped 18% to ¥14.9 billion, with sales of ICs for LANs/WANs slumping due to the continuing low levels of investment in communications infrastructure equipment.

By market in the electronic materials and components segment, sales of components for PCs and peripherals rose 15% to account for 51% of segment sales, reflecting the strong performance from HDD heads. Automotive component sales accounted for 10% of segment sales on a 21% increase spurred by the success of new materials for magnets for motors and demand for power supplies for hybrid electric vehicles (HEVs). Sales of parts rose 27% and accounted for 7% of segment sales. Magnets for micro motors and varistors led the way. Audio and visual product component sales decreased 7% and accounted for 14% of segment sales. While sales of digital audio and visual products were strong, sales of analog products, which account for over 80% of sales here, fell as did sales prices. Sales to the communications industry declined 11% and accounted for 9% of segment sales, reflecting the effect of discounting and continuing low levels of investment in communications equipment.

The recording media & systems segment saw sales edge down slightly by 0.9% to ¥136.4 billion. Audiotape sales fell 22%, but this was made up for by sales of tape-based data storage media for computers and software. And the 2002 FIFA World Cup? spurred videotape sales higher. In optical media, demand for CD-Rs and DVDs was buoyant, but this strength was negated by falling MD demand and lower sales prices of CD-Rs, resulting in largely flat sales overall.

Looking at regional results, sales in Asia (excluding Japan) and Others jumped 19% to account for 43% of net sales on the back of a strong performance in China in particular. The Americas posted a 3% decline in sales and accounted for 17% of net sales. Sales were higher for automotive applications, but demand in the communications field was soft. In Europe, sales declined 1% and accounted for 13% of net sales. Here, too, demand in the communications field was sluggish. Overall, overseas sales rose to account for 72.8% of net sales, compared with 71% in fiscal 2002.

Turning to operating income, we turned around a loss of ¥43.7 billion in fiscal 2002 to post operating income of ¥22.1 billion, as I said earlier. This was a ¥65.8 billion improvement and exceeded our initial target of ¥20 billion. With this result, TDK has taken the first steps toward reforming its profit structure. Specifically, higher sales and changes in our product mix boosted earnings by ¥53.3 billion. Rationalization measures (including purchased materials savings, improved production yields and expense reductions) contributed ¥51.0 billion to operating income. And a decrease in structural reform expenses, from ¥36.1 billion in fiscal 2002 to ¥7.2 billion in fiscal 2003 gave a ¥28.9 billion boost to operating income. On the other hand, sales price discounts of 9.6% had a negative effect of ¥64.4 billion on earnings, while exchange rate movements had a ¥3.0 billion negative effect as the yen changed from ¥125 to ¥122 against the U.S. dollar.

In terms of earnings by segment, the electronic materials and components segment recorded a ¥56.9 billion improvement in operating income to ¥20.5 billion. The main factor was a strong performance from HDD heads, which outweighed overall discounts of 9%. The recording media & systems segment saw operating income improve ¥8.9 billion to ¥1.5 billion despite discounts of 11% as headway was made on profit structure reforms. This marked the first profit in three years in this segment. TDK will continue to work to boost earnings in this segment going forward.

TDK also made progress in improving cash flows. Free cash flows in fiscal 2003 were ¥57.7 billion, ¥74.1 billion more than the ¥16.4 billion negative free cash flows recorded in the previous fiscal year. Along with the recovery in earnings, TDK achieved an improvement in the return on assets.

Let's now look at parent company results. Net sales were almost unchanged, increasing merely 0.9% to ¥320.7 billion. Operating income was ¥3.2 billion, compared with an operating loss of ¥8.5 billion in fiscal 2002. Current income rose 19.8% to ¥9.1 billion. Income before income taxes was ¥1.6 billion, a turnaround from a loss of ¥8.8 billion in the previous fiscal year. Net income was ¥133 million, compared with a net loss of ¥3.8 billion in fiscal 2002.

The reason for the improvement of only ¥3.9 billion in net income when operating income improved ¥11.7 billion was a ¥9.9 billion decrease in dividend payments from subsidiaries.

The dividend per common share applicable to the year will be ¥50. This was made up of a year-end dividend of ¥25 per share and an interim dividend of ¥25 per share paid in December 2002.

Turning to our forecasts for fiscal 2004, we are projecting consolidated net sales of ¥635.0 billion, which would represent an increase of 4.3%. Operating income is forecast at ¥41.0 billion, an 86% rise. Income before income taxes is projected at ¥42.0 billion, up 132%. And we are forecasting consolidated net income of ¥30.0 billion, which would be an increase of 2.5 times over the fiscal 2003 result.

The world economy, which has suffered from the U.S. slowdown, is expected to remain in the doldrums. The electronics industry, which is closely linked to the U.S. in many respects, such as markets, information and product development, will also likely mark time. However, there are some growth sectors. For example, DVD recorders are recording three-fold growth, digital TVs are recording 50% growth and digital still cameras are recording 30% growth. And the growing use of electronics in automobiles is underpinning growth of just under 10% in the electronic components market.

That said, we can't count on growth that will compensate for lower rates of expansion in the PC and mobile phone markets, which heretofore have driven growth in demand for electronic components. It will also be hard to reverse the downward trend in prices, with China increasing production and time needed to correct the supply-demand imbalance.

We must therefore steel ourselves to operate in a difficult business climate. We are aiming to create a TDK that can generate earnings without counting on top-line growth. This is an ongoing drive. We are also striving to grow sales even without market growth. This is a key theme for fiscal 2004. And we will do so by offering innovative products in a timely fashion that match customer needs.

We will make TDK stronger in fields where we are already strong, as we assert our expertise as an e-material solution provider. For example, we are targeting an increase of at least 10% in sales of capacitors by channeling our energies into high-capacitance products, where TDK has been traditionally strong. And we will aggressively promote alternatives to tantalum capacitors. In inductive devices, we will launch new products during the summer and fall. And I can say that we are more cost competitive in this area. Moreover, we will expand sales, particularly for automotive applications of products like common-mode filters. Sensors and actuators is another area where we are strong. In HDD heads, our targets are conservative. And we intend to stake out a leading position in 80GB/P, 120GB/P and 160GB/P products.
In the prevailing market conditions, R&D will be key. We plan to earmark 5-6% of net sales for R&D expenses. And we will narrow our R&D themes to products that we believe will be winners from the development stage.

To respond to the three key growth markets that TDK is targeting, we are realigning our sales system. And we have established the Application Center, which will match market needs and elemental technologies. Other initiatives include promoting business development by integrating intellectual property considerations into our operations and R&D, and fostering a mindset transformation among employees.

By advancing R&D with these initiatives we aim to have new products, excluding HDD heads, account for 30% of all sales. New products already account for more than 30% of sales if HDD sales are included. But, because our product mix will change in 6 months, the ratio of new products, excluding these will be 30%. Another goal is for 50% of our products to hold down number-one market positions. This will lead to a further recovery in our earnings.

Next I would like to break down specifically how we intend to lift operating income by ¥18.9 billion in fiscal 2004 to ¥41.0 billion, from the ¥22.1 billion recorded in fiscal 2003. Sales increases and a changed product mix should contribute ¥35.1 billion to earnings. Rationalization efforts, such as yield improvements, purchasing materials discounts and reductions in expenses, should contribute another ¥32.6 billion, while lower structural reform expenses and other areas should boost earnings by ¥3.2 billion. We are projecting structural reform expenses of ¥4.0 billion for fiscal 2004, compared with structural reform expenses of ¥7.2 billion in fiscal 2003. On the downside, discounts are expected to shave ¥50.0 billion off earnings, while foreign currency movements are expected to have a negative effect of ¥2.0 billion. The average exchange rate was ¥122 for the U.S. dollar in fiscal 2003, but we are assuming it to be ¥120 in fiscal 2004. We thus expect earnings to rise ¥18.9 billion.

To finish today's presentation, I want to stress that I want to make fiscal 2004 the start of a new period of growth for TDK. Sure we face a difficult operating environment. But we are determined to generate earnings without sales growth. And we are determined to try and grow sales even though our markets are not growing. These are two key themes for fiscal 2004. It goes without saying, but if we do the basics right this year and deliver profitable new products in a timely manner, TDK will once again become a highly profitable company in fiscal 2004.

In the near term, our operating environment will be difficult. But there are many trends that suggest that the medium- and long-term outlooks are more encouraging. Fields such as energy, the environment and robots harbor growth potential. For these and other fields, we will refine our materials and process technologies.

Fiscal 2004 is the last year of Exciting 108, our current medium-term management plan. Unfortunately, it will be very difficult for us to achieve our goals in the wake of the collapse of the IT bubble and the miscalculation of capital expenditures that the IT bubble brought about. Nevertheless, we are intent on completing our program of structural reforms and achieving our targets even if we are a little late in doing so. I ask for your continued support and guidance as we work to put TDK firmly back on a growth path.

Thank you.