[ 1st Quarter of fiscal 2004 Performance Briefing ]Consolidated Results

Mr. Seiji Enami
General Manager
Finance & Accounting Department

My name is Seiji Enami. I'm general manager of the Finance & Accounting Department. Thank you for taking the time to attend today's presentation.

I will now present TDK's consolidated operating results for the first quarter of fiscal 2004, the three-month period from April 1, 2003 through June 30, 2003. My presentation will follow the earnings release.

As page 1 of the earnings release shows, we recorded top- and bottom-line growth in the first quarter. Net sales rose 3.0%, or ¥4.5 billion, to ¥153,216 million, operating income climbed 70.1%, or ¥4.2 billion, to ¥10,180 million, income before income taxes surged 238.0% to ¥11,164 million and net income jumped 271.4% to ¥8,025 million. Net income per common share was ¥60.51.

Average first-quarter yen exchange rates for the U.S. dollar and euro were ¥119 and ¥135, respectively, as the yen appreciated 6.3% from ¥127 versus the U.S. dollar and depreciated 15.4% from ¥117 against the euro, compared with the previous fiscal year's first quarter. This had the effect of lowering net sales by approximately ¥4.9 billion and operating income by approximately ¥2.1 billion.

There were three main reasons for the higher sales and earnings. One was a strong performance in recording devices, namely HDD heads (40GB/P and 80GB/P products). Secondly, while we still have work to do, we are gradually seeing the benefits of structural reforms aimed at creating a company that can deliver profits even without sales growth. We have realigned redundant resources (facilities, inventories and people), reduced operating expenses, and withdrawn from loss-making businesses in accordance with a policy of selection and concentration. And this result came despite lower overall sales of electronic components, compared to the previous fiscal year's first quarter, when demand increased temporarily following a period of inventory reductions after the IT bubble burst. The third factor underpinning our results was the absence of significant foreign currency movements like the large exchange loss on accounts receivable and other foreign-currency denominated assets and liabilities recorded in the corresponding period of the previous fiscal year. In the first quarter of fiscal 2003, the yen went from ¥133 against the U.S. dollar at March 31, 2002 to an average of ¥127 between April and June 2002, finishing at ¥120 on June 30, 2002. By contrast, in the first quarter of fiscal 2004, exchange gains mostly offset losses.

Let's now look at a breakdown of sales, which is shown on the lower half of page 1. The breakdown shows our operating results for each segment, the share of sales for each segment and sector and the percentage change from the same period in fiscal 2003.

As you know, electronic materials, electronic devices and semiconductors & others recorded progressively lower sales than in the first quarter of fiscal 2003 through the fourth quarter, after demand spiked in the first quarter following a period of inventory reductions at customers. Conversely, recording devices, a sector that includes HDD heads, saw sales grow progressively from the first quarter of fiscal 2003 through the fourth quarter, along with increasing demand for 40GB/P HDD heads. Comparisons between the first quarter of fiscal 2004 and the first quarter of fiscal 2003 are made against this backdrop.

The electronic materials and components segment recorded a 4.8% increase in sales to ¥123.8 billion, and accounted for 80.8% of total net sales.

Sales in the electronic materials and electronic devices sectors fell due to a weak recovery in overall demand for finished products, although demand was strong in some areas, such as for digital audio and visual products, including DVD players. Supporting the higher sales in this segment was an increase in sales in the recording devices sector, notably of HDD heads.

In terms of sector results, the electronic materials sector recorded sales of ¥40.4 billion, down 11.9% year on year, and accounted for 26.4% of total net sales.

(Capacitors) Sales decreased compared with the first quarter of fiscal 2003 for the reasons mentioned earlier. But there was an upturn in a wide range of fields, particularly audio and visual equipment and communications products, compared with the fourth quarter.
(Ferrite cores) In ferrite cores, overall sales declined year on year due to lower demand for deflection yoke cores and for general-purpose power supply cores in a soft TV and computer monitor market.
(Magnets) Magnet sales also declined, despite solid growth from the automobile industry, driven by the increasing use of electronics in vehicles. Inventory reductions by customers and price discounts in other industries were to blame for the lower overall magnet sales.

Capacitors accounted for 67% of sector sales, down 10% year on year. Ferrite cores and magnets accounted for the remaining 33%, down 16% year on year.

In the electronic devices sector, sales declined 13.5% to ¥25.8 billion, and accounted for 16.9% of total net sales.
(Inductive devices) Inductive devices saw sales decline compared to the first quarter of fiscal 2003 when special factors such as a temporary increase in demand after inventory reductions and demand for TVs related to the 2002 FIFA World CupTM boosted sales. On the other hand, an expanding digital audio and visual products market and the increasing use of electronics in vehicles resulted in higher demand in these areas.
(High-frequency components) Sales of high-frequency components decreased, despite an upswing in sales volume for use in mobile phones. This was due to calls for price reductions and lower demand in fields other than mobile phones.
(Other products) Overall, sales of other products decreased. Solid growth continued to be recorded by actuators and chip varistors used in PCs and peripherals and in communications products. However, there was a precipitous fall in sales of DC-DC converters for video game systems due to inventory reductions by customers.
As a result, inductive devices accounted for 57% of sector sales, down 6%. High-frequency components accounted for 15% of sector sales, down 13%, while other products represented 28%, down 26%.

Recording devices sales climbed 40.4% to ¥53.8 billion, and accounted for 35.1% of total net sales. Sales of both HDD heads and other heads were strong.
(HDD Heads) HDD heads accounted for 91% of sector sales, up 41%.
(Other Heads) Other heads accounted for the remaining 9% of sector sales, up 39%.

The semiconductors & others sector posted sales of ¥3.7 billion, down 10.0%, and accounted for 2.4% of total net sales. Sales remained low for semiconductors for LAN/WAN applications and set-top box modems. Another factor was lower sales of anechoic chambers for noise control.

Next, I would like to look at the recording media & systems segment. Sales declined 3.6% to ¥29.4 billion, and accounted for 19.2% of total net sales. Audiotape and videotape sales shrank amid declining demand. In optical media, an expanding market for DVDs and strong demand for CD-Rs offset falling MD demand and lower sales prices of CD-Rs to lift sales. In other products, while sales of tape-based data storage media for computers continued to grow steadily, the sector saw overall sales decline due to factors such as lower sales of software, recording equipment and other products.

(Audiotapes) Audiotape sales accounted for 9% of segment sales, down 24%.
(Videotapes) Videotape sales accounted for 30% of segment sales, down 14%.
(Optical Discs) Optical discs accounted for 33% of segment sales, up 32%.
(Data Tapes, Recording Equipment and Others) Sales here accounted for the remaining 28% of segment sales, down 13%.

Please refer to page 3 of the supplementary data to the handout, which shows the share and growth rate for products by market for the electronic materials and components segment. Net sales in this segment were ¥123.8 billion as reported before and assumed to be 100 for the purpose of calculating share of sales and growth rates.

Please turn to the consolidated income statements on page 6. You will note that operating income increased ¥4.2 billion year on year. In terms of the main positive factors for this increase, higher sales, including an improved capacity utilization rate and changed product mix, contributed ¥13.4 billion. This also reflects the benefits derived from withdrawing from unprofitable businesses. Moreover, lower materials costs contributed ¥5.1 billion, and rationalization and costs cutting contributed ¥2.4 billion, meaning that positive factors lifted earnings by a total of ¥20.9 billion.

In terms of factors that negatively affected earnings, the largest was sales price discounts, which had a ¥13.1 billion detrimental effect. And, as reported earlier, the appreciation of the yen against the U.S. dollar by about 7%, brought down net sales by ¥4.9 billion and operating income by ¥2.1 billion.

Turning back to discounts, overall sales prices fell 8% on average year on year. Even new 80GB/P HDD heads came under discounting pressure, even though we had expected them to be immune as a new product. Other negative factors were a ¥1.5 billion increase in selling, general and administrative expenses, excluding the effects of foreign exchange movements. These factors resulted in a combined negative effect on earnings of ¥16.7 billion, limiting the increase in operating income to ¥4.2 billion.

You will note that restructuring costs are no longer shown separately as they were on previous occasions. We decided to stop showing them, reflecting their declining impact on our results.

For reference purposes, however, let me give you a comparison with the previous fiscal year. Restructuring costs in the first quarter of fiscal 2004 were ¥1.4 billion, ¥0.6 billion higher than the ¥0.8 billion recorded in the first quarter of fiscal 2003. Expenses related to structural reforms in the first quarter of fiscal 2004 that were included in cost of sales due to their nature were ¥0.1 billion, ¥1.0 billion lower than the ¥1.1 billion in the first quarter of fiscal 2003. In total then first-quarter structural reform-related expenses were ¥1.5 billion, ¥0.4 billion less than the ¥1.9 billion in the previous fiscal year's first quarter. This was another factor behind the higher operating income.

In other income (deductions), there was a ¥3.2 billion improvement in the foreign exchange gain, from the loss recorded in the previous fiscal year. As I said earlier, in the previous fiscal year TDK booked a ¥4.2 billion charge related to the revaluation of foreign currency-denominated assets and liabilities, such as accounts receivable, due to a sudden rise in the yen against the U.S. dollar at the end of June 2002. The absence of this effect was the reason for the improvement in the foreign exchange gain.

Please now look at the balance sheets on page 7 of the earnings release. I would like to look at our financial position with reference also to the cash flow statements on page 8. The comparisons I will draw are with March 31, 2003.

Total assets stood at ¥760.5 billion at June 30, 2003, an increase of ¥13.2 billion. The yen appreciated slightly, by ¥0.40 against the U.S. dollar, from ¥120.20 to ¥119.80 at June 30, 2003. During the same period, the yen depreciated by ¥7.09 against the euro, falling from ¥129.83 to ¥136.92. These changes had the effect of increasing overseas assets when converted into yen by ¥2.2 billion.

Cash and cash equivalents increased ¥14.7 billion. Cash outlays included ¥5.5 billion for paying bonuses and other accrued labor costs, ¥3.3 billion for dividends, ¥8.6 billion for capital expenditures, and there was a ¥2.5 billion increase in inventories, which was disappointing. However, these uses of cash were covered by ¥8.0 billion in earnings recorded from operating activities, ¥11.7 billion in depreciation and amortization, and ¥1.9 billion from the collection of accounts receivable, among other items. Operating activities provided net cash of over ¥25.7 billion, investing activities used net cash of over ¥8.2 billion and financing activities used net cash of over ¥3.4 billion. Including a ¥0.6 billion positive effect of exchange rate changes, cash and cash equivalents rose ¥14.7 billion to ¥185.3 billion at June 30, 2003. Cash from operating activities increased by more than ¥15.9 billion, compared with the previous fiscal year's first quarter. While this partly reflects the higher earnings in the first quarter of fiscal 2004, it is also attributable to the absence of cash outflows for the payment of retirement expenses related to a special voluntary retirement package offered as part of structural reforms.

Accumulated other comprehensive income (loss) increased by approximately ¥0.4 billion, lowering shareholders' equity. The extent of the increase was smaller than that in the same quarter of fiscal 2003, and with earnings higher than this increase, comprehensive income returned to positive territory in the quarter, resulting in higher shareholders' equity. You can find a detailed breakdown of this account in Note 3 on page 10.

Please now look at segment information on page 9. First, look at industry segment information on the top half of the page.

Operating income in the electronic materials and components segment increased ¥5.4 billion, or 98.7% year on year, to ¥11.0 billion. The recording media & systems segment, meanwhile, posted an operating loss of ¥0.8 billion, a decrease of ¥1.2 billion from the previous fiscal year's operating income.

In the electronic materials and components segment, the increase in net sales and the increase in operating income were about the same. While HDD heads in recording devices turned in a strong performance, if that is excluded, the results show that net sales in electronic components fell as a whole. I'm not sure whether you can say that this is the result of our gradual transformation into a company that is capable of delivering profits even without sales growth, but it is the result of operating income not falling to the same extent as sales.

In the recording media & systems segment, the operating loss resulted from a lackluster performance in the software side of our business, as well as lower earnings in optical media, where sales are growing. Because this business is still unable to generate sufficient profits, the slight drop in sales in the first quarter brought down earnings. However, we do expect this segment to be profitable for the full year.

At the very bottom of the page you will see a breakdown of sales by region. Sales in Japan decreased 4.9% to ¥40.4 billion. While sales increased in the recording devices sector, mainly on HDD head demand, sales fell in all other product sectors.

In the Americas, sales dropped 22.9% to ¥22.5 billion, reflecting a weak recovery in demand as well as the yen's appreciation, both of which caused sales in all product sectors to decrease in this region.

In Europe, sales increased 8.4% to ¥18.0 billion. This was mainly the result of the yen's depreciation against the euro. But the higher sales also reflected stronger demand for magnets, particularly in the automobile industry, and optical media such as CD-Rs and DVDs.

In Asia (excluding Japan) and Others, sales increased 19.7% to ¥72.3 billion. While sales of electronic materials and electronic devices declined, this was outweighed by higher sales of recording devices, including HDD heads. Sales in this region accounted for 47% of total net sales.

The overall result was a 6.2% increase in overseas sales year on year to ¥112.8 billion. Overseas sales accounted for 73.6% of total net sales, a 2.2 percentage point increase from 71.4% in fiscal 2003.

Finally, I would like to cover TDK's consolidated projections for fiscal 2004, ending March 31, 2004. These are shown on page 5. There is also a supplementary explanation on page 6.

In short, there has been no change to the projections announced on May 7 this year. We decided not to revise our projections due to a number of considerations. One was the uncertainty in our operating environment, including macroeconomic trends. Second was that looking at the first-quarter results for fiscal 2004, some products exceeded expectations while others fell short. Third was that we did not give a breakdown by quarter when we announced our projections for the first half and second half in May this year. Considering these reasons, we decided that it was best to wait until our interim results come out, when we will be better placed to project third-quarter results before deciding whether to revise full-year projections. This way we avoid creating any misunderstanding.

That said, let me give you some thoughts on how we see things at the moment.

Regarding exchange rates, while these are difficult to predict with any accuracy, we believe that even if there is a slight change, the yen will trend at around ¥120 to the U.S. dollar or thereabouts.

The sales projection for electronic materials was premised on a gradual recovery in demand due to steadily improving macroeconomic conditions. But looking at first-quarter results, while there was a recovery compared with the fourth quarter of the previous fiscal year, it was not as strong as had been expected. Consequently, at the present time, we believe that the year-on-year growth rate on a consolidated basis may be less than 5%, compared to the 8.1% we projected in May.

Since sales projections for electronic devices are based on the same premises as with electronic materials, the first-quarter recovery in electronic devices sales, compared with the fourth quarter of fiscal 2003, was not as strong as had been expected. Consequently, at the present time we believe that the year-on-year growth rate on a consolidated basis may be slightly less than the 4.2% we projected in May.

Regarding recording devices, with first-quarter sales as strong as in the fourth quarter of fiscal 2003, and given that orders in the second quarter remain just as strong, we feel at the present time that the growth rate for recording device sales in the first half of fiscal 2004 could be over 30%. In May, we projected a 16.7% year-on-year increase for the first half. For the full year, we feel that the growth rate could be between 14-15%, higher than the 4.7% we projected in May.

Recording media and systems saw lower demand for videotapes in the first quarter due to the rapid adoption of DVDs, and sales growth for software and other products fell short of expectations. While we projected flat year-on-year sales comparisons in this product segment in May, we now feel that sales could drop below the previous year's level.

That concludes my presentation of TDK's first quarter results and fiscal 2004 projections.

Thank you for your attention.