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[ Financial Results for Fiscal 2004 Performance Briefing ]Fiscal 2004 Consolidated Results and Fiscal 2005 Projections

Mr. Hajime Sawabe President & CEO

Mr. Hajime Sawabe
President & CEO

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

Today, I would like to report on TDK's consolidated results for fiscal 2004, ended March 31, 2004

TDK posted consolidated net sales of ¥658.9 billion, up 8.2% year on year. Operating income climbed approximately 2.5 times to ¥54.3 billion. Income before income taxes jumped 3 times to ¥55.6 billion. Net income soared 3.5 times to ¥42.1 billion. Operating income included structural reform expenses of ¥7.5 billion.

Basic net income per common share was ¥317.80, up from ¥90.56. Stockholders' equity per common share was ¥4,351.80, up from ¥4,176.32.

These results mean that we met the forecasts issued on January 29, 2004, when we released our third-quarter results. As in the previous fiscal year, we achieved increases in both net sales and earnings.

Next I'd like to look at sales by segment.

Electronic materials and components segment sales rose 10.7% to ¥522.9 billion. Results for each product sector were as follows.

In the electronic materials and electronic devices sectors, sales were lackluster in the year's first half in the wake of SARS and the Iraq war, but extremely robust from summer onward. There was a rapid recovery in demand for PC, mobile phone and other components, which combined with strong demand for digital home appliances, including flat-panel TVs, digital cameras and DVD recorders, to fuel higher sales and orders. Due to these market conditions, our plant capacity utilization rate increased on the back of extremely robust volume growth in the year's second half.

In the recording devices sector, sales grew strongly as the market for HDD heads expanded and TDK increased its market share. This drove sales higher in the entire segment.

By product category, electronic materials sales decreased 1.3% to ¥166.8 billion. Sales of multilayer chip capacitors increased for two main reasons. Orders remained high, with a broad-based recovery in demand for digital home appliances, communications products, PCs and automobiles, resulting in an extremely busy second half of the year. TDK also saw the benefits of efforts to improve its product mix and expand sales of new products.

On the other hand, sales of ferrite cores dropped sharply. This was precipitated by a large fall in sales of deflection yoke cores and flyback transformer cores accompanying the progression toward flat-panel TVs. However, TDK recorded growth in sales of cores to the communications market for use in ADSL (Asymmetric Digital Subscriber Lines) devices and other applications. Magnet sales decreased despite higher sales volumes, due to advances in product miniaturization and falling sales prices.

In electronic devices, sector sales decreased 4.2% to ¥108.0 billion. Inductive devices posted higher sales, as demand for EMC filters, SMD coils and other products rose due to the greater use of electronics in automobiles, a recovery in mobile phone demand and growth in digital home appliances.

Sales of sensors and actuators rose sharply, mainly due to demand from the PC and communications fields. However, overall sector sales declined due to a large drop in sales of power supplies for video game systems and pachinko machines in the amusement field due to deteriorating market conditions.

Recording devices sales climbed 30.8% to ¥230.1 billion. The substantial increase in sales is explained by several factors. Strong year-on-year growth of about 20% in the HDD market, a small decline in the average number of heads used per HDD from 2.65 to 2.60, and a steady increase in TDK's HDD head market share from 30% to 33%.

Sales in the semiconductors & others sector increased 20.7% to ¥17.9 billion, the result of rising demand for products related to electromagnetic wave engineering for noise reduction, particularly from the communications and automobile fields. This growth outweighed lower sales of ICs for LANs/WANs caused by a soft communications infrastructure equipment market.

By end-user market in the electronic materials and components segment, sales of components for PCs and peripherals rose 22% to account for 56% of segment sales. Automotive component sales accounted for 9% of segment sales on a 1% increase. Sales to the communications industry rose 11% and accounted for 9% of segment sales. Audio and visual product component sales decreased 17% and accounted for 11% of segment sales. As previously mentioned, amusement- and analog-related products declined.

In the recording media & systems segment, sales were down slightly year on year. A drop in sales of audiotapes and videotapes was offset by an increase in sales of optical media products. However, the latter failed to offset lackluster software sales, resulting in the marginal drop in segment sales as a whole.

By region, sales in Asia (excluding Japan) and Others, Europe and Japan increased by 23%, 4% and 2%, respectively, while sales in the Americas decreased 16%. The overall result was a 10.6% increase in overseas sales year on year to ¥490.2 billion. Overseas sales accounted for 74.4% of consolidated net sales, rising 1.6 percentage points from the previous fiscal year.

Consolidated operating income rose by approximately 2.5 times, from ¥22.1 billion to ¥54.3 billion. The ¥32.2 billion improvement was due to several factors. Higher sales and an improved product mix boosted earnings by ¥63.3 billion yen, while rationalization, materials discounts, improved yields and cost-cutting contributed ¥40.1 billion. On the other hand, sales price discounts of 8.1% on average had a negative effect of ¥58.0 billion on earnings, while exchange rate movements reduced earnings by ¥13.2 billion as the yen strengthened from ¥122 to ¥113 against the U.S. dollar.

Looking at earnings by segment, the electronic materials and components segment posted a ¥36.0 billion year-on-year increase in operating income to ¥56.5 billion due to a strong performance in HDD heads, expanding demand from the second half for components, and progress made in reforming the profit structure. As a result, the segment posted a double-digit operating profit margin percentage for the fiscal year.

The recording media & systems segment posted an operating loss of ¥2.2 billion, ¥3.7 billion worse than the operating income recorded in the previous fiscal year. While improved earnings in optical media products cancelled out lower earnings in magnetic tape products, results were lackluster at TDK's U.S.-based software subsidiary. This software subsidiary was sold in December 2003.

TDK's efforts are focused on putting in place a structure that can generate earnings from the remaining businesses in this segment, especially optical media products.

Turning to cash flows, free cash flows in fiscal 2004 were ¥76.9 billion, an improvement of ¥19.2 billion from ¥57.7 billion a year earlier, the result of higher operating income as well as improvements in return on assets. Inventory turnover improved from 1.5 to 1.4 months; fixed asset turnover improved from 2.5 to 3.0 times; and trade receivables turnover improved from 2.8 to 2.5 months.

Let's now look at parent company results. Net sales decreased 1.4% to ¥316.1 billion, operating income decreased 44.8% to ¥1.8 billion, current income increased 13.2% to ¥10.3 billion and net income rose from ¥0.1 billion to ¥4.5 billion. The decrease in operating income will be explained in detail later by Mr. Seiji Enami, General Manager of the Finance & Accounting Department. To summarize, this was the result of the treatment of income that offsets operating expenses as non-operating income. The key point from our results is that we are seeing an improvement in our operating structure.

TDK plans to pay a year-end dividend of ¥30 per common share, an increase of ¥5. Together with the interim dividend of ¥25 per common share paid in December 2003, the dividend per common share applicable to the year will be ¥55.

Turning to our forecasts for fiscal 2005, we are projecting consolidated net sales of ¥680.0 billion, which would represent an increase of 3.2%. Operating income is forecast at ¥60.0 billion, a 10.5% rise. Income before income taxes is projected at ¥62.0 billion, up 11.5%. And we are forecasting consolidated net income of ¥46.5 billion, which would be an increase of 10.4% over fiscal 2004. We are thus projecting growth in both sales and earnings. Our assumed exchange rate for fiscal 2005 of ¥105 to the U.S. dollar would have the effect of lowering net sales by approximately ¥30.0 billion and operating income by approximately ¥11.9 billion compared with exchange rates in the past fiscal year.

As I make this presentation today, it would appear that economic fortunes are improving considerably. But this must be tempered by the fact that there are some lingering concerns about whether the recovery is sustainable. With regard to the electronics industry, in particular, which is inextricably linked to China and the U.S., the sustainability of the recovery in both those countries is of interest to us. The risk of a bubble caused by excessive liquidity resulting from Japanese government intervention in the currency markets and a deficit blowout in the U.S. are also of concern.

Putting aside macroeconomic issues, the electronics industry is extremely strong in the U.S., China and Japan. Orders for electronic components didn't fall much in the fourth quarter of fiscal 2004 compared with the third quarter, and have been extremely brisk in the first quarter of fiscal 2005. Our orders have been better than we expected at the start of the year.

The dominant view in the industry is that this strong momentum will continue until at least the summer Olympics in Greece and possibly beyond to the U.S. presidential elections and even into next year. But, as the future is uncertain, we are adopting a watchful approach. Over the medium term, the electronics industry appears to have entered a period of robust growth, as long as there isn't a dramatic economic slump.

Even if there is somewhat of a retreat around 2005, expectations are for growth through 2006, 2007 or 2008, fueled by the nascent digital information appliance field, car electronics, the increasing use of IT in offices and digital convergence, which will link all of these advancements.

I believe that four key words will define the coming years: new products, China, currencies and environmental harmony.

I believe that China's importance as a market rather than a production base is growing. Companies competing on the basis of using low-cost labor alone will soon be overtaken by local manufacturers. Consequently, I feel that the Chinese market has entered a new stage where business must be conducted based on the provision of products that are distinctive in terms of either their features or how they are made.

Regarding currencies, the basic assumption is that the yen will continue to strengthen, with the specter of the dollar falling below ¥100 a possibility in my opinion. There are various countermeasures that can be taken such as making products in places where costs are not denominated in yen and establishing exchange rate hedges. But I believe that there is no substitute for continuing to fabricate strong, competitive products that are impervious to currency movements as the best way to live with the yen's rise.

With respect to environmental harmony, as a manufacturer, environmental issues are growing in importance to us. Our ability to strike a harmonious balance with the environment has become extremely important from the perspectives of cost and our relationship with society. We are determined to deal with environmental issues in a forthright manner based also on our responsibility to future generations. I think that we must find suitable ways of manufacturing products that strike the correct balance among all these issues.

These three subjects have a direct link to new products. Continuous growth will hinge on whether we can constantly deliver the products markets want. To also counter falling sales prices, a perennial battle in the electronics field, we must create new products with value for customers.

Fortunately, TDK operates in the electronics industry, where there are expectations for growth moving forward. While that doesn't necessarily mean that TDK will grow automatically, there are enormous opportunities.

On the other hand, the tempo of change is quickening as we head toward a society based on digital and network technologies. Advances are being made in the standardization of key devices and competition is escalating. New products that fail to stamp their authority on the marketplace will quickly be engulfed by price competition and come to a premature end. The prerequisite for prevailing in this digital era is bringing products that have their foundation in TDK's core business to the market in a timely manner.

In the March 2005 fiscal year, we want new products with value to generate one-third of our sales. Our goals are for new products to account for at least 35% of sales and for TDK to be number one in at least 50% of the product categories where we are active. This 35% target excludes HDD heads. Since most head products are always new, their inclusion would cause new products to exceed 50% of sales.

Our task is clear. We will clarify and hone the elemental technologies that are required for our products to stand out from the competition. At the same time, we have restructured our development framework and have selected R&D themes more rigorously. Backed by these initiatives, we hope to increase the ratio of new products and the efficiency of new product development programs.

In the past fiscal year, growth and earnings were underpinned by HDD heads, which benefited from a number of favorable market trends. HDD heads did especially well in the third quarter, as we seemingly couldn't do anything wrong. However, because the performance of the recording devices business can change suddenly, such is the nature of the business, I want to quickly build an earnings structure based on solid earnings from electronic materials and electronic devices. Earnings from recording devices and products in the electronic media & systems segment would augment that.

As an e-material solution provider, TDK must achieve new growth by continuously producing new products that deliver value. And we need to do that through the development of electronic materials and components with distinctive properties and process technologies that take full advantage of them.

We are applying the thin-film technologies honed in HDD heads to many other components, satisfying market demands for compact, lightweight, high-performance products that are reasonably priced. We are already producing such components inspired by this desire.

TDK has already produced multilayer chip capacitors with larger capacity, sensors and actuators based on sophisticated multilayer technologies, inductive devices and other new products that are profitable and competitive. But there are other product groupings with many issues to be resolved with regard to profitability. These include ferrite cores and magnets; power supplies, which we expect to be a pillar of earnings in the future; and products in the recording media & systems segment. We are eager to raise the profitability of these product groupings by introducing new products and production processes.

Naturally, we also want to raise earnings in recording devices. While we expect sales to decline in fiscal 2005 due to the in-house manufacture of heads by Western Digital and our market share will fall as well, I think it is possible to expand sales and recapture market share if we can preserve our technological edge. In HDDs, the growing non-IT market is helping to drive growth. We are already working on several fronts -size, capacity and price- to capitalize on opportunities in this market. While it is no simple feat, my hope is that we can remain the market leader.

Another focus is our balance sheet. We have made considerable progress improving it, but the level of cash and deposits remains a problem. When interest rates are as low as they are now, it makes sense to hold down cash and deposits. However, I also think we need sufficient liquidity to hedge risks, such as event, foreign currency and liquidity risks. Our stance with regard to cash and deposits is also based on our belief that we will see an end to excess cash flows worldwide. Another point should also be considered. Because we operate in the high-risk high technology field, we need to maintain a certain level of cash.

What's important, and this is our basic stance, is to use the funds that we have been entrusted with by investors to raise our corporate value by actively implementing strategies that expand sales of new products.

TDK today, if I can use a mountaineering analogy, has climbed from the bottom of a ravine half-way up the side of a mountain. Our fate now rests in our own hands and the direction of the wind. Nevertheless, as we watch where we climb, we are determined to reach the top, our goal.

TDK has been lacking a driving force for growth. But by steadily implementing imperatives in fields where we are strongest, I believe we can develop more new products and raise corporate value.

Thank you.

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