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[ 1st Quarter of fiscal 2005 Performance Briefing ] Consolidated Results

Mr. Seiji Enami Corporate Officer General Manager Finance & Accounting Department

Mr. Seiji Enami
Corporate Officer
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 and braving the heat to attend today's presentation.

I will now present TDK's consolidated operating results for the first quarter of fiscal 2005, the three-month period ended June 30, 2004. My presentation will follow the earnings release.

As page 1 of the earnings release shows, we recorded higher sales and earnings in the first quarter. Net sales rose 3.1%, or just under ¥4.7 billion, to ¥157,891 million; operating income climbed 37.8%, or just over ¥3.8 billion, to ¥14,025 million; income before income taxes increased 33.9% to ¥14,950 million; and net income rose 26.6% to ¥10,163 million. Net income per common share was ¥76.75.

Average first-quarter yen exchange rates for the U.S. dollar and euro were ¥109.63 and ¥132.15, respectively, as the yen appreciated 7.5% versus the U.S. dollar and 1.9% against the euro, compared with the previous fiscal year's first quarter. This had the effect of lowering net sales by approximately ¥8.0 billion and operating income by approximately ¥3.4 billion.

There were three main reasons for the higher sales and earnings. As you know, we lost orders for HDD heads in the recording devices sector due to the internal production of heads by a major client that has vertically integrated its business. Since HDD head results were extremely strong in fiscal 2004's second and third quarters, no these two quarters should not be used for drawing comparisons.comparisons should be made at this time. However, we were able to minimize the impact in the first quarter of these lost orders compared with the same period in the previous fiscal year. This was one reason for our strong performance. Secondly, we finally started to see signs of a turnaround in electronic components other than HDD heads as a whole. This contributed to our higher earnings. The third reason is that we were largely unaffected by the considerable volatility in exchange rates as the yen went from ¥105.69 against the U.S. dollar at March 31, 2004 to ¥114 at one point during the first quarter before finishing at ¥108.43 on June 30, 2004. Despite this, exchange gains and losses on receivables and other items were almost even.

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 2004.

In the electronic materials and components segment, net sales rose 5.4% to ¥130.5 billion, and represented 82.6% of total net sales. The electronics market in the first quarter of fiscal 2005 saw demand continue to grow briskly, supported by the rising popularity of mobile phones and digital home electronics appliances such as flat-screen TVs, digital still cameras and DVD recorders. These robust market conditions supported relatively firm demand for electronic components as a whole.

In terms of sector results, sales in the electronic materials sector increased 10.7% to ¥44.8 billion, and accounted for 28.3% of total net sales. (Capacitors) Sales of capacitors increased year on year. Multilayer ceramic chip capacitors, the main products in the capacitor sector, recorded higher sales due to demand for use in digital home electronics appliances and mobile phones, a rising proportion of which have color displays and cameras. This growth absorbed the effect of downward pressure on sales prices and the higher yen.
(Ferrite Cores) In ferrite cores, sales were buoyed by healthy demand for coils and transformers used in digital home electronics appliances and information and communications equipment.
(Magnets) Magnet sales rose too on the back of firm demand for use in voice coil motors (VCMs) in HDDs.

As a result, capacitors accounted for 70% of sector sales, up 14% year on year. Ferrite cores and magnets accounted for the remaining 30%, up 3% year on year.

In the electronic devices sector, sales increased 9.4% to ¥28.2 billion, and accounted for 17.9% of total net sales.
(Inductive Devices) Higher sales of inductive devices to the communications equipment field offset the effect of lower sales prices and the higher yen.
(High-frequency Components) Sales of high-frequency components edged up over the previous fiscal year. There was an upswing in shipment volumes that resulted from strong demand for components used in mobile phones and successful activities to win new orders. This growth was largely negated, however, by severe price discounting demands from customers.
(Other Products) Sales of other products rose year on year, with sensors and actuators and power systems recording higher sales to the communications equipment market.

At this point I must ask for your understanding with regard to the re-categorization of some products. This relates to the reclassification of products affects the classification of products by market for the electronic materials and components segment, which I will give you later, as well as some low-endsub-category products in the inductive devices, high-frequency components, power systems and other products sectors. To be more specific, transformer-related products have now been excluded from the inductive devices sector, reflecting our concentration on signal line and power line coils and EMC components are now included in inductive devices while transformer-related products have been excluded from this product sector and included in power systems. The re-categorization was made from the perspective of the continuity of disclosure and to reflect the actual situation because we have already been using these classifications internally as we conduct these businesses.

Because some of you have been keeping a record of the changes by product in the electronic materials devices sector under the past system, I will give you the share of sales and year-on-year growth rates for five quarters, from the first quarter of last year to the first quarter under review, based on the new categories.

In the first quarter of fiscal 2004, inductive devices accounted for 47% of total sector sales, down 7%, followed by 48% in the second quarter, up 2%, 46% in the third quarter, up 9%, and 46% in the fourth quarter, up 12%. In the first quarter of 2005, they accounted for 47% of total sector sales, up 11%.

In the first quarter of fiscal 2004, high-frequency components accounted for 11% of total sector sales, down 16%, followed by 11% in the second quarter, down 11%, 11% in the third quarter, down 15%, and 11% in the fourth quarter, down 12%. In the first quarter of fiscal 2005, they accounted for 10% of total sector sales, up 2%.

In the first quarter of fiscal 2004, other products accounted for 42% of total sector sales, down 19%, followed by 41% in the second quarter, down 20%, 43% in the third quarter, down 4%, and 43% in the fourth quarter, up 10%. In the first quarter of fiscal 2005, they accounted for 43% of total sector sales, up 9%.

Recording devices sales declined 3.1% to ¥52.2 billion, and accounted for 33.0% of total net sales.
(HDD Heads) Sales of HDD heads declined slightly due to the effect of a customer producing heads in-house and production cutbacks in the HDD market.
(Other Heads) Sales of other heads also declined year on year.

HDD heads accounted for 91% of total sector sales, with sales down 3%, while other heads accounted for the remaining 9%, with sales down 4%.

The semiconductors and other sector posted sales of ¥5.3 billion, up 42.6%, and accounted for 3.4% of total net sales. Sales of semiconductors declined due to lower sales to the communications equipment market. Sales of anechoic chambers and other products rose.

Next, I would like to look at the recording media & systems segment. Sales declined 6.8% to ¥27.4 billion, and accounted for 17.4% of total net sales.
(Audiotapes and Videotapes) Sales of audiotapes and videotapes declined year on year. This was because, while TDK maintained a high market share, demand continues to decrease.
(Optical MediaDiscs) Sales of optical media increased on growing demand for DVDs. However, downward pressure on sales prices remains severe. (Other Products) Sales of other products decreased, the result of the sale in the previous fiscal year's second half of a U.S. software development subsidiary and sluggish sales of recording equipment.

(Audiotapes) Audiotape sales accounted for 6% of segment sales, down 31%.
(Videotapes) Videotape sales accounted for 25% of segment sales, down 22%.
(Optical DiscsMedia) Optical discs media accounted for 42% of segment sales, up 18%.
(Data Tapes, Recording Equipment and Others) Sales here accounted for the remaining 27% of segment sales, down 12%.

As I mentioned briefly before, we have changed the previous classification of products by market for the electronic materials and components segment to the following customer industries: IT home electronics appliances; high-speed, large-capacity networks; car electronics; and others. This reflects TDK's concentration on these categories as strategic areas. Net sales in this segment were ¥130.5 billion and assumed to be 100 for the purpose of calculating share of sales and year-on-year growth rates as in the past.

For comparative purposes, I will give you these figures for five quarters, from the first quarter of fiscal 2004 through the first quarter of fiscal 2005. These are shown in the supplementary data on page 3.

In the first quarter of fiscal 2004, IT home electronics appliances accounted for 65% of total segment sales, up 9%, followed by 66% in the second quarter, up 17%, 67% in the third quarter, up 24%, and 63% in the fourth quarter, up 7%. In the first quarter of fiscal 2005, they accounted for 63% of total segment sales, up 3%.

In the first quarter of fiscal 2004, high-speed, large-capacity networks accounted for 8% of total segment sales, down 3%, followed by 9% in the second quarter, up 19%, 9% in the third quarter, up 15%, and 9% in the fourth quarter, up 26%. In the first quarter of fiscal 2005, they accounted for 10%, up 32%.

In the first quarter of fiscal 2004, car electronics accounted for 9% of total segment sales, down 9%, followed by 9% in the second quarter, down 3%, 8% in the third quarter, down 3%, and 9% in the fourth quarter, up 1%. In the first quarter of fiscal 2005, they accounted for 9%, up 4%.

In the first quarter of fiscal 2004, others accounted for 18% of total segment sales, up 1%, followed by 16% in the second quarter, up 1%, 16% in the third quarter, up 3%, and 19% in the fourth quarter, up 12%. In the first quarter of fiscal 2005, they accounted for 18%, up 3%.

Please turn to the consolidated income statements on page 6. Operating income increased by ¥3.8 billion year on year. The main positive factors for this increase were higher sales, including improvements in the capacity utilization rate and product mix, which contributed ¥14.8 billion; lower materials costs contributed ¥3.3 billion amid an increase in the price of oil and other materials; and rationalization and cost cutting contributed ¥6.4 billion. This meant that positive factors lifted earnings by a total of ¥24.5 billion.

Turning to factors that negatively affected earnings, the single largest factor was sales price discounts, which had a ¥17.3 billion detrimental effect. And, as I noted earlier, exchange rate changes brought down net sales by ¥8.0 billion and operating income by ¥3.4 billion. These and other factors resulted in a combined negative effect on earnings of ¥20.7 billion, limiting the increase in operating income to ¥3.8 billion.

While downward pressure on prices remained severe, the effect was mitigated somewhat in electronic components by near full capacity utilization.

The negative monetary effect of sales price discounts is substantial. This figure is calculated by comparing prices for the period under review with the previous period. With HDD heads, however, because products change every year, we could not make comparisons and therefore no monetary effect was attributed to HDD heads. Instead, because of the switch from old products to new products, we attributed the discount on heads as a product mix factor. But the longevity of 80GB/P HDD heads, which still account for around 98% of shipments, means that we are now able to make year-on-year comparisons, so the monetary effect of discounts can be calculated. While this was not the only reason for the increase in the negative effect of sales price discounts, as given earlier, the fact is that discounting pressure has increased in respect of 80GB/P HDD heads because of their extended use.

Recording media and systems also came under severe discounting pressure, most notably DVDs.

As a whole, and reflecting the above items, sales prices fell just under 8% on average year on year in the electronic materials and components segment, which also includes HDD heads.

Restructuring costs in the first quarter of fiscal 2004 were ¥1.5 billion, ¥1.1 billion more than the ¥0.4 billion booked in the first quarter of fiscal 2005. This was another reason for the higher operating income.

Please look at the balance sheet on page 7 of the earnings release. I would like to discuss our financial position with reference also to the cash flow statements on page 8. The comparisons I will draw are with March 31, 2004.

Total assets stood at ¥792.2 billion, an increase of ¥21.9 billion. The yen depreciated by ¥2.74 against the U.S. dollar, from ¥105.69 to ¥108.43 at June 30, 2004. During the same period, the yen depreciated by ¥2.18 against the euro, falling from ¥128.88 to ¥131.06. These changes had the effect of increasing yen translations of overseas assets by ¥8.2 billion.

Cash and cash equivalents increased slightly by ¥3.5 billion. Operating activities provided net cash of ¥18.8 billion, with the main positive factors being earnings and depreciation and amortization and the main negative factors being an increase in inventories and slight increases in other assets. Investing activities used net cash of ¥14.1 billion, mainly for capital expenditures. Financing activities used net cash of ¥3.9 billion, with dividends paid accounting for a large share of this figure. The depreciation of the yen had a positive effect of ¥2.6 billion, resulting in a net increase in cash and cash equivalents of ¥3.5 billion. This was ¥11.2 billion less than the increase of ¥14.7 billion in the first quarter of fiscal 2004. The main reason was the increase in capital expenditures, but an increase in inventories and other items also had an impact.

Inventories increased ¥4.8 billion, the majority of which represented optical media in the recording media & systems segment. Since price declines are severe on these products, this increase is impacting our operating results. We are well aware of the need to reduce inventories as quickly as possible.

Net property, plant and equipment increased for the first time in quite a while, by ¥4.6 billion, the result of the need to ramp up output capacity due to higher capacity utilization. This comes after the disposal of facilities during a period of structural reforms.

Accumulated other comprehensive income (loss)loss decreased by approximately ¥10.6 billion. You can find a detailed breakdown of accumulated other comprehensive income (loss) on page 10. The main positive factors were an increase in foreign exchange translation adjustments due to the weaker yen, and an increase in pension assets due to the strong stock market. In absolute terms at June 30, 2004, foreign currency translation adjustments were minus ¥47.3 billion, minimum pension liability adjustments were minus ¥32.7 billion and net unrealized gains on securities were ¥0.2 billion, resulting in a total accumulated other comprehensive loss of ¥79.8 billion.

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 ¥4.0 billion, or 36.3%, year on year, to ¥14.9 billion. The recording media & systems segment, meanwhile, posted an operating loss of ¥0.9 billion, ¥0.1 billion more than a year earlier.

In the electronic materials and components segment, the fall in sales of heads in recording devices was countered by other electronic components, particularly capacitors, thanks to strong demand for digital home electronic appliances and mobile phones.

In the recording media & systems segment, the sale of the software development business eliminated one of the reasons for the segment's previous operating loss. However, due to a sudden drop in DVD prices, higher sales in the optical media division didn't generate sufficient earnings to make this segment profitable. While weren't able to generate a profit, the result was better than forecast at the start of the quarter.

At the very bottom of the page you will see a breakdown of sales by region. Sales in Japan rose 5.8% to ¥42.8 billion, marking the first increase in some time, on the back of an improving domestic economy. As a result of higher sales due to strong sales of electronic components, Japan operating income increased ¥4.3 billion to ¥5.8 billion, as shown in the center table. In the Americas and Europe, sales continued to decline, with currency movements also having an effect. In Asia (excluding Japan) and Others, sales increased 6.8% to ¥77.2 billion. The increase should have been greater, but lower sales of HDD heads partly negated higher sales of electronic components.

The overall result was a 2.1% increase in overseas sales year on year to ¥115.1 billion. However, the proportion of total sales accounted for by overseas sales declined, by just under 1 percentage point, from 73.6% to 72.9%, as domestic sales increased. Naturally, Japan sales increased as a percentage of total sales.

Finally, I would like to cover TDK's consolidated projections for fiscal 2005, ending March 31, 2005. These are shown on page 5.

In short, there has been no change to the first-half and full-year projections announced on April 28 this year. Due to uncertainties in the operating environment, we think it is more advisable to revise full-year forecasts, if necessary, based on interim results rather than confuse you by changing forecasts at the end of the first quarter.

In the second quarter, we expect HDD head results to be almost the same as in the first quarter or slightly lower. Strongly performing electronic components should cover this. But because sales fell in June and July compared with April and May we are bearish about sales forecasts for August and September as well as the full year, making August and September and then the year-end selling season critical. While we don't therefore expect a major increase in sales, we hope to generate the same earnings in the second quarter as in the first quarter, which also means the same earnings as in the second quarter of fiscal 2004.

This concludes my presentation of TDK's first-quarter results and second quarter fiscal 2005 projections.

Thank you for your attention.

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