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[ Financial Results for Fiscal 2005 Performance Briefing ]Business Outlook

Mr. Masatoshi Shikanai Corporate Officer General Manager Recording Media and Solutions Business Group

Mr. Masatoshi Shikanai
Corporate Officer
General Manager
Recording Media and Solutions Business Group

Good afternoon. I'm Masatoshi Shikanai and I'm in charge of the recording media business.

As was reported earlier, the recording media & systems segment posted net sales of ¥112.6 billion and a large operating loss of ¥7.7 billion for fiscal 2005.

A drop in DVD sales prices that was much larger than expected was the single largest factor behind this result. The drop was ¥32.0 billion compared with fiscal 2004. The reality is that we were slow in implementing management reforms to cope with a rapidly changing business environment and, as a result, there has been a serious decline in the segment's performance.

For fiscal 2006, we are forecasting consolidated net sales of ¥110.0 billion and an operating loss of ¥3.5 billion. The latter includes restructuring charges of ¥4.5 billion. Excluding these charges, we would be forecasting operating income of ¥1.0 billion, a ¥7.4 billion year-on-year improvement. But to achieve this sort of turnaround, we plan to resolutely implement bold business reforms. That means reforming the very structure of the business itself.

Recording media products, as typified by the DVD, are quickly becoming commodities. Shorter product lifecycles are fanning intense price competition, making it extremely difficult to recoup investments in mass production facilities. As a manufacturer in the media business in this environment, TDK must make major changes.

Basically, we must strike an optimal balance in our product portfolio between products we manufacture in-house and ODM products.

Let me explain what I mean in a more straightforward manner.

One option is to completely abandon development and in-house manufacture and just purchase products for sale. However, we haven't chosen this path, at least in recording media. This is because doing so would be tantamount to abandoning the founding philosophy of TDK. It would also be akin to turning our backs on our customers, who have put their trust in TDK's media for many years. If we didn't continue to develop and manufacture products ourselves, we also wouldn't be able to create new products that meet customers' expectations. We are convinced that creating new products is essential to raising the value of our brand and, ultimately, our enterprise value.

That said, conditions do not allow for expanding volume in-house as we have done in the past, particularly for commodities such as DVDs. Therefore, we plan to expand the contract manufacture of products through an approach that revolves around the transfer of technology to reliable partner companies. And we intend to bring to market new and value-added products earlier rather than latter, and to offer product prices that win acceptance in the marketplace.

We are targeting business processes and supply chain management for reform, too. In Europe, in particular, where market change is dynamic, our actions have been inadequate and slow in the past. Reflecting deeply on this, we will execute bold structural reforms of our sales organization as a whole to rectify this problem. For some products where there has been a clear market contraction and it is difficult to expect to generate profits as a market survivor, we will quickly exit manufacturing activities. We will execute major structural reforms with respect to manufacturing bases in Europe and Japan, in particular. In specific terms, are consolidating pre-production processes for VHS, and will also take actions in regard to other unprofitable products.

We are determined to refine the core technologies we have acquired over the many years since our founding to lead the market in commercializing products with value that is demanded and recognized by customers. We believe that, above all else, this is our mission. In this sense, I believe that data tapes and Blu-ray discs, the next generation of optical media, hold the most promise. With respect to these areas, we will consolidate development bases and concentrate investments in development to speed up the commercialization of products. Last year, we took the lead in introducing third-generation LTO-standard data tapes and are now seeing the benefits of this in terms of sales and earnings. We plan to push ahead with the early launch of new products following the road map for this business, while continuing with efforts to rationalize production further to lower costs. With respect to Blu-ray discs, we have worked hard on developing this technology for the past several years. I believe that our storehouse of expertise gives us the ability to take the lead in responding to marketplace demands. We plan to establish a production system in preparation for an anticipated launch of this market at the beginning of 2007. We expect Blu-ray discs to start contributing to profits in fiscal 2008.

In the ways I have described, we are determined to achieve an operating profit in this segment by the fourth quarter of fiscal 2006 at the latest and dispel investor concerns about this business. TDK has long been a pioneer in the recording media business in Japan. We have been involved in everything from development and manufacture through sales in this business since our earliest days, and have supplied a continuous stream of innovative products. As a guardian of this legacy, I am deeply aware that my most important duty is to extricate this business from the current difficulties. Rest assured, I will apply all my energies and efforts to make this happen.

Thank you for your continued support.