[ 1st Half of fiscal 2006 Performance Briefing ]Consolidated Results 1st half of FY2006 & Projections for FY March 2006

Mr. Hajime Sawabe
President & CEO

Thank you for taking the time to attend today's meeting, and for your interest in TDK. I will begin my presentation by discussing our first-half consolidated results.

1. Consolidated results

(1) Sales and earnings

Net sales rose 10.4% to ¥350.4 billion. Operating income was ¥28.1 billion, up 1.1%. Income from continuing operations before income taxes was ¥31.6 billion, up 6.5%. Net income was ¥21.7 billion, up 9.0%.

First-half net sales rose 10.4% and there was a small increase in operating income despite the contribution one year ago of demand created by the Athens Olympics. Overall, we met the goals set forth in our initial business plan. As a result, we were able to report year-on-year growth in sales and earnings in this fiscal year's first half.

Net income per common share rose from ¥150.11 to ¥163.84, while stockholders' equity per common share increased from ¥4,615.44 to ¥5,058.27.

(2) Sales by business segment

Electronic materials and components

First-half net sales increased 15.2% to ¥300.7 billion.

The electronics market began slowly recovering in the first quarter from the weakness that prevailed in last fiscal year's fourth quarter. As the first quarter progressed, growth in demand for components used in mobile phones and PCs began to gain momentum. In the second quarter, we also saw solid demand from manufacturers of digital home appliances. The result was extremely strong demand for electronic components.

Demand for hard disk drives, which bottomed out in the past fiscal year's second half, continued to climb. We saw strong demand for our HDD heads during the first half as a result.

Orders were also higher for car electronic components as cars rely increasingly on electronic devices.

Electronic materials

Sales in this sector decreased 5% to ¥86.1 billion.

Capacitor sales benefited from a rebound in orders from mobile phone and PC manufacturers that began late in the first quarter. However, due to production problems unique to TDK, we were unable to take full advantage of the growth. As a result, capacitor sales fell 10%.

Ferrite core sales were down because of falling demand for cores used in CRT televisions. Magnet sales, however, were higher because of sharp growth in sales of HDD magnets and steady growth in sales of magnets used in car electronics. As a result, sales of ferrite cores and magnets increased 4% year on year.

Electronic devices

Sector sales increased 6% to ¥61.0 billion.

Sales of inductive devices increased 8% because of higher sales in the IT home electronic appliance, networking and car electronics markets.

Sales of high-frequency components were down 9%. The effects of lower sales prices of mobile phone components and a shortfall in sales to certain customers were greater than the contribution made by strong sales of wireless LAN components.

Sales of other products increased 7%. There were two primary reasons. One was growth in sales of power supplies used in IT home electronic appliances and industrial equipment. The other was higher sales of components for mobile phones in sensors and actuators category.

Recording devices

Sector sales were up 36% to ¥140.3 billion.

HDD head sales were weak in the first half of the previous fiscal year as HDD manufacturers reduced inventories, but head demand rebounded in the second half. This growth continued in this fiscal year's first half, too. Rising demand along with an increasing number of HDD applications is now fueling consistently solid demand for heads. Our head sales climbed 40% as we raised our market share to 35% compared with 29% in the past fiscal year's first half.

In the other heads category, sales fell 11% because lower output by certain customers reduced orders for optical pickups.

Other electronic components

Sector sales were up 46% to ¥13.4 billion, mainly a reflection of our efforts to sell displays and other new products.

Electronic materials and components sales by market category

By market field in the electronic materials and components segment, sales to the IT home electronics field increased 23% and accounted for 67% of segment sales. Sales to the high-speed, large-capacity networks field declined 2% and accounted for 8% of segment sales. Sales to the car electronics field rose 12% and accounted for 9% of segment sales. Sales to other fields were flat and accounted for 16% of segment sales.

Growth in HDD heads is the primary reason for the higher sales in the IT home electronics field. Sales associated with high-speed, large-capacity networks were held back by a downturn in sales of mobile phone components. Higher automotive sales reflect the increasing use of electronic devices in automobiles.

Recording media segment

Segment sales were down 12% to ¥49.7 billion. Higher sales of DVDs and other optical media and of computer backup tapes were insufficient to offset the decline in sales of videotapes, audiotapes and other analog tapes.

(3) Sales by region

Sales in Japan decreased ¥1,540 million, or 2%, from ¥87,622 million to ¥86,082 million. Sales in the Americas were down ¥335 million, or 1%, from ¥39,801 million to ¥39,466 million. Sales in Europe were down ¥3,304 million, or 9%, from ¥35,973 million to ¥32,669 million. But sales in Asia, excluding Japan, and other areas increased ¥38,074 million, or 25%, from ¥154,096 million to ¥192,170 million. Overseas sales thus increased 15% to ¥264.3 billion and accounted for 75.4% of consolidated net sales, up 3 percentage points from 72.4% in the previous fiscal year.

In Japan and the Americas, the drop in recording media sales was greater than the growth in sales of electronic components. In Europe, sales declined in both segments. Higher sales in Asia were driven by large increases in sales of recording devices and other electronic components.

(4) Operating income

Operating income was up 1% to ¥28.1 billion, an increase of ¥0.3 billion. The components of this increase are summarized below. One was an increase in sales along with an improved product mix, which raised operating income by ¥18.4 billion. Rationalization and other measures contributed ¥22.4 billion to operating income. These positive factors were offset by sales price discounts of 10.3% on average, which reduced operating income by ¥40.3 billion. Exchange rate fluctuations also lowered operating income. The appreciation of the yen from ¥109.8 to ¥109.5 against the U.S. dollar had a ¥0.2 billion negative effect on operating income.

(5) Operating income by business segment

Looking at operating income by business segment, the electronic materials and components segment posted operating income of ¥32.3 billion, up ¥1.5 billion year on year. Earnings benefited from higher earnings in the electronic devices and recording devices sectors and from improvements in our profit structure. This was offset somewhat by lower sales and earnings in the electronic materials sector.

The recording media segment's operating loss increased by ¥1.2 billion to ¥4.2 billion. Earnings were impacted by lower sales of magnetic tapes, which have a high profit margin, and by a worsening product mix and sales price discounts even as we raised sales of optical media. The segment loss includes ¥1.3 billion in restructuring expenses.

In the optical media category in DVDs, we began to see a slowdown in the steep price declines that occurred during the past fiscal year. Even so, sales prices are down about 50% year on year. Earnings were also hurt by a continuing deterioration in our product mix. Due to these factors, segment earnings fell short of our plan.

Our progress in restructuring measures is somewhat behind our initial plan. Nevertheless, we plan to complete the restructuring program we have planned for this fiscal year as quickly as possible during the second half. We are determined to improve recording media segment profitability to the planned level so that we can improve profitability even more in the following fiscal year.

(6) Cash flows

Turning to cash flows, free cash flows were a negative ¥26.5 billion, a difference of ¥36.5 billion compared with the ¥10.0 billion in positive free cash flows one year earlier.

*Based on the six-month period

The following figures are comparisons between March 31 and September 30, 2005.

Trade receivables increased ¥13.6 billion, ¥4.9 billion of which was due to foreign exchange movements.

Inventories increased ¥11.5 billion, ¥2.3 billion of which was due to foreign exchange movements. This increase was mainly the result of higher inventories at overseas subsidiaries and higher HDD head inventories due to growth in orders. This accounted for ¥4.9 billion of the inventories.

First-half capital expenditures totaled ¥34.3 billion, ¥4.5 billion more than one year earlier.

2. Non-Consolidated Results

On a parent-company basis, net sales declined 2.8% to ¥163,096 million, from ¥167,709 million. Operating income was ¥5,854 million, up 2.8%, from ¥5,696 million. Current income was ¥16,364 million, down 26.2% from ¥22,169 million. The parent company recorded a net loss of ¥1,303 million, compared with net income of ¥15,883 million in the previous fiscal year.

Lower sales of capacitors and recording media were the primary causes of the decline in non-consolidated sales. Operating income was up slightly thanks to earnings from recording devices. However, current income and net income both dropped mainly because of a decline in dividends received from overseas subsidiaries. Net income was also brought down by prior year income taxes of ¥11.9 billion. TDK has objected to recent correction notices based on transfer pricing taxation regulations and these objections are currently under examination by the taxation authorities.

3. Interim dividend

In accordance with its basic dividend policy, TDK has raised its interim dividend by ¥10 yen to ¥40 yen per share of common stock.

4. Forecasts for fiscal year ending March 2006

(1) Consolidated sales and earnings

(million yen)

Note:
1. FY05 net income incorporates the effect of transfer pricing taxes.
2. The revised FY06 forecast exchange rate is based on a second-half rate of ¥100 to the U.S. dollar.

These forecasts include the contribution from our acquisition of the Lambda Power Division, which became part of our consolidated financial statements in October. The inclusion of this division is expected to add about ¥25.0 billion to our second-half sales.

Note that the second-half exchange rate is forecast at ¥100 to the U.S. dollar, the same as in our initial plan for the fiscal year. The actual exchange rate during the first half was ¥109.52.

5. Conclusion

In the first half of this fiscal year, we saw a recovery in demand for mobile phones and PCs. There was also an upturn in sales volumes of digital home appliances and continued growth in the use of car electronics. Collectively, these trends underpinned a steady increase in orders for electronic components (electronic materials and electronic devices).

We are also seeing an increase in demand for hard disk drives due to higher sales of HDD-equipped consumer electronics and notebook computers. Due to these market conditions, we were able to raise first-half sales by 10% year on year despite the one-time contribution last year of the Athens Olympics.

Despite this strong performance, we must deal with a number of problems.

In our capacitor business, production-related difficulties prevented us from fully benefiting from favorable market conditions. Initiatives that we started last year to boost productivity did not meet our targets. In fact, capacitor productivity and yields dropped. Making matters worse, our efforts to fill the rising volume of orders further disrupted production activities. We even saw our market share decline. But now we have finally devised a solution for our production issues. Capacitor sales will rebound in the second half along with profitability.

In the money-losing recording media segment, ongoing restructuring measures are falling behind our plan. One reason is issues associated with the communities where we have operations. We plan to resolve these issues by the end of this fiscal year, returning the segment to profitability in the fourth quarter. We will continue to enact sweeping reforms in order to quickly improve the profitability of this business.

Our first-half results depended to a great extent on the HDD head business. The entire HDD market was larger in this fiscal year's first half than it was one year ago. Growth was driven by non-IT applications. Our average share of the HDD head market was 35% in the first half compared with 29% one year ago. Moreover, our HDD head sales were up 40% year on year.

More growth is expected in the market for distributing and viewing moving images on mobile devices. This indicates still more growth in demand for HDDs. The TMR head and perpendicular recording head will make their debut in the next fiscal year. Our goal is to raise our market share to 40% by working even more closely with HDD manufacturers as these events unfold.

Another urgent issue for TDK is the decline in our ability to grow. We must take steps to maximize our growth potential.

Growth must come from our ability to leverage key technologies to supply the products our customers want in a timely fashion. That means meeting demands for smaller size, greater performance, lower power consumption, resource conservation and environmental sensitivity. These demands represent an enormous opportunity for TDK to show off its expertise in electronic materials and components. We are gauging our progress by monitoring the share of number-one products and new products in our lineup. Right now, these figures are 51% and 34%, respectively, indicating that we are largely on track. We will continue to focus on making even more progress.

During the first half, we acquired the Lambda Power Division and Amperex Technology Limited (ATL). We view our primary mission as driving growth by developing, manufacturing and selling products on our own. But we regard mergers and acquisitions as another option. We will use M&As to acquire businesses that allow us to leverage our existing technologies to grow faster in strategic fields and bring talented CEOs into the TDK Group.

We regard power supplies along with inductive devices as our third core business. Ferrite, an electronic material where we have much expertise, is a key element of these two products. We therefore believe that we can continue to grow in the power supply and inductive devices markets. We are currently restructuring our power supply business. We believe that the inclusion of the Lambda Group, which is strong in power supplies for industrial use, will speed up our growth. We will make development, manufacturing and other activities even more efficient. Our goal is to solidify our market profile in order to achieve a double-digit profit margin in the power supply business within the next several years.

In the rechargeable battery business, the combination of ATL's product development skills and TDK's expertise in materials will allow us to move faster in developing products with high energy densities. TDK plans to sell more products with the distinctive features needed to compete successfully in niche markets. Furthermore, we will tap the materials technologies and product development skills of TDK and ATL to start selling new types of components.

Developing materials is not a glamorous task. Projects require much time and only a small share of ideas become a success. But we will continue to concentrate on materials as we work as closely to our markets as possible.

The pace of change in our markets continues to accelerate. In this environment, only the best companies and products can survive. Success demands that we place priority on building a system that can make us the first to supply the products our customers demand. That means constantly refining our core materials, process, and evaluation and simulation technologies. We must focus all our energy on this theme to become a true e-materials solution provider in a class of its own. I am convinced that this process will lead directly to growth in TDK's corporate value.

Looking at the macroeconomic picture, we are witnessing an increase in concerns sparked by the higher cost of crude oil along with other basic materials. This points to an end of growth that was driven by bubble-like conditions in the United States and China. In addition, there has been absolutely no shift in the pressure to raise the value of the Chinese yuan and Japanese yen. Pressure remains even though there is now a temporary lull in the move to boost the yuan's value.

At present, demand for electronic components is extremely strong. Even so, there are concerns about direction of final demand as 2005 draws to a close and 2006 begins. But TDK is committed to meeting our initial goals despite the uncertain outlook and irrespective of our ability to overcome the issues we face during this fiscal year's second half. We are determined to meet the expectations of our shareholders.

I believe that moving as fast as possible over a period of several years to once again make TDK a highly profitable company is the best way to meet the expectations of the market and all our stakeholders. Our initial target is an operating income margin of 15%. With this in mind, we are stepping up efforts to execute structural reforms and build a more powerful organization. We will be moving steadily, one step at a time, closer to our goal of making TDK an Exciting Company.

Thank you.