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[ Financial Results for Fiscal 2006 Performance Briefing ]Q&A

Q1. What is your outlook for quarterly sales of capacitors for fiscal 2007?
A1. If the first quarter of the past fiscal year is 100, then we are planning capacitor sales of 122 in the first quarter, 130 in the second quarter, 130 in the third quarter and 120 in the fourth quarter.
Q2. What is your planned profit margin?
A2. We plan to achieve an operating income margin of between 15% and 20%.
Q3. By the way, what was your operating income margin in the fourth quarter?
A3. We had a double-digit operating income margin.
Q4. What are your plans for increasing output this fiscal year?
A4. We are planning on raising monthly output by about 2 billion units.
Q5. When will this additional capacity be completed?
A5. The additional capacity will begin making a full contribution to our sales in the second half of the fiscal year, starting in about September. We are now slowly preparing to increase our production capacity.
Q6. What are your plans for HDD head sales, using last year's first quarter as 100?
A6. In our previous information meeting, we said that HDD head sales in last year's fourth quarter would be 119, but actual sales were 129. In the current fiscal year, we are expecting sales of 121 in the first quarter, 124 in the second quarter and about 120 in the last two quarters.
Q7. What assumption for capacitor prices is your outlook for capacitor sales based on?
A7. Our plans incorporate capacitor price discounts of about 7%. Currently, demand for capacitors is exceeding the supply. Therefore, we do not expect to see discounting demands that are as strong as in the past. Our price discounting plan takes this situation into consideration.
Q8. Is TDK's 7% discount assumption somewhat higher than the average outlook for the industry? Does this mean you are attempting to capture market share by cutting prices? Or will current market conditions allow TDK to return its market share to an adequate level without cutting prices?
A8. Under current market conditions, we believe that it is possible to achieve adequate gains in market share without cutting prices.
Q9. It appears that demand for capacitors is significantly higher than supply. Is there any need to factor in a possible return to a general balance between supply and demand in the second half of the fiscal year?
A9. Based on current market trends, demand is much higher than supply. Since all manufacturers are currently raising capacitor output capacity, there are concerns that there will be an over-supply of capacitors in the fiscal year's second half. Our plans for higher capacitor sales incorporate the risk of a possible breakdown in supply-demand dynamics. We do not intend to raise sales simply by offering lower prices. We also plan to raise sales by supplying high-margin capacitors for new applications.
Q10. As the current president of TDK, what are your hopes for the new management team once the new president takes over? In other words, what does Mr. Kamigama want to accomplish most of all as the new president?
A10. (Mr. Sawabe) As I explained earlier, I believe that our next medium-term plan will be structured to achieve an operating income margin of 15%. If this is the case, I think that TDK will have to raise sales, and profit margins, of products other than HDD heads, to reach this goal. Naturally, we will continue to place emphasis on the HDD head business. While increasing HDD head sales, we need to increase sales and profit margins of electronic components other than these heads. This is what I have discussed with Mr. Kamigama.
Q11. Please explain your outlook for HDD head prices for this fiscal year. This year, 160GB/P heads will be the primary product for 3.5-inch drives and 80GB/P heads will be the primary product for 2.5-inch drives. Will this shift in sales composition be beneficial for TDK? Please give us your view in terms of profit margins.
A11. We are expecting to see overall price discounts of more than 15% in HDD heads during this fiscal year. Your question concerns a possible improvement in our sales composition due to the launch of two new heads, the 160GB/P and 80GB/P versions. We do foresee a benefit from a shift in the product mix as the sales volume of the new versions begins to climb in about the third quarter. However, our plans assume no sales at all to Maxtor in the fiscal year's second half. That means we must increase sales volume to captive HDD head manufacturers. So you should not place your expectations solely on an improvement in our sales composition. You also need to factor in the impact of a price decline. On the other hand, our results will benefit from the high production yield for TMR heads. This positive factor will probably offset to some degree the impact of price discounts.
Q12. Your outlook for this fiscal year includes lower sales in some businesses and higher sales in others. But what is your outlook for changes in earnings? Your plan calls for an increase of almost \10 billion in operating income, excluding one-time expenses. Please provide a breakdown of this figure.
A12. The biggest change in earnings will take place in the recording media segment. We expect this segment to move from a big loss to a profit this fiscal year even after the inclusion of restructuring expenses. Therefore, after excluding these one-time expenses, we expect that the biggest profit increase will be in the electronic devices sector. This category includes inductive devices and Densei-Lambda power supply products. So we expect our biggest growth here. The second-largest increase in earnings will probably come from the recovery of the electronic materials sector, which includes capacitors. We expect that HDD head earnings will decrease along with sales.
Q13. Based on your plan, what percentage of operating income will come from the power supply business?
A13. We do not discuss operating income for individual businesses. Therefore, I will discuss only the operations of Densei-Lambda KK, a publicly owned company that recently announced its results for the past fiscal year. We are expecting operating income in the range of \2.5 billion to \3.0 billion. According to Densei-Lambda's earnings announcement, the European and U.S. power supply operations that TDK purchased from Invensys plc., and that were subsequently purchased by Densei-Lambda from TDK, resulted in the recording of goodwill by Densei-Lambda. Based on Japanese accounting standards, all of this goodwill can be amortized at once. Densei-Lambda chose to amortize three months of this goodwill in the past fiscal year's fourth quarter and the remainder during the current fiscal year. Therefore, results in the current fiscal year will include a goodwill amortization charge of about \3 billion. When we consolidate the financial statements of Densei-Lambda, we restore this goodwill so that it can be amortized according to SEC standards. Due to the difference in accounting standards, the consolidation of Densei-Lambda's financial statements using SEC standards will boost TDK's operating income by between \2.5 billion and \3.0 billion this fiscal year.
Q14. What is your earnings plan for the recording media segment?
A14. We are seeing steady growth in high-value-added products, like LTO-standard data storage media, that we develop and manufacture. But the overwhelming majority of sales in our recording media segment come from DVDs and other products that we purchase from ODM suppliers. That means we can't hope for substantial earnings. Therefore, we are projecting operating income of between \1.5 billion and \2.0 billion.
Q15. You have stated your intent of once again becoming the leader in the HDD head market. But passing the current leader, Seagate, would require a market share of more than 40%. How do you plan to accomplish this? Another point concerns TDK's loss of two important customers, Western Digital and Maxtor. Even if we assume that no significant actions are needed to respond to this realignment of the HDD industry, is there a possibility that TDK will make an acquisition to protect its head business? Finally, who will succeed Mr. Kamigama as the head of the head business?
A15. Regarding our plans for increasing our market share, we intend to slightly increase our sales to HDD makers that produce heads for internal use. Our plans for this fiscal year already incorporate these sales. However, we do not expect that we can bring our market share back to the previous level in this fiscal year. This process will probably continue into the following fiscal year.

Your question concerning mergers and acquisitions is difficult to answer. We will not be an idle spectator, but will take the actions that we believe are necessary. That is all I can say about this matter.

Regarding my successor, we have made a decision but I cannot make an announcement at this time.
Q16. Please allow me to confirm quarterly restructuring expenses. You just told us the annual figure, but how much of this was recorded in the fourth quarter? And what is your plan for quarterly restructuring expenses in the current fiscal year?
A16. In the past fiscal year, restructuring expenses were \14.2 billion. This was the total of \0.5 billion in the first quarter, \0.8 billion in the second quarter, \0.9 billion in the third quarter and \12.0 billion in the fourth quarter. When goodwill amortization of \1.5 billion is added, the total becomes \15.7 billion. In the current fiscal year, most of the first-quarter expenses of \1.5 billion represent delayed restructuring initiatives involving recording media. Second-quarter restructuring expenses will be \2.3 billion. As I discussed earlier, these actions will target magnetic products. We are planning on no restructuring expenses in the third quarter and expenses of \0.3 billion in the fourth quarter. That means total restructuring expenses will be \4.1 billion.
Q17. Mr. Sawabe's presentation included remarks about high-frequency components. These remarks seemed to have a relatively positive tone about this business. Does this mean that TDK is very confident about future prospects for activities that you will be starting, and that you have been preparing for over the past few years? Also, how does TDK plan to differentiate itself in the WiMAX, Wi-Fi and UWB markets? Please explain the actions you plan to take?
A17. The high-frequency components business has finally become profitable after we eliminated unprofitable operations. But we started projects involving communications ceramic modules and thin-film devices at the end of the past fiscal year. Senior Vice President Minoru Takahashi, our chief technology officer, is overseeing these projects. Furthermore, we are building stronger relationships with major mobile phone manufacturers that are customers of ours. So my remarks reflected our confidence that this business is finally about to turn around.
Q18. What unique TDK strengths do you plan to use to capture market share?
A18. TDK is basically a ceramics company and a process technology company that uses expertise in ceramics. Therefore, we will focus on receiving customer certification of distinctive modules and components that are compact and have low profiles.
Q19. You stated that head shipment volume rose from 123 in last year's third quarter to 129 in the fourth quarter. But Maxtor's earnings release shows that its HDD head volume dropped. Why did TDK's fourth-quarter sales increase? Also, please outline current market trends, including the operating environment in the current quarter.
A19. One reason for the good fourth-quarter sales was that sales to Maxtor did not drop. It appears that the Maxtor management team decided to ship a lot of Maxtor products because of pressure created by the talk of a takeover. So we sold a lot of heads to this company. A second reason for higher sales was growth of the HDD market. In the current quarter, which ends in June, we expect to see a big drop in sales to Maxtor following the large volume of sales in the prior quarter. But we do not expect declines in sales to other HDD companies.
Q20. How did the HDD head profit margin change in the third and fourth quarters?
A20. The fourth-quarter profit margin was higher than in the third quarter.
Q21. TDK has for some time been stating its intention of raising the operating income margin to 15% over the medium term. When do you plan to reach this goal? And what level of sales do you envision when the operating income margin rises to 15%?
A21. We have conducted simulations based on the new medium-term plan that will begin in April 2007. Our simulation assumes that we will begin taking actions to eliminate a lot of our unprofitable operations and to expand new and potential businesses. Based on this outlook, we have established a 15% operating income margin as one of the targets to be reached during the new medium-term plan.
Q22. You have stated that TDK has been recording double-digit year-on-year growth in monthly orders since August 2005. Do you think that growth in orders has passed the peak, or will orders continue to climb at a double-digit pace? Please discuss order growth separately for heads and other electronic components.
A22. Regarding orders, we continue to see very strong growth in all categories of our electronic components. Orders for HDD heads are fairly strong from all customers except Maxtor. Demand for heads for 2.5-inch drives is particularly strong. Furthermore, we believe that Seagate's purchase of Maxtor will give HDD makers that also produce models for desktop computers the chance to increase their market share.
Q23. How many years does the medium-term plan starting next April cover?
A23. Three years.