[ Financial Results for Fiscal 2008 Performance Briefing ]Consolidated Results FY March 2008 & Projections for FY March 2009

Mr. Seiji Enami
Director
Senior Vice President
General Manager
Finance & Accounting Department

Good afternoon. I'm Seiji Enami, General Manager of the Finance & Accounting Department. Thank you for taking the time to attend today's meeting in large numbers and for your ongoing support. Without further ado, let me report on our fiscal 2008 operating results and fiscal 2009 projections. In the past, our presentations have followed the earnings release, but some people have told us that it was difficult to follow because we kept switching between pages. So from now on we plan to follow the projector slides on the screen in front of you.

Now for an overview of our consolidated operating results. We posted consolidated net sales of ¥866.3 billion, up ¥4.3 billion, or 0.5%, year on year. Operating income was ¥87.2 billion, up ¥7.6 billion, or 9.5%, giving an operating margin of 10.1%. Income before income taxes was ¥91.5 billion, up ¥2.8 billion, or 3.2%. Net income was ¥71.5 billion, up ¥1.3 billion, or 1.9%. Basic net income per common share rose from ¥529.88 to ¥551.72, while stockholders' equity per share declined from ¥5,759.18 to ¥5,556.77.

While both sales and earnings were up only slightly on the previous fiscal year, net sales and net income were records for TDK. The decline in stockholders' equity per share was mainly attributable to a large drop in foreign currency-denominated assets upon translation due to the yen's appreciation. This led to a large increase in accumulated other comprehensive income (loss), a component of stockholders' equity, and a consequent drop in stockholders' equity per share with respect to foreign currency-denominated assets.

That brings me to the impact of exchange rates in fiscal 2008. The average yen exchange rate was ¥114.44 for the U.S. dollar, which represented a 2.2% appreciation in the yen's value. Against the euro, the yen depreciated 7.7% to ¥161.59. Overall, exchange rate movements had the effect of reducing net sales by ¥8.1 billion and operating income by ¥5.9 billion. Against the greenback, the yen weakened in the first half but then appreciated in the second half. This volatility is highlighted by a low value of ¥124.14 and a high of ¥95.78 during the fiscal year. The average change year on year was only ¥2.53.

Now the main features of our results. The first feature was a large increase in head volumes in recording devices and a large increase in the share of perpendicular magnetic recording-based products in our product mix. Another feature was steady growth in sales posted by electronic component sectors other than recording devices. Electronic devices and other electronic components saw sales rise on strong demand for digital electronic products.

On the other hand, capacitors, part of the electronic materials sector, weren't able to keep pace with market growth. This product category could have done much better and the run-up of materials prices, which had a Company-wide impact, also weighed heavily on earnings here.

Furthermore, the recording media segment saw sales drop substantially following the transfer of the TDK brand product sales business for recording media to Imation Corp. In return though, TDK recorded a gain on transfer.

Our performance was also impacted by exchange rates as I alluded to just before, although the average rate throughout the year didn't change that much. The rate at March 31, 2008 was ¥100.19, compared with ¥118.05 at March 31, 2007. The approximate ¥18 appreciation had a considerable impact on our income statement and balance sheet.

Another feature of the past year was that we conducted more tender offer bids (TOBs) and M&As than usual.

Turning to sales by segment, I would like to give you the operating results, the share of sales for each segment and sector, and the percentage change from fiscal 2007. Of the ¥866.3 billion in total sales, ¥818.1 billion were accounted for by the electronic materials and components segment, which was ¥59.3 billion, or 7.8%, higher year on year. Sales in the electronic materials and components segment accounted for 94.4% of total sales. The recording media segment, meanwhile, saw net sales fall ¥55.0 billion, or 53.3%, year on year to ¥48.2 billion. This segment accounted for 5.6% of total sales.

Let me explain the reasons behind the ¥59.3 billion growth in net sales in the electronic materials and components segment to ¥818.1 billion. One was higher demand from emerging markets for flat-screen TVs, home video game consoles, notebook PCs, mobile phones, digital cameras and other digital home appliances, which resulted in higher output of finished products. This in turn lifted component production. Another reason is that as finished products become more sophisticated and offer greater functionality, the number of electronic components used in them has risen. Yet another factor is the increasing use of electronics in automobiles. All these factors have fueled an increase in demand for electronic components. We realize, however, that in fiscal 2008 we failed to fully capitalize on expansion in capacitor demand.

Let me break down the ¥818.1 billion recorded by the electronic materials and components segment by sector. Electronic materials labored to record a ¥0.9 billion, or 0.4%, rise in sales to ¥200.1 billion. Sales in this sector accounted for 23.1% of total sales. Capacitors generated only a small increase in sales, the result of lower sales for use in PCs and mobile phones negating higher sales for automotive applications. Ferrite cores and magnets saw sales of magnets rise but sales of ferrite cores fall. As a result, capacitor sales accounted for 69% of sector sales and were largely unchanged year on year. Ferrite cores and magnets accounted for the remaining 31% and sales were up 1%.

Sales in the electronic devices sector of the electronic materials and components segment rose ¥10.9 billion yen, or 5.5%, year on year to ¥209.1 billion. The main reason for the rise was higher sales of power line coils and signal line coils for TVs in the inductive devices category. Furthermore, sales of common-mode filters also increased to the auto market. Sales of high-frequency components increased year on year, the result mainly of higher sales for PC applications. Sales of other products saw a fall in power supplies for semiconductor production equipment and actuators for digital home appliances. Electronic devices overall accounted for 24.1% of total sales. Inductive devices sales rose 7% and accounted for 46% of total sector sales. High-frequency components accounted for 8% and sales were up 71%. Other products accounted for the remaining 46% and sales were down 2%. Incidentally, the reason for the slight decline in power supplies sales was the termination of some unprofitable products following a review of product profitability.

Sales in the recording devices sector increased ¥29.9 billion, or 9.8%, to ¥334.7 billion, and accounted for 38.6% of total sales. TDK's HDD head sales tracked higher production of HDDs for PC applications. The "other heads" category, which is now included under "other" in this sector, saw sales fall due to the withdrawal from some products. We have previously talked about our acquisition of an HDD suspension assemblies manufacturer. Sales of this manufacturer are included under "other," which is why we renamed this category. Overall, HDD heads accounted for 93% of total sector sales and sales were up 6% year on year. Other heads, which as I've just said includes HDD suspension assemblies and the previously classified "other heads," accounted for the remaining 7% and rose 98%.

Finally, in other electronic components, sales climbed ¥17.6 billion, or 31.2%, to ¥74.2 billion, the result of higher energy device (rechargeable batteries) and anechoic chamber sales.

Sales in the recording media segment fell sharply due to the transfer of the TDK brand recording media sales business to Imation Corp. As a result, there was a large change in the makeup of recording media segment sales. Audiotape sales declined 28% and represented 7% of segment sales. Videotape sales were down 59% and accounted for 15% of segment sales. Optical media sales dropped 68% and accounted for 37% of segment sales. Blu-ray Disc sales are increasing gradually as the market comes of age for this media. Other products, including tape-based data storage media for computers, saw sales decline 25% and account for 41% of segment sales. Sales of LTO-standard (Linear Tape-Open) tape-based data storage media for computers rose.

Let's now look at sales in the electronic materials and components segment in terms of three key market fields-IT home electronics, high-speed, large-capacity networks, and car electronics-assuming sales are 100. Sales to the IT home electronics field increased 9% on strong growth in storage devices and accounted for 63% of segment sales. Sales to the high-speed, large-capacity networks field rose 13% due to growth in components for telecommunications and accounted for 11% of segment sales. Sales to the car electronics field rose 10% on strong growth for automotive electronics applications and accounted for 8% of segment sales. Sales to the others field increased 1% on the back of strong growth for industrial machinery applications and accounted for 18% of segment sales.

Now for a breakdown of sales by region. All regions were heavily impacted by the decline in recording media sales. In Japan, sales of electronic components fell, except for other electronic components. Sales decreased overall in the Americas too due to lower sales of electronic materials, although other sectors recorded higher sales. Sales decreased in Europe due to lower sales of electronic materials. In Asia (excluding Japan) and other areas, sales rose overall on the back of higher sales in all four products sectors of the electronic materials and components segment. Overseas sales were ¥714.2 billion and accounted for 82.4% of total net sales, up 2.3 points year on year.

Turning now to our consolidated income statements. You will note that operating income rose ¥7.6 billion and I would like to explain this increase in more detail, but before that I want to mention the ¥4.7 billion decline in total other income. The single largest reason for this decline was a foreign exchange loss, which was ¥4.6 billion worse than the foreign exchange gain recorded in the previous fiscal year. This was the result of the yen's appreciation. There was also a ¥1.3 billion deterioration in other-net, which went from income to an expense and reflected write-downs of marketable securities. Also on the income statements, you'll see that we recorded a gain on business transfer to Imation Corp. of ¥15.3 billion, ¥0.4 billion more than the ¥14.9 billion we previously announced. This relates to the determination of the level of working capital at transfer, which was higher than expected. Working capital was examined closely by the counterparty to the transfer and approved as appropriate. The amount exceeding the initially approved amount was booked as a gain.

Back to the ¥7.6 billion operating income increase. The main positive factors were higher sales, including improvements in the capacity utilization rate and product mix, which contributed ¥25.5 billion; rationalization and cost-cutting, which contributed ¥30.1 billion; and reductions in selling, general and administrative (SG&A) expenses, which contributed ¥0.2 billion. In addition, there was the ¥15.3 billion gain on transfer. In total, positive factors lifted earnings by ¥71.1 billion. In contrast, negative factors totaling ¥63.5 billion brought down earnings. This total included sales price discounts equivalent to 6.2% as a whole, which decreased earnings by ¥57.6 billion. Exchange rate fluctuations lowered earnings by approximately ¥5.9 billion. The net result of these positive and negative factors was the ¥7.6 billion increase in operating income.

Regarding SG&A expenses, because of the transfer of the recording media sales business, we expected to see a considerable decrease in sales expenses. The decrease from this move was ¥9.3 billion. However, R&D expenses increased and selling expenses also increased due to corporate acquisitions. As a result, SG&A expenses weren't much different from the previous fiscal year.

Structural reform expenses, which were ¥7.0 billion in fiscal 2007, were ¥6.0 billion in fiscal 2008. Excluding the gain on transfer of the recording media sales business, operating income actually fell ¥7.7 billion year on year.

Looking at operating income by segment, the electronic materials and components segment saw operating income fall ¥5.8 billion despite a ¥59.3 billion net sales increase. Conversely, while the recording media segment recorded a ¥55.0 billion drop in net sales, its operating income improved ¥13.4 billion from a loss in the previous fiscal year. With the electronic materials and components segment, given that this segment usually has an operating margin of around 10%, it would have expected to have seen earnings rise by roughly ¥6.6 billion on the sales growth. So for operating income to drop ¥5.8 billion, effectively earnings in this segment were down about ¥12.0 billion. One reason for this was the sluggish performance by our capacitor business. Another major factor that explains the earnings decline was much higher materials costs, particularly in our magnetics business.

The recording media segment posted an improvement in operating income of ¥13.4 billion, but it recorded a loss of ¥4.1 billion if the ¥15.3 billion gain on transfer is excluded. Assuming this was the case, the segment's operating loss widened by ¥1.9 billion year on year. This deterioration in earnings is accounted for mostly by the difference in structural reform expenses between the two years. We incurred structural reform expenses of ¥3.3 billion for peripheral facilities related to the transfer. In fiscal 2007, these expenses were only ¥1.3 billion, meaning there was a year-on-year increase of around ¥2.0 billion. Accordingly, if those ¥3.3 billion in structural reform expenses were excluded, the segment would have recorded an operating loss of ¥0.8 billion. That is actually the figure we announced when we released our interim results, so this segment largely broke even in the second half in terms of actual operating income.

Now for a comparison of the fourth quarter with the third quarter. Our performance in the third quarter was strong, so on this basis we were confident that we could achieve the ¥90.0 billion operating income forecast we announced. However, things turned out to be tougher than we had imagined. Our result of ¥87.2 billion ended up being about ¥2.8 billion short of our forecast.

One reason was the sudden appreciation of the yen. Putting this into perspective, the average exchange rate for the yen against the greenback in the third quarter of fiscal 2008 was ¥113, but in the fourth quarter it was ¥105. This ¥8 appreciation between quarters heavily impacted our earnings.

In the electronic materials and components segment, whereas in the third quarter we posted net sales of ¥217.8 billion, in the fourth quarter we recorded net sales of only ¥201.9 billion, a quarter-on-quarter fall of ¥15.9 billion. We had expected a fourth-quarter decline all along and sales were actually in line with our expectations even considering the strong yen. However, one must remember that this result included sales of HDD suspension assemblies. Without the boost from those sales, we would have underperformed by about ¥10.0 billion because of the yen's appreciation. If one can't increase volumes and capacity utilization to overcome a stronger yen, then things can be difficult. Unfortunately, we were unable to raise capacity utilization enough to offset the impact of the yen's appreciation.

I mentioned earlier that fiscal 2008 was also a busy year for TOBs and M&As at TDK. As a result of these activities, we incurred amortization expenses for intangible assets relating to acquisitions. This resulted in expenses of ¥1.7 billion, which were incurred in March. We had anticipated these expenses from the outset and thought we could cover that ¥1.7 billion with higher sales volume that would compensate also for the rising yen. However, that wasn't the case.

I'd now like to look at our balance sheet. Total assets were ¥935.5 billion at March 31, 2008, a year-on-year decline of ¥53.8 billion. This was largely due to a ¥69.7 billion decline in overseas assets when converted into yen, as a result of an approximate ¥18 yen appreciation in the fiscal year-end exchange rate. Cash and cash equivalents including short-term investments were down ¥130.0 billion. Capital expenditures exceeded depreciation and amortization by ¥13.0 billion, there was an outflow of ¥18.6 billion for the acquisition of Magnecomp Precision Technology Public Company Limited, as well as ¥15.9 billion to make Densei-Lambda a wholly owned subsidiary. We also used ¥39.3 billion in cash for share buybacks, ¥17.8 billion for the purchase of investments in securities and ¥15.7 billion for the payment of dividends. We borrowed money to acquire Magnecomp Precision Technology Public Company Limited but we paid this back with internal funds, which reduced long-term debt by ¥9.2 billion. The effect of the yen's appreciation was to reduce cash and cash equivalents by ¥25.4 billion. While we generated net income of ¥71.5 billion, this wasn't enough to offset uses of cash, resulting in the ¥130.0 billion decline.

Looking now at accumulated other comprehensive income (loss), a component of stockholders' equity, you will see that this increased ¥63.7 billion to ¥81.5 billion. Foreign currency translation adjustments deteriorated ¥55.8 billion to ¥72.4 billion due to the stronger yen, while net unrealized gains on securities deteriorated ¥3.2 billion to negative ¥1.5 billion as a result of falling share prices. And minimum pension liability adjustments deteriorated ¥4.7 billion to ¥7.6 billion as share price falls affected asset management performance. The changes in these accounts led to a decline in stockholders' equity per share. Financial indices were all fairly sound, however, the fixed asset turnover ratio declined from 3.52 to 3.37. We made upfront investments in fiscal 2008 for increasing production, but there hasn't been a commensurate rise in production and sales just yet. This is the reason for the fall in this ratio.

Let me talk now about shareholder returns. One way in which we made returns to shareholders during the past fiscal year was to buy back and cancel some of our shares. We bought back 3,599,000 shares at a cost of ¥39.2 billion. We also plan to pay a ¥70 year-end dividend, making the annual dividend per share ¥130, including the ¥60 interim dividend. For fiscal 2009, we plan to pay an annual dividend of ¥140, made up of an interim dividend of ¥70 and a year-end dividend of ¥70. Our basic policy is to give consideration to a consistent increase in dividends, so we will work as hard as we can to achieve our fiscal 2009 earnings forecasts so that we can increase returns to shareholders.

That brings me to our forecasts for fiscal 2009. We are projecting consolidated net sales of ¥880.0 billion, operating income of ¥80.0 billion, income before income taxes of ¥85.5 billion and net income of ¥65.0 billion. These forecasts are premised on an average yen-U.S. dollar exchange rate of ¥100 for the full year. So compared to fiscal 2008, we are forecasting higher net sales, but lower earnings from the operating income level down. Net income is projected to fall 9% year on year.

Projecting results for fiscal 2009 is extremely difficult due to turmoil in the financial markets caused by the subprime loan problem as well as the effects on the real economy, the run-up in raw material costs and exchange rate movements, among other factors. What is difficult is that assumptions change and this leads to a change in projections. In this sense, one must state clearly the assumptions upon which forecasts are based. With that in mind, we have formulated our sales plans based on year-on-year growth in demand for flat-screen TVs, mobile phones, PCs and other finished products in the consumer electronics market, our home ground. We have also based our sales plans for HDD heads assuming firm growth in HDD demand, particularly for 2.5-inch HDDs for notebook PCs. In terms of the exchange rate, our forecasts, as I said, are based on an average yen-U.S. dollar exchange rate of ¥100, representing an appreciation of just under ¥15 compared with the roughly ¥115 for fiscal 2008. Given this, our targets are challenging, but we will nonetheless endeavor to achieve them.

Our projection for capital expenditures is ¥70.0 billion. This projection includes our intention to curb expenditures where we think market conditions warrant that. Depreciation and amortization are forecast at ¥77.0 billion because of upfront investments which will be depreciated or amortized for a full year for the first time in fiscal 2009. Furthermore, we are assuming R&D expenses of ¥57.0 billion. We want to turn the results of our investments into net sales of ¥880.0 billion. One-off charges, which were ¥6.0 billion in fiscal 2008, are projected at ¥4.7 billion for fiscal 2009.

That concludes my presentation. Thank you.