Hiroyuki Uemura - Executive Senior Vice President Noboru Saito - SVP Tetsuji Yamanishi - SVP

If I may be allowed to begin on our session [indiscernible] performance briefing the first quarter of fiscal year ended March, in 2018. Allow me to introduce myself.

I'm [indiscernible]. Thank you.

And that said if I'd now like to take moment to explain on the participants in front of you. We have Executive Senior Vice President, Hiroyuki Uemura.

And then we have Senior Vice President, Mr. Noboru Saito.

Last but not least, we have Senior Vice President, Mr. Tetsuji Yamanishi.

Thank you. Thank you.

First of all, again, I will go through the highlights of the consolidated results for the first quarter of March, 2018. Mr.

Yamanishi is going to be the presenter here.

Hello, and this is Yamanishi speaking. First of all, I'd like to thank you for your precious time despite your busy schedule.

We're here to explain to you our consolidated results for the first quarter and FY ended March, 2018, so happy to have so many of you. Allow me to explain our earnings in the high level first.

And I'd like to share now some of the key points in the reporting first quarter. We transferred high frequency in our components in the end of fourth quarter.

And it had a major impact on the incorporated profit structure on this first quarter. Net sales was up 3.8%.

Operating income was down to 5%, including one-time cost of JPY3.5 billion for InvenSense acquisition. TDK was able to and observed the impact coming from this business transfer because we were able to expand our growth in the existing lines of business.

In the automotive segment, and though the North American market slowed down a little bit, but besides the China market and the European market. Japan market particularly grew firmly, particularly in passive components sales grew.

And furthermore in the -- we had the increased demands in the semiconductor facilities and the industrial robots, and we observed the recovery in the demands in the [indiscernible] such as air conditioners. TDK was able to secure an overall growth of sales in the entire businesses centering around power products.

The total demand for HDD turned out to be the way in we had forecasted in the beginning of this fiscal year. The so-called non-captive HDD [indiscernible] sales performance.

On top of that, due to the acquisition of Hutchinson suspension volume increased, which helped us to observe then a decline in the captive HDD in assemblies. We had that in the numbers in the previous fiscal year; however this fiscal year we are not having that.

As for the rechargeable batteries and sales to our customers in North America grew nicely. And we sold more in the Chinese markets, and due to the strong adoption of solutions in a wide varieties of customers.

Sales in new applications such as drones and in gaming consoles continued to grow, resulting an increase both in revenue and in profit. In light of the transfer of high frequency and components business, in order to develop a new business portfolio since the last fiscal year, TDK executed our M&A activities based upon the company growth strategy.

In order the sensor business, which is the major plan of the growth strategy, we had worked on the acquisition of InvenSense. The acquisition was completed in May in the first quarter.

We launched Sensor Systems Business Company, and it gives me a great pleasure now to report to you that we almost completed building the business platform for mid to long-term growth for the sensor business. Going forward we will further work on the integration of sensor operations, and will promote a speedy ramp up sensing core technologies and materials technologies will be integrated with IC and packaged technologies.

By doing so, TDK will try to establish a solid business foundation. Next, I will go through the highlights of the Q1 results.

Net sales was JPY289.5 billion, down JPY10.7 billion or 3.8% year-on-year. And operating income was JPY15.6 billion, including an M&A one-time cost of JPY3.5 billion, down JPY900 million or 5.5% year-on-year.

Operating margin was down 0.5 points, becoming 5.4%. Income before income tax was JPY16.9 billion, up JPY500 million.

Net income for the quarter was JPY11 billion, down JPY1.4 billion or 11.3%. With these numbers EPS became JPY86.80.

The average FX rate was JPY111.16 to the U.S. dollar.

The Japanese yen became cheaper by 2.6%, and JPY122.02 to euro, pushing up the yen by 0.3%. All in all, the FX in impact was past the JPY4 billion in sales, and operating income was up about JPY1.1 billion.

As for the FX and safety for operating income between the dollar and the yen [indiscernible] about JPY1.2 billion in impact and on the annual basis. And then between the yen and the euro due to the [indiscernible] change in the foreign currencies and profit caused by the [transferred] [ph] and high-frequency components business its impact became JPY200 million from the previous JPY700 million.

Next I would like to now cover the segments [indiscernible]. Starting from this fiscal year now we added a new reporting segment, Sensor Application Products.

So now we have restructured the last year's in actuals, and based upon this new segmentation. Passive components net sales was JPY103.5 billion, down 22.0% year-on-year.

Operating income was JPY10.2 billion, down 31.1% year-on-year. Again, on the JPY103.5 billion, down 22%, and operating income was JPY10.2 billion, down 31.1%.

And our operating OP margin became 9.9%. As for ceramic capacitors, with its share of more than 50% in the automotive industry, it turned out to be rather strong.

And the sales volume in wet goods such as in air conditioners grew, giving us a increase both in revenue and profit. As for the inductive devices, and due to the inventory adjustments among the major smartphone manufacturers in China went down in ICT business year-on-year basis.

But just like ceramic capacitors and thanks to the strong sales in automotive business, and which was in a high share net sales, and industrial robots, and the instrumentation devices, and the healthcare and the renewable energy sales overall grew enabling us and to maintain a high in profit level. I'm so happy being able to report this to you.

High-frequency components had a major decline both in revenue and profit due to the business transfer, and the existing businesses, Wi-Fi and module business gone in this current year -- in the current year. And though we had it in the previous year and are pushing down the net sales drastically.

But TDK was able to maintain its high profitability [indiscernible] the ceramic filters. Piezoelectric material products grew in its revenue and profit thanks to the strong VCM business for the camera modules.

High-frequency components [indiscernible] transfer impacts were not observed as much, at JPY30 billion in the Q1 sales, and about 20% decline in OP margin. But now we will continue to make efforts to improve existing business profits.

This is somewhat a good news and for us to be able to report to you. Next, Sensor Application Products, this consists of temperature and pressure sensors, magnetic sensors [indiscernible] sensors for information.

Due to the change in the segmentation actual sales was JPY10.4 billion, and the operating income was negative JPY1 billion. As for details, net sales was JPY16.4 billion, up 57.7% year-on-year, and operating income was negative JPY4.6 billion.

Due to the completion of the InvenSense acquisition, the overall revenue was up JPY6 billion. We are now calculating the goodwill for the deal.

In the first quarter, we allocated a depreciation on the inventories and assets, and we paid the employees compensation, and also the retention cost, putting them altogether, JPY3.5 billion as the one-time expense. So now that is included in the P&L for the first quarter.

Automotive share is high in the temperature, and pressure sensors, and magnetic sensors showed in this grow mainly in the Japanese market and European market by as much as 13%, and also on the way you started [indiscernible] has been successful in the market. When InvenSense being consulted, MEMS or sensors sales now account for 30% within the entire sensor and application product segmentation, I would say the market accounts 70% plus, drawn and other industrial equipments now account for 30% or little bit less than 30%.

OP margin however was flat and if M&A and cost JPY3.5 billion is excluded.

And next magnetic application products, the net sales over last year was revise it up by JPY5.1 billion and operating income was JPY5.4 billion and operating income was down by JPY2.4 billion due to the change in signal mix and portfolio, net sales in the Q1 was JPY80 billion up by JPY3.5 billion during the year with operating incomes up by JPY4.8 billion and the 17.7% from the year earlier. Operating income margin by 6.0%, as HDD have been almost flat year-on-year although there was no assembly sales of HDD recorded this year.

On the other hand – on the other hand the segment has turned to more profitable due to consolidation of wind power related facilities and the cost of reduction efforts including HDD full turnkey products. Suspension business increased net sales with sales volumes grows due to the acquisition of Hutchinson, magnet business has steadily recovered with favorable businesses in areas of wind power generation and industrial robotics as well as air conditioners.

The net sales has been boosted although still recognizing a losses. So that now ends the business we constructed and recovered.

Power supply business has been going very well with positive growth in both sales and power business well as profit margins because of favorable operating performance into the markets related to semiconductor manufacturing devices and measurement equipments and robotics. Next Film Application Products, net sales was JPY79.7 with operating income over JPY12.7 billion, the net sales was up about as 53.9% and operating income was up with 15.9% and its substantial growth for both year and year, operating income margin has been maintained as high as 15.9%.

[Indiscernible] business for the North American customers has been better than expected including and the tablet products and the business for the customer in China also expanded on large products and breaking into new markets such as drones and the gaming industry have also contributed in dramatic increase of both revenues and profits. Next let me talk about Q-on-Q basis and the changes from the last Q4 and this Q1 in both the net sales and operating income changes.

As I said earlier and by selling that to new business segments and so that's why generally all of this the Q4 sales and net sales and operating income had to be recombine and based on the new segments compositions. First of all, the passive components segments, the sales have declined by JPY9.8 billion, 8.6% decline the ceramic capacitor markets have been steady into the market of automotive applications also they're in newer brand market and industrial robotics sales had been increased mainly for the aluminum capacitors, the sales of inductive devices have been flat from declining two basis from the Q4 but excluding that impact of the currency, it has increased by 3% just like the ceramic capacitors and the business with automotive market have been steady and also the sales of industrial equipment have a dramatic increase on there in hand and for the ICT and due to the inventory adjustments of customer in China have negatively effects and all in all have been flat.

Next sales of the other passive components was declined by JPY11.1 billion Q-on-Q 27.3% is a dramatic decrease perhaps this in the last Q4 and we have JPY14 billion of that gains by the transfer of the high frequency business, so excluding this one-time factor and the revenues have increased by 11% in Q-on-Q. The camera module VCM has been favorable for particularly for the customer in China, operating income of the passive components have declined from Q4 by JPY136.5 billion, 93% Q-on-Q decline but also we have the gains of the business transfers are recognized in Q4 and in total we have JPY134.6 billion these gains was recognized in Q4 for the one time profit, so excluding all these factors and actually on upward basis and was a JPY1.9 billion decline from the JPY12.1 billion in the Q4.

So high frequency, we have the JPY2 billion of the high frequency business segments was recognized, so that excluding this and also excluding impact of currency it was about the 12% increase of the profits. Next the sensor application products and the net sales have increased by JPY4.9 billion and 42.2% up increase Q-on-Q this is mainly due to the consolidation of InvenSense, the operating income have declined by JPY2.4 billion but again this is due to that JPY3.5 billion or one-time M&A cost due to that acquisition of InvenSense.

Next Magnetic Application segments the sales had declined by JPY5.9 billion from Q4 and this 9.6% decline of net sales. The sales for the recording devices and it wasn't much affected, but a slight decline of HDD shipments and also that the full turnkeys HDD shipments have declined so that it will push down by JPY6.3 billion 10%, the other magnetic application products have increased by JPY400 million, 1.7% increase.

The industrial robots and measurement devices for the components have been favorable as well as the products of the other magnetic products and power supplies. The operating income of the magnetic application products have increased by JPY12.1 billion from Q4 but about JPY10 billion of the cost of restructuring of the business is included in Q4, so excluding this impact it was about JPY2 billion is the actual margin of increased net sales and 1.7 times of the operating income.

For HDD Heads in line to Head have increased little bit and also on a favorable change of the product mix and also addition of that goodwill due to the hedges, acquisitions and then also the improvements of the Fairlight Magnus and the power supplies all pushed up that profits. On the film application products, the sales have declined and have increased by JPY25.3 billion, 46.5% Q-on-Q.

And a business on North Korea including their sales of the top list have pushed up more than we had expected and the same time and we have in a diversified expansion the business in the China. When it comes to operating income, the family application products and had increased by JPY7.7 billion and Q4 JPY5 billion and JPY12.7 billion due to that the incremental top line and we could increase it that's the marginal profits and also we can have that dramatic increase due to the cost reduction efforts.

Next let me talk about some of the chain, the breakdown of open income changes. In total all in all now and operating income pushed down by JPY900 million and all in all so that like to talk about breakdown of this.

First of all including that's and for the changes in the sales of that they do, do that they improve their utilization in the mix and then the pushed up by JPY1.8 billion so didn't have just absorbed and these the different and missing of that's and do a profits due to that high frequency profits had a more than offset by this and the top line grows. And the JPY14.9 billion this is the minus and the push down effect of our sales price reductions but at the same time and did a JPY12.5 billion is and it pushed up a by that rationalizations and then the cost reductions and then also that the restructuring efforts to produce a JPY1.3 billion and also for the SG&A and $800 million there's all this pushed up and also more than offset that the due to that negative impacts of the sales by reductions.

And also and the before this JPY2.5 billion to onetime expenses and also the currency then we have an JPY18 billion of the operating incomes and there bit of JPY1.5 billion and it's the bit advantage of the last years a JPY16.5 billion and on top of that's we, they subtracted JPY3.5 billion and after a onetime expense for M&A and all sooner and I think that exchange actuations and it's on and off minus JPY900 million is that's the, the bottom line so, when it comes to this the onetime expenses of the M&A this is including the depreciation of the value-added inventory assets and the compensation the retention fees for and the cost of what employees and the advisory costs. Next let me talk about that net sales of Q2 this year.

And we expect to steady sales of passive components to the, to the stable markets among the amount of Europe, China and Japan as well as industrial devices therefore steady sales over capacitor inductive devices and so force. As for as small for us, the shipments of the components for then North American customer for their new devices will be on a full swing in the near future and also the inventory just meant by the customer and in China will run its course so take all this into consideration we expected a 5% to 7% of increase of net sales.

When it comes to sensor application products in this segment with be supported by the steady sales of the temperature and the pressure sensors for automotive applications and the team are sensors for ICT markets as well there's additional sales of them members of sensors offered by [indiscernible]. And the gross focus of sales is about a 16% to 18%.

As for magnetic application products the shipping index of HDD improved from 100 in Q1 and when is with the based on that last year's Q1 100 and in Q2 of the index is 102 and the sales volume of suspension will go up and components for find an electron microscope will push at the segment sales further as was magnetic products and the power supplies for industrial markets. They still given the negative impact of the currency and a higher appreciation of Yen were expected segment will almost be flat.

For film application products we focus the 7% to 9% up for secondary batteries because of the shipments for new devices up in North American customers will gain momentum. And then last of all let me talk about stats our and focused of that full year business performance and this time and a last time we announced that focused on the May at the time we did not included that's the M&A of in business plan and this time and we have we renew and renew that's the focus including the acquisition invent sense.

So from that the focus we're announced in the May we have to devise up verbally by JPY80 billion of net sales and JPY80 billion and open income and there was no any change in JPY80 billion end open income than the JPY55 billion of net income. Then let me talk about that incremental in the sales.

The last time, when we have announced the forecast of year and now the forecast according to that's the each of these items when I was in May, first of all for presence of components and excluding that impact of the transfer of business of high frequency business. And the last time we and the focus of 8% to 11% of increase but now this time we revise it up wildly to the 12% to 15% increase when it comes a sensor application products.

The last time we have to increase margin with 27% to 30% but including in business now we think that's about they were, 1.7 times to double and for the magnetic application products and the last time we have the minus 6 to 9% of us the focus of last time but this time we have revise it to that the minus of the 3% to 6% minus. For the film application products and the last time we had 8% to 11% increase whether lots of focus but this time we have to revise the upwardly to 25% to 28% of increase.

All in all a in total now we have about 80% and JPY80 billion of incremental and change of the focus that in the sales when it comes open income but the cost for their menu for the emphasis now it will be just only one time that it would be recognized as a cost. And so, we have factored in and JPY9 billion and JPY3.5 billion and they included and if you want but in annually we factored in JPY9 billion but when it comes to that's an impact but all this name fact they can be absolved and offset by the favorable business.

And the average pay foreign exchange rate after Q4. And we still stated the same as we have announced in the May handed Yen to the dollar and handed JPY80 to Euro and but also and for all the expenses when it comes R&D expenses and the, this is will increase due to that conservation of implement sense so that's now we have increased by JPY8 billion from the last time and now it's JPY94 billion.

That's all my presentation. Thank you very much.

Thank you.