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Executives

Tomita – IR Group

Toshiba Corporation (OTCPK:TOSBF) F2Q 2011 Earnings Call October 31, 2011 9:30 AM ET

Tomita

Ladies and gentlemen, now we would like to start the presentation of the Second Quarter Consolidated Business Results of FY2011. Thank you very much for joining us today.

I’d like to introduce the participants from Toshiba. We have Mr. Makoto Kubo, Corporate Executive Vice President; Mr. Naohiro Tomura, Group Manager of Accounting Group; Kohei Hayashi, IR Group Manager. I am Tomita from IR Group.

Now I’d like to ask Mr. Kubo to present the business results.

Thank you very much. I’d like to now present the second quarter consolidated business results for FY2011. Most of the numbers that are shared with you are first six month business results, for the first half of FY2011.

Now this slide shows the key points of the first six months. Net sales decreased year-on-year in the first half affected by sharpened appreciation and in part by the continuing impact of the March earthquake. Operating income also decreased. But in all four segments, we continue to have surplus. Net income was slightly down, but about the same level as a year earlier, with sales were JPY2,912.5 billion, operating income JPY80.2 billion, net income was JPY22.7 billion. On the right hand side, we are showing the year-on-year changes.

Now I would like to mention the negative impact of the strong yen in the first half. Negative impact of the strong yen was JPY146 billion on sales and JPY16 billion on operating income. Now, as for the impact from the earthquake, there was a recovery from the first quarter. However as first half results, the impact was JPY50 billion on sales and JPY10 billion on operating income.

While net sales were down, operating income increased year-on-year in the second quarter from July to September, in the digital products, electronic devices and home appliances segment. The social infrastructure segment continued a solid performance. And all four segments secured profits.

In the Board of Directors Meeting today, we have made a de-official decision which was already announced to you that the interim dividend will be JPY4 per share.

Page 4, shows the first six month result comparing to first half of FY10 as well as the comparison to the plan

Page 5, shows the first six month results by segment, showing you the net sales as well as operating income. As you can see, in both net sales and operating income, home appliances segment increased. However, in the other three segments fortunately, sales and operating income declined especially we had the major negative figures of our digital products and electronic devices.

Now, please turn to page 23, which shows the second quarter business results. As you can see on the page 23, net sales were JPY1,586.4 billion down JPY43 billion and operating income was JPY76.1 billion, up JPY5.1 billion.

Now page 24, shows the second quarter results by segment. As for net sales, digital products and electronic devices declined whereas the social infrastructure and home appliances increased. Turning to operating income, social infrastructure declined slightly. However in the remaining three segments we saw increases in operating income.

Going back to page 6, this page shows the first six month results in comparison to past three years, including sales operating income and net income numbers.

Page 7, shows the change of the operating income from the first half of 2010. So, first half FY2010, operating income was JPY104.8 billion, this number declined by JPY24.6 billion to JPY80.2 billion. The market impact including price erosion and structural change was JPY510 billion. On the positive side, there was a cost reduction as well as prior notices of JPY360 billion. In addition, the volume increased including the use of advanced process technology was JPY130.4 billion.

Based on those three factors, the negative impact was JPY19.6 billion. This was mostly offset by the positive factor that is fixed cost reduction of JPY21 billion. However, there was a negative factor of currency exchange as well as earthquake impact, JPY16 billion and JPY10 billion respectively. We could not offset those two negative factors.

Page 8, shows digital products, net sales declined by 8%. There was an impact of strong yen and sluggish sales in the PC business in Europe and United States. In July, analog broadcasting was stopped in Japan. And because of this demand for the LCD TVs came down and the prices became lower. Also, the sales of the retail information systems and office equipment business came down.

Operating income was higher in PCs. But in LCD TVs, after July, when the transition to digital terrestrial broadcasting was done in Japan, the demand for LCD TV declined and the prices declined. As a result, the TV business as a whole decreased because of the deficit overseas, all our segment income came down.

Now turning to PC business, sales were sluggish especially in Europe and in United States, reflecting the weak demand due to economic conditions. Operating income reflected higher sales in Japan. And there are close reductions and effect of the lower parts and material costs because of the strong yen. So, as our PC business, the operating income increased.

Now turning to electronic devices, I would like to use the following pages to give you the semiconductor as well as the LCD business numbers. First about the semiconductor business, net sales declined by 13%, NAND Flash memory demand was firm. But sales came down due to the strong yen. System LSI performance was undercut by lower demand. And we could not fully recover from the impact of the earthquake in the first quarter.

As for operating income, there was an impact of the sharp yen’s appreciation, NAND flash memory and the impact of the earthquake, system LSI. So, operating income as a whole came down.

The following page shows the semi-conductor business results breakdown. As you can see, net sales of system LSI and memory declined significantly. As a result, operating income of semiconductor business ended at JPY29.7 billion.

Looking at the quarterly trend of the semiconductor business, as you can see in 2010, we had very good performance in the first quarter and the second quarter. As you know, our five Yokichi started its operation in July. Of that five manufacturers, 24 nanometer, NAND flash memories and 4 manufacturers, 19 nanometer NAND flash memories. And we are starting to see the effects of these, despite the strong yen.

We hope to continue to see these good results in the third quarter and fourth quarter. We believe that we have already established a foundation of that in the second quarter despite the strong yen. Our challenge is to make sure that the operating income in the third quarter and fourth quarter will not come down as it did in 2010.

Turning to LCD business, sales were significantly down. However the operating income increased. Now, looking at the sales numbers, last year there was a sale of our subsidiary in Singapore, manufacturing PC displays and there was an effect of that. But operating income as you see improved on healthy performance for the displays for mobile devices such as smartphones. And also, there was a positive progress in cost reduction through our business restructuring.

Social infrastructure, sales were slightly down. Thermo & Hydro Power Systems continued a healthy performance. And Landis+Gyr was consolidated from August, this pushed up our sales numbers. However, there was an impact of the strong yen as a whole. And there was also an impact of the decline of the transmission and distribution business.

Turning to the operating income, the Thermo & Hydro Power System showed healthy performance and the solution was also strong. But due to the lower operating income from the transmission and distribution the overall operating income declined.

Home appliances, is the only segment which saw the increase in sales and profit. There was a strong demand for the energy efficient products that consumed less power. So, LED lighting, and the air conditioning for the household as well as industrial use were very strong.

In the first quarter, we had very good business results for those products. We continued to have positive effect of that. Operating income was boosted by the positive performances in LED lighting, air-conditioning and by the results of the business restructuring. As for the non-operating income and expenses, we booked non-operating loss of JPY37.9 billion, no major change from the previous year.

Fourth line from the top is the foreign exchange loss. The difference between the sales rate and the settlement rate was wider. And yen strengthened in comparison to the sales rate.

Under other’s item in comparison to the previous year, the business restructuring expenses were lower, that was the major factor.

Now income tax and other numbers are shown on the following page, this is the first half results. So, we are showing about the standard percentage for the income tax.

Turning to cash flow, free cash flow unfortunately was minus JPY218.1 billion. Now cash flow from operating activities was JPY30.1 billion, which is significantly lower than the year before.

Our working capital worsened slightly and concerning this, currently we are taking measures under the instruction of our President Sasaki. This is in relation to the risks of the European sovereign debt. And we are currently conducting some stress test. And as one of the measures, we are trying to reduce the inventories. So, in the second half we expect that this working capital will be improved.

Now, under the cash flow from investing activities as you see here, there were investments in acquisitions including Landis+Gyr as well as Vital Image in medical equipments. The total of was JPY150 billion, that was the major factor.

Now the balance sheets are shown on the following pages, this is for your reference.

Now, focusing on the total equity on page 21, the major item here is the accumulated other comprehensive loss which is significantly lower in comparison to the end of March and also end of September last year.

The major reasons are as follows, first, is the foreign exchange translation adjustments. There was a JPY60 billion worsening of this number. This is in relation to the revaluation of our investments in the subsidiaries overseas. Another reason was unrealized gains on securities. This number also worsened by about JPY20 billion. At the end of September, the prices of the shares that we hold came down. And this is a revaluation of the securities.

The debt equity ratio was 155% last year and it came up to 159% this year, 4 points worse. I already talked about the accumulated other comprehensive loss in relation to the equity attributable to the shareholders of the company. And there was a JPY150 billion investments for the merger and acquisition. This pushed up the debt equity ratio by 18 points. And there was also working capital issue in the first half. So, because of all those factors, the debt equity ratio was 159%.

I already talked about the second quarter results and finally page 25 and 26, I’d like to talk about forecasts. Now because of the strong yen, we could not achieve our sales target for the first half by about JPY187.5 billion. I understand that there was an intervention by BOJ today, but in the second half we expect that the strong yen situation to continue. So, under those circumstances, we understand that the JPY7 trillion-target for net sales is quite high.

In the second half, we would be improving the throughput of NAND flash memory production in the semiconductor segment. And also expand the sales of digital products in emerging economies.

Operating income target is JPY300 billion and net income target is JPY140 billion. There are risks including strong yen and sovereign debt risk in Europe and flood in Thailand. But we have already taken measures for those risks. So, we believe those targets of JPY300 billion in operating income and JPY140 billion in net income are achievable.

And therefore, we have made no changes to the forecast for FY2011 and forecast by segment.

And that concludes the presentation on the business results. Thank you very much for your attention.

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