TDK Corporation

We will now start the TDK Corporation, the first half performance briefing for the fiscal year March 2027. Thank you very much for taking the time to join our briefing today despite your busy schedule. First, let me introduce the attendees, President and CEO Noboru Saito. Thank you. Senior Executive Vice President and CFO, Tetsuji Yamanishi. Thank you. Executive Vice President, Shigeki Sato. Thank you very much. Corporate Officer, Fumio Sashida. Thank you. Corporate Officer, Takao Tsutsui. Thank you. that are all for the attendees. Today, after presenting the first half results, and the projections for the fiscal year March 2027 and the mid-term plan progress of the mid-term plan, we will have a Q&A session. The entire session is scheduled for about 75 minutes. Today's materials are available in both English and Japanese on our website, so please refer to them as well. Now let us start the briefing. Mr. Saito, please. I am Saito. Thank you very much for joining us today. First, let me share today's key points at the outset. In the first half of fiscal year March 2027, with higher sales and profit, we achieved record highs in net sales and profits. For the second half, although ICT device production such as smartphones is expected to be lower than initial projections, sales for the AI ecosystem are tracking ahead of expectations and should remain solid. Targets in the medium-term plan are largely on track, but we will further reinforce business portfolio management. To secure growth under the next mid-term plan, we will accelerate investments in products and technologies for AI data centers and physical AI. Also, as announced today, we will transition from a company with an audit and supervisory board to a company with three committees. We will continue to control the controllable, that is to enhance our own competitiveness and strengthen dialogue with investors and analysts. These are today's points I would like to communicate. I will pass the floor to Mr. Yamanishi. I am Yamanishi. So I will walk you through on the performance, the consolidated results highlights. The key points of the first half fiscal year March 2027 in the electronics market affecting our business, tight memory supply and price hikes led to a year-on-year decline in ICT device production, including smartphones. Meanwhile, Nearline HDD demand for AI data centers remained robust. In industrial equipment, CAPEX demand stayed solid. In the automotive market, advancement of electrification and autonomous driving kept demand firm. In this environment, despite lower ICT device production, new product launches for smartphones and others, and robust AI data center demand drove in-ear sales and profit growth across all segments. As a result, net sales rose 31.9% and operating profit grew 41.0%, both reaching new record highs for the first half. Next, the first half P&L summary. including Forex positive impacts of approximately ¥134.4 billion on net sales and approximately ¥19.9 billion of operating profit. Net sales were ¥1,560.6 billion, up ¥377.2 billion or 31.9% year-on-year. and OP was 208.2 billion yen, up 60.5 billion or 41% year-on-year. Profit before tax was 213.1 billion yen, up 65.6 billion yen or 44.5%. Net profit was 176.4 billion yen, up 65 billion or 58.4%, hitting record highs in net sales and all profit items. EPS for the half was 92.94 yen. OP Forex sensitivity per one yen change is estimated at approximately 2 billion yen annually for the U.S. dollar and approximately 300 million yen for euro, same as the past. Next, the first half results by segment. First, passive components. Sales increased across all three priority markets, automotive, ICT, and industrial equipment. In particular, sales for AI data centers grew substantially, lifting net sales to 358 billion yen, up 25.3% EONIA, and OP to 39.6 billion yen, up 2.7 times EONIA. Ceramic capacitors saw higher sales for AI data centers and automotive, yielding higher net sales and profit, and profitability improved meaningfully. Aluminum electrolytic and film capacitor grew sales and profit on higher AI data center sales, expanding both earnings scale and profitability. Inductive devices grew in sales and profit on higher demand from automotive and ICT. Piezoelectric and circuit protection components also increased in sales and profit via industrial equipment and automotive demand. High-frequency components with higher ICT exposure, sales decreased due to lower ICT device production, yet profitability improved. Next, sensor application products. Driven by volume growth in ICT and industrial equipment, net sales reached 127.7 billion yen, up 18.3% year-on-year, and OP was 18.3 billion yen, up approximately 1.5 times year-on-year. Temperature and pressure sensors posted net sales and profit growth on stronger sales to industrial equipment and automotive. For magnetic sensors, TMR sensors rose in ICT and automotive. Whole sensors grew in automotive and industrial, generating overall sales and profit growth. In MEMS sensors, motion sensors increased in ICT and industrial, raising segment sales and profitability, contributing significantly to overall sensor profits. Next, magnetic application products. Net sales were 176.9 billion yen up approximately 1.5 times EON and operating profit reached 33.1 billion yen up 2.8 times EON. Backed by sustained solid HDD demand driven by AI data centers, sales volumes surged 38% for heads and 34% for suspensions, yielding significant sales growth and large profit gains aided by higher utilization. In magnets, automotive sales increased to drive net sales up while productivity and quality improvements steadily reduced operating losses. Next, energy application products. Net sales were 867.7 billion, up 33.9% eonea, and OP was 150.1 billion yen, up 9.1% eonea in rechargeable batteries. Despite lower sales volume from reduced ICT production, sales grew substantially due to better product mix from new launches and price revisions aligned with material costs. operating profit grew on successful launches on new small capacity batteries for small smartphone and others. Power supplies for industrial equipment saw sales and profit increase with a mild demand recovery in semiconductor production equipment. In the first quarter, following the completed divestment of the EV power supply R&D business, we booked a one-time gain of 2.6 billion yen. Next, the second quarter P&L highlights. Including positive Forex impacts of approximately 61.9 billion yen on sales and approximately 8.6 billion yen on OP, net sales were 819.6 billion yen up 26.6% yen, OP was 121.8 billion yen, profit before tax was 118.6 billion yen, and up 32%, and net profit was 95.8 billion yen, up 37%, sitting quarterly record highs for sales and all profit lines. EPS for the quarter was 50.49 yen. Next, Q-on-Q changes in sales and OP by segment from the first quarter to the second quarter. In passive components, net sales rose 4.4 billion yen or 2.5% Q-on-Q and operating profit is up 4.9 billion yen 28% Q on Q. In ceramic capacitors, with sales roughly flat, profit grew through favorable product mix and cost reductions. Aluminum and film capacitors posted higher sales and profit, backed by brisk AI data center shipments. Inductors grew in sales and profit on higher shipments to automotive and ICT. High-frequency components remained virtually flat in both sales and OP. Piezoelectric and circuit protection components increased in sales and profit due to stronger demand from ICT and industrial equipment. Next, in sensor application products, net sales rose 4 billion yen or 6.4% Q&Q and OP increased. 2.6 billion yen or 32.6% QoQ. Temperature and pressure sensors grew profit on cost improvements despite flood sales. In magnetic sensors, ICT seasonality peaked in the second quarter, driving sales and profit growth of TMR and hole sensors. In MEMS sensors, although motion sensor sales fell in industrial and ICT, microphone grew in smartphones. Total MEMS sales were flat and OP was slightly up. Next, magnetic application products. Sales rose 13.7 billion yen or 16.7% year-on-year. OP was up 14 billion yen, up approximately 2.5 times Q-on-Q. with HDD head volumes up 17% and suspension volumes up 9% and total HDD heads and suspensions posted higher sales and profit. Magnets saw sales increase with ongoing cost reductions further narrowing losses. Lastly, energy application products Sales grew 56.1 billion yen or 13.8% QonQ and OP rose 11.4 billion yen or 16.4% QonQ. Small capacity battery volume for ICT grew approximately 6% with favorable mix from new launches and higher medium capacity battery sales to generate substantial sales and profit growth. Power supplies for industrial equipment grew in sales and profit as demand rebounded. We recorded 2.6 billion yen gain on the EV power supply R&D divestment in the first quarter. Next, the operating profit variance analysis on a 60.5 billion yen increase sales growth across all segments, with product mix improvements and higher utilization added ¥50.7 billion to profit. Disciplined pricing reflecting supply-demand balance kept negative fluctuation impacts to ¥2.1 billion, shrinking from past levels. On top of that, rationalization and cost cuts contributed 10.9 billion yen, alongside 1.7 billion yen in benefits from prior year restructuring. As we accelerate new technology and product rollouts, mainly in rechargeable batteries and HDD heads advancing HAMA, SNG rose 24.3 billion yen due to increased R&D. Lower one-time net costs realized ¥3.7 billion positive impact and ¥19.9 billion forex gain from weak yen netting ¥60.5 billion increase overall. Next, I will cover cash flows. The first half operating cash flow decreased by 110.8 billion yen a year. While profits grew, key factors reducing cash flow were one-off, withholding tax payments in the first quarter and increased working capital from sales expansion. In investment cash flows, CapEx tracked broadly in line with initial expectations. and it totalled to 101.6 billion yen, including cash outflows for the acquisition of the energy in rechargeable batteries. Consequently, free cash flow was negative 23 billion yen. Although M&NA increased working capital and temporary outflows led to negative free cash flows, This will not materially impact our mid-term capital allocation plan.

Next, I will explain the next four-year business forecast. First, the revisions to our production volume forecast for major devices relevant to our business which underpin our earnings projections. In the automotive market, relative to our April assumptions, we now expect higher production of VEVs and HEVs, but lower production of PHEVs. Overall, XEV production is expected to be slightly lower, as is total vehicle production. For smartphones, a key indicator of the ICT market, our April forecast assumed a roughly 10% year-on-year decline to 1,112,000,000 units. Given the greater impact expected from memory supply shortages, we now project a further 5% point year-on-year decline. taking production below 1.1 billion units. In the HDD market, continued robust demand has led us to raise our forecast for near-line HDD production for data centers from the April estimate to 79 million units. Now I will explain our expectations for changes in segment revenue from the second to the third quarter. A third-quarter exchange rate assumption is 155 yen to the U.S. dollar, but the changes I will describe exclude foreign exchange effects. In passive components, we expect revenue to increase 3% to 6% driven by higher sales of various products for the automotive market and AI data centers. In sensor application products, we expect revenue to decline 4% to 7% as seasonal factors in the ICT market reduce sales of the magnetic sensors and MEMS microphones. In magnetic application products, we expect shipments of HDD heads for near-line applications to rise approximately 5%, partly due to higher sales to captive customers. Suspension shipments are expected to fall approximately 6% due to model transitions. Overall segment revenue is expected to increase 0% to 3%. Finally, in energy application products, smartphone production is expected to peak in the second quarter and decline in the second half. Accordingly, small battery shipments and volumes are projected to fall approximately 10% quarter on quarter. Meanwhile, sales of medium-sized batteries to industrial customers should continue to increase steadily. Overall segment revenue is expected to decline 2% to 5%. As part, so therefore, so therefore, This is my last portion. And therefore, due to the AI Dental Center, they're having a very good sales. And also the ICT sales, in comparison, they're having a decline. However, they're having a good impact. And therefore, we are able to have a very good business portfolio management. And therefore, we are able to have a very good business result in the latter half. So there will be a great demand for the AI data center. Therefore, for the passive components, HDD heads and suspension, we are going to have a good result. So on top of that, in the latter half, so from 150 yen, we have revised to 155 yen. Due to the yen's depreciation, we are going to have a positive impact. And therefore, we have revised upward our forecast. So 3 trillion 550 billion, operating profit 365 billion. We are going to achieve 280 billion after tax and therefore as a business portfolio management, we do have the structural one-time expense. So from 6 billion, we are going to increase to 11 billion in one-time expense. So even after this increase, we expect to achieve the final year targets of our medium-term plan for operating margin and ROIC. Our free cash flow forecast has been reduced significantly from our initial projection to negative 50 billion yen, mainly reflecting strategic M&A Investments. We expect rolling to improve from our initial forecast of 8% to 9.7%, reflecting progress in business portfolio management and the realization of investment returns. In view of higher profit after tax and in accordance with our dividend policy, we plan to raise both the interim and year-end dividends from 20 to 25 yen per share. and given strong demand across the AI ecosystem. We will increase capital expenditure by 30 billion yen primarily to expand production capacity for STD heads and suspension used in AI data centers. This brings expected annual capital expenditure to 400 billion yen. We are also raising our depreciation forecast by 10 billion yen to 250 billion yen. And this concludes my presentation. Thank you very much. So I will explain the progress of our midterm plan. As we have discussed previously, We are strengthening, accelerating, and promoting proactive business portfolio management toward achieving our mid-to-long-term goals of ROE of 15% or higher and ROIC of 12% or higher. Today, I'd like first to explain the second topic, dealing with the business under intensive monitoring. Regarding the progress of portfolio management, so I'd like to explain the changes since the four-year financial results in April of the five CBUs that were under discussions to have transitioned to business units under improvement. The number of CBUs under improvement has increased from 13 to 15 CBUs at present. These two product groups applying flash memory included in company-wide others. For the three CBUs currently remaining under discussion, we plan to determine their direction by the end of the final fiscal year of the midterm plan. That is the end of this fiscal year. Next, the promotion of growth strategies, which is the top priority of business portfolio management. As we have explained, we view various applications related to AI as the AI ecosystem. As shown in the graph on the left, we have previously stated that we plan to increase net sales for AI ecosystem by about three times. Also, for the fiscal year-on-year growth, we initially expect a growth of about 1.2 times. By the end of the first half, it shows strong growth of about 1.7 times year-on-year, and we expect this strong growth to continue. The graph on the right shows sales of passive components related to AI data centers, which we explained in April would increase to about 10 times The previous fiscal year's level. While we expected a year-on-year growth rate of about two times for this fiscal year as of April, at the end of the first half, we anticipate the growth of three times year-on-year. To sustain these high growth rates over the mid to long term, we believe it is crucial to timely execute various strategies such as aggressive capacity increase investment. Next are capacity expansion investment plans for MLCCs to increase capacity by about 20% toward the next fiscal year, and we intend to continue increasing capacity For the aluminum electrolyte capacitors, we aim to double capacity year after year. So therefore, by March 2029, we'd like to increase by seven times. For the same film inductors, we will invest approximately 40 billion yen in total to secure about double the supply capacity. The background behind our investment of approximately 40 billion yen to stay filmed this is an advancement of new power supply methods for the GPUs and CPUs. Until now, the voltage regulators have been placed beside semiconductors, but going forward, the industry will shift toward a vertical power supply method where they are placed on the bottom of the substrate. Placing them on the side lengthens the power supply line. resulting in heat generation and losses. By adapting vertical power supply, it shortens the wiring suppress resistance and improves efficiency by about 70%. Inductors are also necessary for these voltage regulators in the future. Lower profiles will be required to package them inside the substrates. To meet this growing demand, our coil-thin film technology applying proprietary plating technology derived from HDD heads will greatly contribute to achieving lower profiles and high current, high efficiency. With our competitive advantage combining materials and design technology, we will continue to achieve industry-leading characteristics. Next, regarding TML sensors for which demand is expected to grow significantly in the AI ecosystem, we are going to invest approximately 100 billion yen, one of the largest scales domestically, to expand the Shinanogawa Technoplans located in Niigata Prefecture. Also, with the capacity of Asama Technology Plant in Nagano Prefecture, we are going to double the capacity and have a two-site production system. In recent years, the spread of AI technology has rapidly expanded into physical AI areas. For example, we estimate that dozens of sensors will be used for humanoid robot for joint angles and hand tactile sensing and other functions. Also for data centers, we expect demand for high precision current sensors to increase substantially. Looking ahead to the mid to long term, we concluded that high performance TMR sensors offering space saving low power consumption, high speed response are indispensable for the growth of physical AI domain and therefore which have led to our investment. Finally, R&D investments, CBC investments, and M&As. I would like to explain about inorganic growth. On the left is our value creation cycle that we have discussed previously. Since its establishment in 2019, TDK Ventures has invested in 58 companies, has already achieved divestment records from eight companies, including Glock. In addition to financial returns, our CBC aims to enable early access to emerging technologies and customer needs with a mid-to-long-term perspective. We operate to support startups while exploring business opportunities and by connecting them with TDK's R&D, marketing, sales, and business units, we lead to organic development partnerships and M&A. As explained at Investor Day in September 4, 2020, CBC made its initial investment in 2021 by passive components, supported technical collaboration across the value chain, and ultimately reached an agreement. While continuing to strengthen exploration activities originating from CBC, we will continue to rapidly and efficiently transform our value creation cycle in order to enhance our corporate value. So, as I also announced today, as a transformation in governance, We will transition from our current company with an audit and supervisory board company with the three communities. Through this transition, we will clarify the separation of supervision and execution and to evolve the boards of directors into more highly effective monitoring boards. And we will proceed with these transition based on two concepts. Including this transition of the governance system, we will continue to strive toward enhancing corporate value. To reiterate, for the enhancement of the corporate value, rental alignment through constructive dialogue and collaboration with shareholders, investors, and analysts is important. We ask for your continued support. This concludes our explanation. Thank you very much for listening.