Operator: We will now start the TDK Corporation H1 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.
Noboru Saito: Thank you.
Operator: Senior Executive Vice President and CFO, Tetsuji Yamanishi.
Tetsuji Yamanishi: Thank you.
Operator: Executive Vice President, Shigeki Sato.
Shigeki Sato: Thank you very much.
Operator: Corporate Officer, Fumio Sashida.
Fumio Sashida: Thank you.
Operator: Corporate Officer, Takao Tsutsui.
Takao Tsutsui: Thank you.
Operator: Those are all for the attendees. Today, after presenting the H1 results and the projections for the fiscal year March 2027 and the progress of the midterm 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.
Noboru Saito: I am Saito. Thank you very much for joining us today. First, let me share today's key points at the outset. In H1 of fiscal year March 2027, with higher sales and profit, we achieved record highs in net sales and profits. For the H2, 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.
Noboru Saito: To secure growth under the next midterm 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.
Tetsuji Yamanishi: I am Yamanishi. I will walk you through on the performance, the consolidated results highlights. The key points of the H1 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.
Tetsuji Yamanishi: 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 a robust AI data center demand drove year-on-year sales and profit growth across all segments.
Tetsuji Yamanishi: As a result, net sales rose 31.9% and operating profit grew 41.0%, both reaching new record highs for the H1. Next, the H1 P&L summary. Including forex positive impacts of approximately JPY 134.4 billion on net sales and approximately JPY 19.9 billion of operating profit, net sales were JPY 1 trillion 560.6 billion, up JPY 377.2 billion, or 31.9% year-on-year, and OP was JPY 208.2 billion, up JPY 60.5 billion, or 41% year-on-year. Profit before tax was JPY 213.1 billion, up JPY 65.6 billion, or 44.5%.
Tetsuji Yamanishi: Net profit was JPY 176.4 billion, up JPY 65 billion, or 58.4%, hitting record highs in net sales and all profit items. EPS for the half was JPY 92.94. OP forex sensitivity per JPY 1 change is estimated at approximately JPY 2 billion annually for the US dollar and approximately JPY 300 million for euro, same as the past. Next, the H1 results by segment.
Tetsuji Yamanishi: 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 JPY 358 billion, up 25.3% year-on-year, and OP to JPY 39.6 billion, up 2.7 times year-on-year. Ceramic capacitors saw higher sales for AI data centers and automotive, yielding higher net sales and profit, and profitability improved meaningfully.
Tetsuji Yamanishi: 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.
Tetsuji Yamanishi: Driven by volume growth in ICT and industrial equipment, net sales reached JPY 127.7 billion, up 18.3% year-on-year, and OP was JPY 18.3 billion, up approximately 1.5 times year-on-year. Temperature and pressure sensors pulsed at net sales and profit growth on stronger sales to industrial equipment and automotive. For magnetic sensors, TMR sensors rose in ICT and automotive. Hall sensors grew in automotive and industrial, generating overall sales and profit growth.
Tetsuji Yamanishi: 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 JPY 176.9 billion, up approximately 1.5 times year-on-year, and operating profit reached JPY 33.1 billion, up 2.8 times year-on-year.
Tetsuji Yamanishi: 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 JPY 867.7 billion, up 33.9% year-on-year, and OP was JPY 150.1 billion, up 9.1% year-on-year.
Tetsuji Yamanishi: 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 of new small-capacity batteries for small smartphones and others. Power supplies for industrial equipment saw sales and profit increase, with a mild demand recovery in semiconductor production equipment.
Tetsuji Yamanishi: In the first quarter, following the completed divestment of the EV power supply R&D business, we booked a one-time gain of JPY 2.6 billion. Next, the second quarter P&L highlights. Including positive forex impacts of approximately JPY 61.9 billion on sales and approximately JPY 8.6 billion on OP, net sales were JPY 819.6 billion, up 26.6% year-on-year. OP was JPY 121.8 billion.
Tetsuji Yamanishi: Profit before tax was JPY 118.6 billion and up 32%, and net profit was JPY 95.8 billion, up 37%, setting quarterly record highs for sales and all profit lines. EPS for the quarter was JPY 50.49. 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 JPY 4.4 billion, or 2.5% Q-on-Q, and operating profit is up JPY 4.9 billion, 28% Q-on-Q.
Tetsuji Yamanishi: 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.
Tetsuji Yamanishi: Next, in Sensor Application Products, net sales rose JPY 4 billion, or 6.4% Q-on-Q, and OP increased JPY 2.6 billion, or 32.6% Q-on-Q. Temperature and pressure sensors grew profit on cost improvements despite flat sales. In magnetic sensors, ICT seasonality peaked in Q2, driving sales and profit growth of TMR and Hall sensors. In MEMS sensors, although motion sensor sales fell in industrial and ICT, microphone grew in smartphones.
Tetsuji Yamanishi: Total MEMS sales were flat, and OP was slightly up. Next, Magnetic Application Products. Sales rose JPY 13.7 billion, or 16.7% year-on-year. OP was up JPY 14 billion, 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.
Tetsuji Yamanishi: Sales grew JPY 56.1 billion, or 13.8% Q-on-Q, and OP rose JPY 11.4 billion, or 16.4% Q-on-Q. 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 JPY 2.6 billion gain on the EV power supply R&D divestment in Q1.
Tetsuji Yamanishi: Next, the operating profit variance analysis on a JPY 60.5 billion increase. Sales growth across all segments, with product mix improvements and higher utilization, added JPY 50.7 billion to profit. Disciplined pricing reflecting supply-demand balance kept negative fluctuation impact to JPY 2.1 billion, shrinking from past levels. On top of that, rationalization and cost cuts contributed JPY 10.9 billion, alongside JPY 1.7 billion in benefits from prior-year restructuring.
Tetsuji Yamanishi: As we accelerate new technology and product rollouts, mainly in rechargeable batteries and HDD heads advancing HAMR, SG&A rose JPY 24.3 billion due to increased R&D. Lower one-time net costs realized JPY 3.7 billion positive impact and JPY 19.9 billion forex gain from weak yen, netting JPY 60.5 billion increase overall. Next, I will cover cash flows. The H1 operating cash flow decreased by JPY 110.8 billion year-on-year.
Tetsuji Yamanishi: While profits grew, key factors reducing cash flow were one-off withholding tax payments in Q1 and increased working capital from sales expansion. In investment cash flows, CapEx tracked broadly in line with the initial expectations, and it totaled to JPY 101.6 billion, including cash outflows for the acquisition of Linergy in rechargeable batteries. Consequently, free cash flow was -JPY 23 billion. Although M&A increased working capital and temporary outflows led to negative free cash flows, this will not materially impact our midterm capital allocation plan.
Tetsuji Yamanishi: Next, I will explain the next full-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 BEVs and HEVs, but lower production of PHEVs. Overall, xEV production is expected to be slightly lower, as is total vehicle production.
Tetsuji Yamanishi: For smartphones, a key indicator of the ICT market, our April forecast assumed a roughly 10% year-on-year decline to 1,112 million units. Given the greater impact expected from memory supply shortages, we now project a further 5 percentage point year-on-year decline, taking production below 1.1 billion units. In the HDD markets, continued robust demand has led us to raise our forecast for nearline HDD production for data centers from the April estimate to 79 million units.
Tetsuji Yamanishi: Now, I will explain our expectations for changes in segment revenue from Q2 to Q3. Our Q3 exchange rate assumption is JPY 155 to the US 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.
Tetsuji Yamanishi: In Sensor Application Products, we expect revenue to decline 4% to 7% as seasonal factors in the ICT market reduce sales of the TMR sensors and MEMS microphones. In Magnetic Application Products, we expect shipments of HDD heads for nearline 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%.
Tetsuji Yamanishi: Finally, in Energy Application Products, smartphone production is expected to peak in Q2 and decline in the H2. Accordingly, small-capacity batteries shipment volumes are projected to fall approximately 10% quarter on quarter. Meanwhile, sales of medium-sized batteries to industrial equipment customers should continue to increase steadily. Overall, segment revenue is expected to decline 2% to 5%.
Tetsuji Yamanishi: Therefore, due to the AI data center, there have been very good sales, and also the ICT sales, in comparison, they are having a decline. However, there has been a good impact, and therefore, we are able to have very good business portfolio management, and therefore, we are able to have very good business results in the H2. There will be a great demand for the AI data center.
Tetsuji Yamanishi: Therefore, for the Passive Components, HDD heads, and suspension, we are going to have a good result. On top of that, in the H2, from JPY 150, we have revised to JPY 155. Due to the yen's depreciation, we are going to have a positive impact, and therefore, we have revised upward our forecast. JPY 3,550 billion, operating profit JPY 365 billion. We are going to achieve JPY 280 billion after tax, and therefore, as a business portfolio management, we do have the structural one-time expense.
Tetsuji Yamanishi: From JPY 6 billion, we are going to increase to JPY 11 billion in one-time expense. 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 -JPY 50 billion, mainly reflecting strategic M&A investments.
Tetsuji Yamanishi: We expect ROIC 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 dividend from JPY 20 to JPY 25 per share.
Tetsuji Yamanishi: Given strong demand across the AI ecosystem, we will increase CapEx by JPY 30 billion, primarily to expand production capacity for HDD heads and suspension used in AI data centers. This brings expected annual CapEx to JPY 400 billion. We are also raising our depreciation forecast by JPY 10 billion to JPY 250 billion. This concludes my presentation. Thank you very much.
Noboru Saito: 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, I'd like to explain the changes since the full-year financial results in April.
Noboru Saito: Of the five CBUs that were under discussions, two have transitioned to business units under improvement. The number of CBUs under improvement has increased from 13 to 15 CBUs at present. These two are product groups applying flash memory included in company-wide others. For the three CBUs currently remaining under discussions, 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.
Noboru Saito: 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.
Noboru Saito: By the end of the H1, 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.
Noboru Saito: 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 H1, we anticipate a 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.
Noboru Saito: Next, our capacity expansion investment plans for MLCCs to increase capacity by about 20% toward the next fiscal year, and we intend to continue increasing. For the aluminum electrolytic capacitors, we aim to double capacity year after year. Therefore, by March 2029, we'd like to increase by seven times. For the thin-film inductors, we will invest approximately JPY 40 billion in total to secure about double the supply capacity.
Noboru Saito: The background behind our investment of approximately JPY 40 billion to thin-film inductors is 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.
Noboru Saito: By adopting vertical power supply, it shortens the wiring, suppresses 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.
Noboru Saito: With our competitive advantage combining materials and design technology, we will continue to achieve industry-leading characteristics. Next, regarding TMR sensors, for which demand is expected to grow significantly in the AI ecosystem, we are going to invest approximately JPY 100 billion, one of the largest scales domestically, to expand the Shinanogawa Techno Plant located in Niigata Prefecture.
Noboru Saito: Also, with the capacity of Asama Techno 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 robots 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.
Noboru Saito: 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 has led to our investment. Finally, R&D investments, CVC 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.
Noboru Saito: Since its establishment in 2019, TDK Ventures has invested in 58 companies and already achieved divestment records from eight companies, including Groq. In addition to financial returns, our CVC 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&As.
Noboru Saito: As explained at Investor Day in September for wearable headphones, CVC 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 CVC, we will continue to rapidly and efficiently transform our value creation cycle in order to enhance our corporate value.
Noboru Saito: 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 committees. 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. We will proceed with these transitions based on two concepts. Including this transition of the governance system, we will continue to strive toward enhancing corporate value.
Noboru Saito: To reiterate, for the enhancement of the corporate value, the 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.
