IDEC CORPORATION Q2 FY2026 earnings call

80th Anniversary and Mid-Term Management Plan Goal

• IDEC celebrates its 80th anniversary this fiscal year, and has set the goal of "New IDEC" to transform into a market-adaptable, competitive corporate structure under the new mid-term management plan.
• The core strategic focus is shifting to a customer-centric business structure and improving responsiveness to market changes, with group-wide reform projects underway to build a customer-centric, global corporate culture and establish a foundation for high profitability.

Key Reform Projects

1. Global Matrix Management Organization

   • Launched in April 2025, with a parallel functional/regional axis structure and the establishment of the Global Operations Committee (GOC) for regular information sharing and rapid decision-making. Progress on the mid-term plan is on track.
   • Two business units (IDEC BU and APEM BU) were established to leverage the unique strengths of each brand and improve group-wide performance, with three clear targets: 1.5x growth in safety business sales; increase solution business revenue share from 10% to 15%; increase new product sales share from 10% to 15%.
   • IDEC BU focuses on expanding global presence as a safety equipment manufacturer, expanding product portfolios, exploring M&A and partnerships, growing the collaborative safety and mobility (AGV/AMR) solution businesses across Japan, Europe and North America.
   • APEM BU focuses on four high-potential segments: material handling, construction, defense, and e-Transportation, targeting top HMI supplier position for special vehicles, expanding product high-value addedness through selective product portfolio pruning and new function development.

2. Global SCM Optimization

   • Rolling out a global supply chain planning system to centralize demand data and improve planning accuracy; deployment completed in Japan and China, with ongoing global rollout.
   • Initiated logistics network review to reduce lead time, completed future state design in H1, will begin To-Be model validation in H2 and full implementation starting next fiscal year.
   • Underway supplier consolidation across IDEC and APEM to improve purchasing efficiency: evaluation criteria revised and category-level consolidation started in H1, with preparation for global rollout in H2 ahead of full launch next fiscal year, targeting 20-30% inventory reduction versus current levels.

3. R&D Process and System Reform

   • Revised product development process to center customer needs, added customer need validation at all development milestones to enable concurrent development and shorten development lead time.
   • Launched a core competency center in Europe to strengthen functional safety and cybersecurity products, targeting group-wide development process standardization by the end of this fiscal year.

Operational Results Highlights

• Structural reform delivered selling, general and administrative (SG&A) reduction: SG&A decreased 1.7% year-over-year, driven by labor cost reductions from Japan's second career support program and cost elimination from the divested solar power generation business. Gross margin reached 44.6%, with consolidated operating margin of 7.7% for H1.

IDEC reports the following product segment performance for the first half (H1) of FY2026:

1. HMI Business: IDEC-branded products (industrial switches, programmable displays for factory automation) saw strong sales, while APEM-branded products declined due to European economic slowdown and weak demand from the special vehicle industry. Q2 sales grew quarter-over-quarter on recovery in the Americas and EMEA regions.
2. Industrial Components Business (including Safety & Explosion-Proof): Sales increased overall, driven by growth in control relays across core Asia-Pacific and North American markets. Safety-related equipment in China performed solidly, leading to an overall revenue increase for the segment. Safety & Explosion-Proof sales grew in Q2 in Japan and China.
3. Automation & Sensing Business: Sales decreased, as new orders for the core product programmable controllers declined due to OEM inventory adjustment. Q2 sales still increased quarter-over-quarter in line with broader trends across product groups.

Geographically (destination-based sales): Japan saw improving sales on distribution inventory normalization; the Americas recovered from Q1 sales declines from the delayed launch of a new logistics center to achieve growth, with additional tariffs fully passed through to selling prices; EMEA (Europe) saw sales declines from weak demand in core industries across Germany and other European markets; Asia-Pacific (led by China) saw sales growth from expanding demand in automotive and semiconductor industries and normalized distribution inventory. Total consolidated H1 sales were 34.1 billion yen (up 3.1% year-over-year), with consolidated operating profit of 2.6 billion yen (up 68.4% year-over-year). Q2 consolidated operating margin reached 12.4%.

• Full-year FY2026 earnings guidance remains unchanged from the May 2025 announcement, with no adjustments to product-level or regional forecasts.
• Industry outlook remains unchanged: the automotive, special vehicle, and European markets face continued uncertainty, while the machine tools, semiconductors, robots, and AGV/AMR industries are expected to perform relatively solidly.
• Management maintains its target of achieving the full-year plan, and does not expect a material downturn in H2 performance despite the conservative implied H2 earnings from the unchanged full-year guidance, driven by ongoing recovery trends from Q1 to Q2.
• Inventory is expected to decline systematically through the end of the fiscal year after a temporary increase driven by US tariff effects and pre-positioning for expected demand growth.
• EMEA order recovery is expected to continue into H2, with no material deterioration forecast from current levels.

• Persistent demand weakness in the EMEA (European) market, with no material fundamental improvement in the regional economic environment despite sequential Q2 order recovery.
• Uncertainty around US tariff policy, with recent changes increasing the likelihood of existing tariffs being invalidated in December 2025, creating uncertainty for customer capital investment planning.
• Temporary elevated inventory levels due to external demand volatility from European economic conditions and US tariff changes, alongside pre-positioning for future demand growth.
• Weak demand for APEM-branded products in the Americas from the construction and material handling industries, with continued soft order intake for this segment.

Q: Why is the implied H2 operating profit forecast conservative relative to Q2 performance, and is this due to expected downside risks?

A: H1 results include one-off factors: Q1 sales were depressed by the delayed US logistics center launch, and Q2 saw a sharp recovery from that temporary dip. Management maintains the original full-year guidance and focuses on hitting the full-year target, and does not expect a material H2 downturn given the ongoing industry recovery trend.

Q: What has been achieved so far from the ongoing corporate reform projects?

A: For global supply chain reform, management is conducting a zero-base review to optimize lead time and inventory efficiency, targeting a 20-30% inventory reduction from current levels. For R&D reform, the revised development process now allows flexible resource allocation and speed adjustment for key projects, improving development responsiveness.

Q: What regions and segments are expected to grow in H2?

A: China and the US are the most attractive regions for growth right now, with consistently solid order growth. Within these regions, data center-related demand in the US and infrastructure projects in China are key growth drivers. IDEC is focusing its sales and resource efforts on these high-growth areas to capture new orders.

Q: How has US tariff policy affected customer and IDEC capital investment plans?

A: After initial waves of tariff-driven onshoring and nearshoring investment, policy uncertainty has re-emerged, with growing odds that existing Trump-era tariffs will be invalidated in December 2025. Management expects most customers will pause new capital investment plans until the policy situation is clarified, as the tariff outlook has shifted repeatedly since the start of the year.

Q: Why did Q2 operating margin jump to 12.4%, and can this high margin be sustained?

A: Q2's high margin partially reflects a recovery from temporary Q1 weakness from the delayed US logistics center launch, which suppressed Q1 sales and margins. Looking forward, order books are on a recovery trend, so management expects overall performance to stay stable with solid margins going forward.