Message from the Chief Financial Officer

Further enhancing our ability to continuously create corporate value by executing our financial strategy and steadily achieving results

Overview of Performance in Fiscal 2024:
Efforts to Realize Further Growth and Corporate Value Creation

In fiscal 2024, revenue reached a record high of ¥7,144.7 billion, up 11.6% year on year, due to robust vehicle sales primarily in Japan and North America following the easing of the semiconductor shortage, as well as the progression of yen depreciation and expanded sales in focus fields, such as electrification and safety products. On the other hand, operating profit came to ¥380.6 billion, down 10.7%, due mainly to the impact of allocating ¥201.5 billion to address quality-related issues, centered on fuel pumps. This offset our efforts to counter soaring material costs, primarily for electronic components, and labor costs through rationalization and the passing on of costs to customers.

In fiscal 2025, we anticipate a challenging operating environment, including difficulties in selling Japanese cars in China due to the expansion of local automakers and market downturns in Asia following the tightening of credit policies. In such an environment, we will strive to increase sales of high-value-added products primarily in our mainstay businesses and further enhance our rationalization efforts and ability to respond to change, all while steadily strengthening investments in R&D and human capital with a view toward future growth. Through these efforts, we will aim to achieve revenue of ¥7,330.0 billion and operating profit of ¥692.0 billion, marking record highs for both.

1. Reinforce Profit Structure:
Aiming to Realize the DENSO Philosophy through the Pursuit of Three Bold Initiatives

(1) Entrenching ROIC-minded Management to Realize Sustainable Value Enhancement

DENSO’s ROIC-minded management is not a method for short-term improvement in financial indicators but rather aims to enhance corporate value over the medium to long term. It is something that is realized by having all members of management and all employees thoroughly understand the significance of ROIC and act accordingly.

To that end, we are implementing initiatives to facilitate an understanding of financial indicators among employees that cover various angles, including the in-house rollout of an “ROIC tree,” which shows the relationship between management KPIs, such as ROIC, and individual actions; regular educational activities; and the sharing of ROIC improvement examples in global in-house publications. At the same time, we have included ROIC as an indicator for determining the performance-linked compensation of Board members and are disclosing ROIC targets as one of our KPIs. In these ways, we have clarified the awareness and commitment of our management. Moving forward, we will continue to entrench and advance ROIC-minded management with a view toward sustainable value enhancement.

① Evolving Mobility (Electrification and ADAS)

Electrification and advanced driver assistance systems (ADAS) are two domains that are crucial for the realization of the principles of green and peace of mind and sustainable growth. By continuing to deliver new value that fully leverages DENSO’s strengths, we have helped evolve mobility and achieved growth that exceeded that of the market on a continuous basis.

First, in the electrification domain, as the electrification of mobility progresses further, centered on battery electric vehicles (BEVs), we are proceeding with efforts to achieve differentiation through our technological capabilities, which are backed by years of experience, and our extensive lineup of products that meet diversifying customer needs. In fiscal 2024, we sold a total of 4.77 million inverters, which is a 1.4-fold increase from the previous fiscal year, thanks to expanded sales in North America and China. Moreover, we will seek to further contribute to the electrification of vehicles through our lineup of energy management systems, which include power supply systems, steering and braking systems, and heat management systems. We will also advance efforts to enhance our environmental value and expand global sales. By doing so, we aim to achieve ¥1.7 trillion in sales in the electrification domain in fiscal 2031 (a 1.9-fold increase compared with fiscal 2024).

Next, for the ADAS domain, we have been achieving solid sales with Global Safety Package 3 (GSP3) (up 1.8-fold compared with the previous fiscal year), which now covers a range of up to 37% of potential accident scenarios. In addition, we have completed preparations for introducing next-generation products into GSP3 that extend the system’s detection range with the aim of providing even greater safety value. By introducing such products, we expect to increase the range of potential accident scenarios covered by GSP3 to 56% by fiscal 2026. Looking ahead, we will promote the development of advanced technologies integrated with infrastructure such as human–machine interface (HMI) and traffic environments. Through such efforts, we will aim to achieve sales of ¥1.0 trillion in fiscal 2031 (2.1 times the level of fiscal 2024) in the ADAS field and extend the range of coverage of GSP3 to 80%. Additionally, by fiscal 2036, we will draw on GSP3 technology to help realize a society without fatalities from traffic accidents and in which people can move freely and safely, thereby contributing to the resolution of social issues.

② Strengthening Fundamental Technologies (Semiconductors and Software)

To evolve mobility, which I just talked about, it is imperative that we strengthen our fundamental technologies. DENSO has positioned semiconductors and software as its fundamental technologies, as they both provide the key for promoting the electrification and evolution of vehicles. By actively investing resources in these technologies and promoting relevant collaboration with business partners, we will refine our technological capabilities and reinforce our supply structure.

In the semiconductor domain, we are advancing investment primarily in power semiconductors that contribute to the longer driving distances of electric vehicles. In 2023, we launched our first silicon carbide (SiC) inverter on the market. Moreover, in the System on a Chip (SoC) domain, we became a member of Japan’s Advanced SoC Research for Automotive (ASRA) initiative through which we are advancing R&D activities across various industries.

From the perspective of supply, we are not only enhancing our production capacity but also strengthening the entire value chain through collaboration with our business partners. As part of these efforts, in fiscal 2024 we invested in Silicon Carbide LLC, which handles SiC manufacturing for the U.S.-based Coherent Corp., in a bid to enhance our competitiveness through vertical integration. We also carried out an additional investment in Japan Advanced Semiconductor Manufacturing, Inc. for the purpose of securing a supply structure with even greater stability.

Through these kinds of efforts, we plan on investing a total of ¥500.0 billion in the semiconductor domain by fiscal 2031. Additionally, by fiscal 2036, we will increase the size of our semiconductor business to ¥700.0 billion (2.7 times the level in fiscal 2024).

Next, we position software as a core technology for making vehicles more advanced, including through automated driving, electrification, and connectedness, and will thus seek to bolster our development capabilities. The term “software-defined vehicles (SDVs)” refers to the idea of dramatically enhancing the value of vehicles and services through software. As this concept becomes more widespread, it is important that we are able to support increasingly more complex and larger systems. We have been developing in-vehicle software for over 40 years, which has honed our ability to fulfill OEM requirements through software. Leveraging this experience and our development assets, we will actively pursue strategic partnerships with external organizations and adopt advanced development techniques that incorporate IT, AI, and other cutting-edge technologies. Simultaneously, by expanding recruitment of software-savvy personnel and promoting reskilling within our organization, we aim to enhance our development capabilities both qualitatively and quantitatively. By fiscal 2031, we will establish a development structure comprising 18,000 employees (1.5 times the level in fiscal 2024), and by fiscal 2036, we aim to achieve a software business scale of ¥800.0 billion (4.0 times the level in fiscal 2024).

③ Creating New Value

To date, DENSO has created social value by contributing to the evolution of mobility. Moving ahead, we will go beyond the mobility domain to execute further investments in domains offering new value, such as energy, food and agriculture (AgTech), and factory automation (FA), so that we can both resolve social issues in new areas and achieve further business growth by leveraging the strengths we have cultivated in car manufacturing.

In all these domains, we will stray away from a go-it-alone approach and actively pursue strategic partnerships to accelerate our business expansion. In fiscal 2024, we made the Certhon Group, which possesses world-class, cutting-edge technologies in the horticultural facility domain, a wholly owned subsidiary.

Through these efforts, we aim to achieve sales in new value domains of ¥300.0 billion by fiscal 2031 and to continue growing sales in these domains so that they account for 20% of total Companywide sales by fiscal 2036.

④ De-Emphasis and Discontinuation (Internal Combustion Engine Business)

In tandem with realizing growth in core domains, it is important that we scale down or withdraw from maturing businesses at appropriate times if we are to realize an optimized business portfolio. Although there are short-term difficulties when decreasing the size of a business or withdrawing from it altogether, we are pursuing Companywide efforts to de-emphasize and discontinue maturing businesses as a means to contribute to future growth and new value creation.

Specifically, we have divided the Company’s businesses into 112 product groups and, on a regular basis, are determining the future direction of each group based on its contribution to the following criteria: realizing the DENSO Philosophy, accelerating growth, and boosting profitability in terms of ROIC. Recently, the fuel pump module, type III alternator, and spark plug and exhaust gas sensor businesses have been the targets of business transfers. These are all core products for internal combustion engines, which have underpinned DENSO’s growth, and currently remain highly profitable. Nevertheless, selection and concentration across various companies is crucial for achieving the further growth of not just DENSO but the automotive industry as a whole. With a strong desire to realize the DENSO Philosophy, we will lead reorganization efforts within the automotive industry with the aim of achieving medium- to long-term growth for the Company and the greater industry.

By creating new resources through these endeavors and boldly redirecting them to new growth domains, we will steadily realize the aims of our three bold initiatives.

2. Reduce Low-Profit Assets:
Improving Asset Efficiency by Reducing Assets While Determining Ideal Asset Levels

DENSO seeks to utilize its asset portfolio with the greatest levels of efficiency by determining the necessary levels of certain types of assets in order to reduce asset amounts.

(1) Optimizing Cash on Hand

We have been working to optimize cash on hand by minimizing the funds needed for business operation (standard business funds) and reducing uneven asset distribution by region through the use of the Global Cash Management System (GCMS). By enhancing the precision of our day-to-day cash management in fiscal 2024, we were essentially able to achieve the fiscal 2026 target for cash on hand of 1.0 times* the amount of monthly revenue for the total of standard business funds and rainy-day funds for emergency circumstances. Going forward, we will continue to promote the efficient utilization of cash as we seek to grow.

* In the financial statements, funds under the GCMS are treated as deposits by the lending company and loans by the borrowing company, which means that they are recorded as both deposits and loans. However, the figure for actual cash on hand excludes the impact of the GCMS.

(2) Reducing Cross-Shareholdings

DENSO has a basic policy of not owning strategic shareholdings unless ownership of them is deemed rational. Under this policy, we are steadily reducing cross-shareholdings across all areas. In fiscal 2024, we accelerated reduction efforts by commencing the reduction of shares in the Toyota Group. When including partial sales, we sold 11 stocks for a total of ¥125.8 billion. Accelerating the pace of these reduction efforts, as of the first half of fiscal 2025 we had sold over ¥300.0 billion in cross-shareholdings through the partial reduction of shares in Renesas Electronics Corporation and Toyota Industries Corporation, among others.

3. Improve Capital Structure:
Pursuing Targeted Capital Structure by Bolstering Funding Platform and Issuing Proactive Shareholder Returns

We seek to reduce capital costs while maintaining a balance between safety and efficiency, and to diversify funding sources, utilize borrowings, and issue proactive shareholder returns in order to create corporate value. In these ways, we will improve our capital structure.

For fiscal 2026, we target an equity ratio of 50% or more. We believe that this is a level that will allow us to maintain a credit score that enables fundraising even during an economic crisis.

(1) Diversifying Funding Sources and Utilizing Borrowings

DENSO prepares for future investments in growth domains, new businesses, M&As, and business alliances, by diversifying funding sources through such means as utilizing bank loans, domestic corporate bonds, and foreign-denominated funds via overseas corporate bonds. Through such efforts, we are able to maintain a stable funding platform.

Additionally, through the ongoing utilization of sustainability financing (bonds and loans), we will further accelerate efforts to resolve environmental and social issues, centered on the sustainability management initiatives that we have been implementing since our founding.

Going forward, we will seek to further improve capital efficiency by actively utilizing borrowings and bonds while maintaining a high degree of financial health.

(2) Shareholder Return Policy

DENSO aims to realize and further enhance total shareholder return (TSR)* that exceeds the cost of shareholders’ equity steadily over the long term by increasing both dividends (income gain) and share price (capital gain). With regard to TSR results, we have been steadily working to enhance shareholder returns with a focus on improving income gains and to strengthen our financial structure with a view toward greater capital gains. Through such efforts, over the past five years following the revamping of our financial strategy, we have achieved returns that significantly exceed the cost of shareholders’ equity of 8.0% as well as the Tokyo Stock Price Index (TOPIX).

For dividends, we have adopted a basic policy of consistently growing dividend on equity (DOE: Dividends ÷ Shareholders’ equity) using the level of 3.0% as our baseline. Guided by this policy, we increased DOE by 0.1 percentage point year on year in fiscal 2024, to 3.3%, marking the third consecutive year of increases. As for treasury stock acquisition, we acquired ¥200.0 billion in treasury stock in fiscal 2024, which made for our largest-ever acquisition. The scale of this acquisition was determined by comparing our targeted capital structure and theoretical share price with actual figures as well as taking into account the robust market demand following the public offering of shares. Looking ahead, we will continue to promote the flexible acquisition of treasury stock while expanding the scale of this acquisition.

Through our efforts to enhance stable, long-term shareholder returns, we will realize TSR that exceeds the cost of shareholders’ equity. At the same time, we will curtail increases in capital and enhance our corporate value.

* TSR: Total return on investment that combines capital gains and dividends

4. Engage in Dialogue with Markets:
Increasing Communication Regarding Our Long-Cultivated Non-Financial Capital and Promoting the Appeal of Our Value Provision

DENSO is communicating information to investors and analysts in a timely and appropriate manner and advancing dialogue through efforts by corporate officers. Through these activities, we aim to reduce information gaps with capital markets and expand our equity spread by reducing the cost of shareholders’ equity.

In fiscal 2024, we held roughly 1,750 dialogues with companies including through the utilization of online meetings. At the same time, we held DENSO DIALOG DAY, an event where executive directors explain our corporate strategies and exchange opinions with the media and investors. The opinions received at this event were communicated at official in-house meetings and reflected in various initiatives, including the determination of management policies and efforts to reduce cross-shareholdings. In addition, guided by our sustainability management, we are stepping up investments in non-financial capital to reduce business risks and expand opportunities over the medium to long term. For example, we have positioned investments in intangible assets, such as R&D, as growth investments that contribute directly to corporate growth. Based on this approach, we plan on executing ¥640.0 billion in R&D expenditure in fiscal 2025, up ¥90.0 billion year on year, in an effort to bolster our overall investment activities. Through these activities, in Japan and overseas, our number of patent applications filed came to roughly 3,600 as of the fiscal 2024 year-end, with approximately 39,000 patents held. Through our patents, we have steadily enhanced the value we provide to customers and society with a view to the next generation. Quantitatively demonstrating the relationship between investments in non-financial capital and the creation of financial value in this manner is extremely important in appropriately evaluating DENSO’s medium- to long-term business growth. As such, we introduce such information and its impacts from a variety of perspectives in DENSO Integrated Report 2024.

Furthermore, when making the public offering of our shares in November 2023, we focused on sales to individual investors with the aim of stabilizing our share price to reduce capital costs. By utilizing various advertising media to ensure that our strengths and business strategies are thoroughly understood by the market, we have secured strong demand from individual investors. In fact, as of March 31, 2024, the number of individual shareholders was 182,000, an increase of 98,000 compared with the previous fiscal year.

In fiscal 2024, we received a second-place ranking in the Automobiles/Parts/Tires division of the 2023 Award for Excellence in Corporate Disclosure, in recognition of our IR activities. Furthermore, DENSO Integrated Report 2023 received the Gold Award for excellence of the WICI Japan Integrated Report Award 2023, becoming the first company in the automotive industry to do so. We also received the Grand Prix E (Environment) Award of the Third Annual NIKKEI Integrated Report Award, the highest award given related to the disclosure of environmental information. In these ways, our IR activities and stance on information disclosure have been highly evaluated by numerous institutions.

Additionally, we are working to enhance employee awareness of corporate value by actively utilizing our integrated report in-house. Moving ahead, we will reflect the various opinions we receive through dialogue with markets in our efforts to enhance the quality of our management.