Kokusai Electric Corp

Thank you very much. As of 5 p.m. today, there's an appointment of executive officers, which is effective April 1st, 2024, that I would like to go over in detail. The details will be skipped. Please do refer to the press release that has been made available for details. The purpose of this executive officer changes. After we have had a successful IPO, in anticipation of the business developments for the coming 10 years, we decided to embrace a new structure for management. We hope to seek your understanding. Thank you in advance. And as for retiring executive officers Kamiya as well as Ogawa, They will continue to remain as director as well as director slash executive fellow, respectively, and they will continue to engage in the management of the company. We hope to seek your understanding on this front as well. Thank you very much. I am Kamiya, Director, Senior Managing Executive Officer and CFO. Thank you for joining us today at Kokusai Electric's earnings call. I would like to present our third quarter financial results and our outlook going forward. We will omit the company overview and medium to long-term initiatives as there have been no major changes from the second quarter financial results earnings call. Those slides are available in the appendix. Details of the disclaimers will be skipped. First, a summary of the third quarter results. Page 4 are highlights. Details will be shared from the next page and on. Please see page 5. This section shows profit loss for the third quarter and the first nine months of the year. Since we consider adjusted profit to be an important management indicator, we will discuss things in adjusted profit terms. Also to note, since most of the export sales of our products are yen-denominated, impact of foreign exchange on our profits is minuscule. In the third quarter, revenue was down 17% and adjusted operating income was down 28% compared to the same period of last year. The reason for the large decrease compared to the market is that our memory sales account for a large proportion of our total sales and were strongly affected by the memory market slump. On the other hand, compared to the second quarter, the company recovered further with a 20% increase in revenue and a 12% increase in adjusted operating income. As expected, bottoming out happened in the first quarter and recovery trend proved evident in the second and third quarters. Due to a change in the project mix, the gross profit margin declined from the first and second quarters, but remained above 40%. For the first nine months of the year, revenue was down 29% from the same period last year, in line with our initial expectations. Adjusted operating income continued to exceed initial expectations with a 42% decline. Research and development expenses, capital expenditures, and depreciation amortization are progressing as initially expected. Page 6 shows the factors behind the year-on-year changes in the third quarter revenue and adjusted operating income. As in the first and second quarters, semiconductor device manufacturers curbed their investments in NAND, resulting in large decline in equipment sales in the third quarter as well. This decline in sales led to a decrease in gross profit, resulting in a decrease in adjusted operating income. In addition to active investment in mature nodes in China, DRAM and Logic Foundry outside of China also began to recover in the third quarter. The ratio of equipment and services sales to China in the third quarter totaled 44% of total sales. But this is expected to move closer to its original level of around 30% in the future as sales outside of China recover. In addition, mainstain equipment sales accounted for about 50% of total equipment sales in the third quarter, with batch ALD accounting for about 50% and treatment about 10%. Page 7 shows revenue by business segment. For the full year ended March 2023, equipment accounted for 70% and services 30%. Coming into fiscal year ending March 2024, while equipment sales declined, the service sales composition ratio increased as service revenues remained on par with the same period of the previous year. But since equipment sales recovered in the third quarter, sales composition ratio returned to the original breakdown. Page 8 shows sales revenue by application. For the full year ended March 2023, NAND accounted for 43%, DRAM for 20%, and Logic and others for 37%. In fiscal year ended March 2024, while NAND sales declined, active investment in mature nodes in China has been supporting our performance since the second quarter. However, DRAM and Logic Foundry sales outside of China have also started to recover since the third quarter. As for NAND, device manufacturers continue to pursue cutting-edge device development, and sales of development equipment are maintaining a certain scale. Others consist of water applications, SI-powered device applications, and others. SIC-powered device applications with wafer size of 150 to 200 millimeters are included in the service business. Page 9 shows changes in order backlog. The order backlog at the end of third quarter was 163.7 billion yen, showing the same level as the end of second quarter. Orders bottomed out in the second quarter as initially expected and have been recovering from the third quarter. In addition, the order backlog remained high due to an increase in long lead time projects following the supply chain problems in the second half of the fiscal year ended March 2022. But as initially expected, long lead time projects have begun being converted into sales. As a result, orders received and revenue from sales were at the same levels in the third quarter, and as such, order backlog is heading to normalizing. approximately 30% of the order backlog from the third quarter end will be booked as sales in the current fiscal year, 60% in the next fiscal year, and the remaining 10% in subsequent years. Page 10 is the balance sheet. Explanation is going to be omitted. So total assets were generally unchanged from the end of fiscal year March 2023 due to an increase in tangible fixed assets from large capital investments and an increase in inventories in anticipation of the demand recovery, despite decreases in cash and cash equivalents, as well as trade and other receivables. Total liabilities decreased by 18.5 billion yen from the end of fiscal year March 2023, mainly owing to a decrease in trade and other payables. Page 11 shows changes to the main management indicators on the balance sheet. Equity capital ratio increased approximately 5 percentage points from the end of previous period to 48.6%. Regarding the relationship between cash and debt, net cash is temporarily negative due to the impact of deteriorating operating cash flow in the fiscal year ended March 2024. But as sales revenue recovers, operating cash flow will improve accordingly, and next cash is expected to turn positive in the next fiscal year and beyond. Page 12 shows quarterly cash flows. Operating cash flow turned positive in the third quarter, although it declined in line with lower sales revenues. Cash and cash equivalents balance remains at sufficient levels for working capital. Page 13 shows quarterly R&D expenses, capital expenditures, and depreciation and amortization. Since the company continues to invest in R&D and capital expenditures in anticipation of future demand recovery and medium to longer-term demand expansion, the ratio of R&D and capital expenditures to net sales has temporarily increased due to the current sales decline. R&D expenses, which have to date been 4% to 5% of net sales, will be raised to around 6% in the medium to longer term. Capital investment, which has traditionally been 2 to 3 billion JPY per year, will be increased to 4 to 6 billion JPY per year going forward. Capital expenditures in the third quarter were temporarily large due to large-scale capital expenditures, including investments related to the new plant being built in Toyama Prefecture and the expansion of the demonstration room in South Korea. In addition, Ordinary capital expenditures also temporarily increased, including the installation of evaluation equipment in conjunction with the demo room expansion in South Korea. Next, I will explain our full year forecasts. Page 15 are highlights. Details are available in the following pages. Please see page 16. There are no changes to the earnings forecast for fiscal year March 2024 announced at the time of listing. Although profits through the third quarter have exceeded the initial forecast, the full year forecast remains unchanged, and we view each profit in the full year forecast as a minimum level. Now, through our group. As the Toyama office and locations of our group companies in Toyama Prefecture, we have not seen severe damage from the Noto Peninsula earthquake of 2024, which occurred on January 1st of this year, and normal business operations have started sequentially on January 9th. Therefore, the impact of the earthquake on our business performance is negligible. There is no change to the dividend forecast, which will be a semi-annual amount taking into account the fact that the listing period is in the second half of the year and the entire amount will be paid as a year-end dividend. The dividend payout ratio is based on an unadjusted net income, but if calculated based on adjusted net income, the payout ratio would be 10%, which is equivalent to a level of 20% for the year. On page 17, we show the factors for the increase or decrease in the full-year forecast compared with the previous year's actual results. In the fourth quarter, in addition to continued active investment in mature nodes in China, which has been continuing since the second quarter, investment in DRAM and Logic Foundry outside of China, which has been recovering since the third quarter, is expected to drive our business performance. We also expect to maintain a certain level of NAND sales, including development equipment sales. Page 18 shows the sales composition by business segment for the full year. We expect the ratio of service business to total sales to expand temporarily in fiscal year March 2024 due to the decline in equipment sales, but we expect it to return to the previous balance as equipment sales recover. In the mid to long term, we aim to achieve a balance of 70% to 75% equipment sales and 25% to 30% service sales by growing both equipment and service businesses.

Page 19 shows sales compositions of equipment sales by application for the full year. In fiscal year March 24, we expect the DRAM and logic fund rate ratios to rise temporarily due to reduced investment in NAND, but over the medium to long term, we will expand each of these ratios, aiming for balance of 30% in NAND, 30% in DRAM, and 40% in logic fund rate and others. The outlook for the future begins on page 20. please look at page 20. I will explain from here. The semiconductor device market is expected to grow significantly in the mid to long term due to the expansion of data center, investment in reducing environmental impact, and so-called GX, et cetera. The WFE market is expected to grow to about $110 to $120 billion in the next few years, although it is expected to be the same level as in 23 and 24. Although our expected sales for March 24 is expected to decline significantly from the previous year, we expect equipment sales to grow by about 20% in fiscal year March 25, exceeding WFE. Although active investment in mature node in China will continue, we are taking a cautious view from the second half of fiscal year March 25 onward, following the outlook by application. DRAM is expected to have the most stable orders and sales, and in addition to increased demand for mature node for China, we anticipate increased demand for advanced devices globally. The growth in demand for DRAM is expected to be boosted by the expansion of HBM demand due to the spread of generative AI. In logic foundry, we expect mature news for China to lead the way in the near term, followed by the start of mass production for advanced devices in the global market. Acquisition of PORs for GAA development has increased further, with the PORs from all major manufacturers. At present, GAA-related orders are expected to reach the 10 billion yen mark and are expected to start contributing to sales in fiscal year March 25, with demand expected to grow thereafter. Market conditions for NAND will begin to recover in the second half of March 25, and a full-fledged recovery in mass production is expected in March 26th. We expect SIC power devices to grow about eight times year-on-year in fiscal year March 24th due to increased demand for existing products. And in fiscal year March 25th, we expect sales to increase by more than 20% compared to fiscal year March 24th as new high-temperature activated annealing products are delivered for evaluation purposes. Furthermore, rapid growth is expected from FY26 onwards through mass production of new products. Page 21 summarizes the outlook for the batch ALD market. Please see the figure on the left. Batch and single wafer are used in separate applications with little overlap between the two areas. As semiconductor devices become more complex, productivity challenges become more pronounced, and the need for batch ALD is expanding. This has resulted in the batch ALD market expanding in the upper right direction. The upper right figure shows the features of our batch ALD process. Our batch ALD uses thermals and cyclical gas supply to achieve high productivity and excellent step coverage in both the vertical and horizontal directions. We believe that our batch ALD is the best solution for the next-generation logic GAA, which requires uniform, high-quality deposition in both the vertical and lateral horizontal directions. The lower right figure shows the inner spacer and hard mask, which can take advantage of our Batch ALD technology as well as locate in Logic GAA. We expect that the transition from GAA to CFET will further increase the number of processes where Batch ALD is advantageous. On page 22, we summarized the drivers of our future growth along with our development roadmap. We believe that as semi-doctrine devices become more multi-layered, complex, and three-dimensional, there will be increasing opportunities to take advantage of our expertise in batch ALD and the treatments for NAND, DRAM, and logic devices, respectively. In the short term, demand for DRAM, including mature nodes and logic foundry, will increase, followed by recovery in the NAND market. In the medium term, drivers will be sales expansion due to acquisition of volume production POR for log GAA, increased demand for advanced DRAM with more production of HBM, and rapid growth from launch of new products of CIC power devices. In the long term, there are inflection points such as the transition to 3D DRAM and log CFET. By providing products and services that meet the demand in each of these areas, we aim to realize balanced portfolio and achieve medium to long-term growth. That concludes our presentation. Thank you all for listening.