Kokusai Electric Corp

I am Kaokami, Managing Executive Officer and CFO. Thank you for joining us today at Kokusai Electric's earnings call. I will begin by explaining our financial results for the fiscal year ended March 31, 2024, and our forecast for the fiscal year ending March 31, 2025. These are disclaimers that will be skipped. First, a summary of the full year results. Page 4 are highlights. Details will be covered from the next page and beyond. Please see page 5. This section shows profit loss for the fourth quarter as well as the full year. Since we consider adjusted earnings to be an important management indicator, we will explain them in adjusted earnings terms. Since most of the export sales of our products are denominated in yen, foreign exchange impact on profit is minimal. In the fourth quarter, revenue was down 18% and adjusted operating profit was down 39% year on year. The large decrease in sales was due to the large proportion of sales for NAND in the same period of the previous year, which was strongly affected by the sluggish NAND market. The decrease in sales and profit compared to the third quarter is due to the decline in service sales, while the recovery trend in equipment sales since the second quarter has continued. On the other hand, for the full year, revenue was down 26% and adjusted operating profit was down 41% from the previous year, but adjusted operating profit exceeded the earnings forecast by 1.5 billion JPY. Although we have the Toyama office and the group company locations in Toyama Prefecture, the Noto Peninsula earthquake of 2024, which occurred on January 1st of this year, did not cause extensive damage and had only minor impact on our business performance. R&D, capital expenditures, and depreciation were generally in line with the initial expectations. As previously forecasted, the company plans to pay a year-end dividend of 11 yen as a semi-annual amount, taking into account that the listing period was in the second half of the fiscal year. On page 6 are the factors that contribute to the year-on-year changes in revenue and adjusted operating profit for the full year. In the fourth quarter, sales revenue decreased year-on-year due to the restrained investment in NAND by device manufacturers. On the other hand, the decline in revenue is narrowing due to active investment for mature nodes in China, as well as recovering demand for equipment for DRAM and Logic in countries around the globe. Adjusted operating profit decreased due to lower gross profit resulting from lower sales. The decline in gross profit margin was a one-time event due to the implementation of a cautious approach to the valuation of certain components. Excluding the write-downs, gross margin was higher than in the third quarter. Page 7 shows the factors for increased decrease for the full year. In the fiscal year ended March 31, 2024, sales and profits declined from the previous year due to restrained investment in NAN by device manufacturers throughout the year. However, despite the significant decline in sales revenue, the gross profit margin improved from the previous year. Page 8 shows the quarterly sales structure by business. In the fourth quarter, equipment sales continued to recover and were in the same conventional balance as in the third quarter. Breakdown of sales of mainstay equipment was 50% batch ALD and 10% treatment. Page 9 shows the sales composition by business for the full year. In the fiscal year ended March 31, 2024, the ratio of the service business was temporarily larger due to the decline in equipment sales. Breakdown of sales of mainstay equipment and equipment sales for the fiscal year ended March 31, 2024, was 50% batch ALD and 10% treatment. Page 10 shows quarterly equipment sales by application. In the fourth quarter, the ratio for DRAM and Logic was larger due to the significant impact of restrained investment in NAND. Sales for DRAM and Logic were the largest in the fiscal year ended March 31, 2024, respectively due to active investment for mature nodes in China, which has been noticeable since the second quarter as well as the recovery in equipment demand worldwide from the third quarter. Page 11 shows the sales composition by application for the full year. Coming into the fiscal year and at March 31, 2024, the ratio of DRAM and logic applications was large, as DRAM and logic applications were strong, while those for NAND applications declined significantly. For NAND, device manufacturers continue to pursue cutting-edge development, and sales of equipment for development use have maintained a certain scale. Others consist of wafer applications, SI-powered device applications, and others. The service business includes equipment with wafer sizes of 150 to 200 millimeters, including SIC power device applications. Page 12 shows the sales composition by destination for the full year. In the fiscal year ended March 31, 2024, equipment and services combined accounted for 46% of the total sales to China. While sales for NAND have been declining significantly, the percentage of sales to China has become larger due to active investment in China for mature nodes, mainly DRAM and Logic since the second quarter. We expect this rate to return to previous 30% levels as investments in advanced nodes start to show full recovery around the world. In the medium to longer term, we believe that from further expansion of sales in other countries around the globe will bring the China ratio towards 20% levels. Page 13 shows changes in order backlog. The order backlog at the end of the fiscal year ended March 31, 2024 was 149.7 billion yen. The order backlog had remained high due to an increase in long lead time projects following the supply chain issues in the second half of the fiscal year ended March 31, 2022. But as initially expected, long lead time projects are now being converted to sales. Approximately 90% of the order backlog at the end of fiscal year ended March 31st, 2024 will be booked as sales in the fiscal year ending March 31st, 2025, and the remaining 10% in the fiscal year ending March 31st, 2026 and thereafter. By region, approximately 60% of the orders are to China, but this includes sales conversion of projects with long delivery times. Orders received include a mix of projects with long lead times that are booked crossing fiscal years and projects with short lead times that are booked within the same quarter, and the composition of these projects varies from quarter to quarter. Therefore, we refrain from disclosing numbers in the presentations in efforts to avoid misleading, but it has bottomed out in the second quarter as expected, and a recovery trend has been continuing since the third quarter. Page 14 is the balance sheet by quarter. Total assets as of March 31, 2024, increased by 1.9 billion yen from the end of the previous fiscal year due to an increase in property, plant and equipment, resulting from large capital investments and an increase in inventories in anticipation of a recovery in demand, although cash and cash equivalents and trade and other receivables decreased from the end of the previous fiscal year. Total liabilities decreased by 24.6 billion Japanese yen year-on-year owing to a decrease in trade and other payables and planned repayment of borrowings. Total assets increased by 26.5 billion Japanese yen year-on-year owing to an increase in retained earnings. Page 15 shows the main management indicators of the balance sheet. The equity ratio as of March 31st, 2024 was 50%, up seven points from the end of the previous fiscal year. Regarding the relationship between cash and debt, net cash was slightly negative due to weak operating cash flow in the first half of the fiscal year ended March 31, 2024. Going forward, operating cash flow is expected to improve as sales revenue recovers and net cash is expected to turn positive. Page 16 shows quarterly cash flows. Coming into fiscal year and at March 31st, 2024, free cash flow had been declining year on year due to the decline in sales revenue, but began to recover in the third quarter and free cash flow turned positive in the fourth quarter. Cash and cash equivalents balance remains sufficient for working capital. Page 17 shows cash flows for the full year. Free cash flow for the year ended March 31, 2024 decreased year-on-year due to decrease in operating cash flow and an increase in investment cash flow. In the fiscal year ending March 31, 2025, free cash flow is also expected to improve significantly owing to the recovery of operating cash flow. Page 18 shows R&D, capital expenditures, and depreciation for the full year. The company continues to invest in R&D and capital equipment in anticipation of future demand recovery and medium to longer-term demand expansion. Although R&D expenses have temporarily increased as a percentage of the net sales due to the current sales decline, we plan to raise R&D expenses from 4% to 5% of net sales to around 6% over the medium to longer term. Further, capital investment, which has been 2 to 3 billion yen per year in the past, is planned to increase to 4 to 6 billion Japanese yen per year, excluding large capital investments. Research and development expenses for the fiscal year ended March 31st, 2024 were 12.7 billion yen, generally the same level as the previous year. R&D expenses for the fiscal year ending March 31st, 2025 are expected to increase by approximately 20% from the previous fiscal year. Large-scale capital expenditures were recorded, including the construction of a new plant totaling 24 billion yen in Toyama Prefecture and the expansion of a demonstration room in South Korea totaling 9.0 billion yen. In addition, regular capital expenditures, such as evaluation equipment, increased in conjunction with the expansion of the demonstration room in South Korea. As a result, capital investment for the full year totaled 20.5 billion yen, an increase of 3.1 times that of the previous year. In the fiscal year ending March 31, 2025, the total amount of capital expenditures will continue to be large, as about half of the investment in the construction of the new plant will be recorded. But this is expected to normalize in the fiscal year ending March 31, 2026 and thereafter. Then here is a forecast for the fiscal year ending March 31, 2025. Page 20 are highlights. Specific details are provided on the following pages and beyond. Please see page 21. For the fiscal year ending March 31, 2025, we project a 20% increase in revenue and increases in gross profit, adjusted operating profit, and adjusted net income of 24%, 35%, and 30%, respectively, versus the fiscal year ended March 31, 2024. In line with our shareholder return policy, we have set our annual dividend forecast at 32 yen per share, which corresponds to a dividend payout ratio of over 20% based on adjusted net income. The dividend payout ratios shown in the table are based on unadjusted net income.

Page 22 shows the forecast sales revenue by first half and second half for the fiscal year ending March 25. In the first half of this fiscal year ending March 25, we expect sales to China and to the rest of the world to be on par with the second half of the last fiscal year, and legacy equipment sales included in the service business are expected to boost sales revenue. In the second half of the year, we expect legacy equipment sales in the service business to settle down, and we take cautious view on the demand for mature nose equipments in China, while demand for equipment for leading-edge products around the world will begin to recover. Therefore, we expect sales to grow in the second half of the year for all countries in the world, except China. For reference, sales to China are expected to account for 50 to 60% of equipment business sales revenue in the first half and 40 to 50% in the second half. On page 23, we show the bridge analysis of the forecast for the fiscal year ending March 25 compared with the actual results for the fiscal year ended March 24. Overall revenue is expected to increase by 20% as sales recover, especially for DRAM and LOGIC. Adjusted operating income is expected to increase 35% due to higher gross profit from sales recovery and higher gross margin. Page 24 shows the revenue mix forecast by business for the full year. For the fiscal year ending March 25, we expect equipment sales to increase 26% and service sales to increase 10% over the last fiscal year. bringing us closer to our historical balance. 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 services. Page 25 shows equipment sales composition by application for the full year. We expect that sales for DRAM and LOGIC will begin a full-scale recovery in the third quarter and that the DRAM and LOGIC ratio will remain high. On the other hand, we expect a full recovery in the sales for NAND to begin at the end of the fiscal year ending March 25, and with limited contribution to sales expected this fiscal year, the ratio will remain low. In the mid to long term, we will expect each application aiming for a balance of 30% in NAND, 30% in DRAM, and 40% in logic, fundraising, and others. That covers my presentation. I am Kanai president and CEO. Let me explain the outlook for the future. Page 27 is a highlight. Details are to follow. Page 28 is the outlook for the business environment. Inventory adjustments are underway in the semiconductor device market, and unit prices for memory devices have begun to rise, leading us to believe that market conditions have bottomed out in 2023. Investment in leading-edge product development continues worldwide, and we expect capital investment in leading-edge products to begin to recover in the second half of 2024. In China, on the other hand, capital investment in mature nodes, including power devices, has been active and expected to remain brisk over the next several years. In the mid to long term, the semiconductor-related market is expected to grow significantly due to expanding demand for electronic devices such as smartphones and PCs, the expansion of data centers, and the investment in reducing environment impact, the so-called GX. In light of this, our business plan is based on the assumption that the demand for equipment for leading its products will begin to recover in the second half of the fiscal year ending March 25. As for our sales to China, we take cautious view beyond the middle of the fiscal year ending March 25. We expect the WFE market to be about the same size in 2024 as it was in 2023, or slightly larger, but we expect it to reach $110 billion to $120 billion in the next few years, growing to about $130 billion by 2027. Page 29 is the strategy for the equipment business. We are focusing on batch deposition and treatment systems, and our mainstay batch ALD have a global market share of approximately 70%, while that of our single wafer treatment systems have grown to approximately 20%. In response to the expected evolution of semiconductor devices, we will focus on R&D, acquisition of new PORs, and the sales expansion by taking advantage of our technological superiority, aiming for sales growth exceeding the growth of the WFE market. On page 30, we reiterate the advantages of our batch ALD equipment. Although we skip the details, the batch ALD system is not simply a combination of batch deposition technology and ALD technology, but rather a combination of complex technologies and years of expertise that can only be achieved with high performance, and its high added value is recognized by device manufacturers around the world. Our primary growth strategy is to increase sales of this batch ALD. On page 31, we reiterate the advantages of our treatment equipment. Although we skipped the details, we have already made progress in the NAND and DRAM areas, and our second growth strategy is to use the expansion into logic as the next inflection point to increase sales of treatment equipment. On page 32, we summarize our efforts by application. In the area of DRAM, we have been acquiring new PORs for the highly complex deposition process for leading-edge DRAM, and we expect TAM to expand as devices evolve, and we will aim to acquire even more new PORs. Furthermore, in the mid to long term, we aim to expand our market share in the same way as for 3D NAND, as the device structure in 3D DRAM becomes more complex. For logic, we have already won a development POR in GAA, and we expect the GAA generation sales to exceed 10 billion yen in the fiscal year ending March 25, and to expand in the fiscal year ending March 26 and beyond. In the mid to long term, we estimate that the batch deposition process for CFETs will be 1.4 times that for FinFETs, and we aim to expand our market share. For NAND, we have gained an overwhelming share of the 3D NAND deposition process with our lineup of large batch deposition systems and the mini batch deposition system for more advanced deposition. And we expect the demand to recover and expand as the market recovers and the devices become more multi-layered. Finally, in the service business category for SIC power devices, we expect sales to grow by about 20% year-on-year in the fiscal year ending March 25 due to the introduction of new high-temperature activated annealing products and the expansion of sales of existing products. We expect sales of new high-temperature activated annealing products to grow to become one of the pillars of our business in the fiscal year ending March 26. Page 33 summarizes the strategy for the service business. In parts sales and maintenance services, where relatively stable demand can be expected, we will provide high value-added services based on the design for service business concept, taking advantage of the large increase of the installed base in recent years. The table below right shows the example of the effect of design for service business. The increase in the number of high-value-added products sold, combined with the increase in the sales per unit of parts sales and maintenance, has contributed to the expansion of parts and maintenance sales and improved profitability. We will also focus on the sales of equipment for wafer sizes over 200 mm or smaller, including those for SIC power devices, by utilizing the sales networks of our group companies. Page 34 lay out our plans for the expansion of production, development, sales, and service systems. Currently, a new plant is under construction in Tonami City, Toyama Prefecture, with the aim of commencing cooperation in the fall of this year. Toyama plant will shift part of its manufacturing function to the new plant and expand its development function. Through these measures, we will double our manufacturing capacity in the fiscal year ending March 26 compared to the fiscal year ending March 21 and expand our development capacity by 1.5 times building a structure that will enable us to meet growing demand until 2030. In the second quarter, we will start operations at the local subsidiary established in Singapore to expand our business in Asia, including Asia, Malaysia and India, and to strengthen our service support system. Page 35 is our ESG initiatives. Under our corporate philosophy, we are moving into a phase of upgrading the level of sustainability management throughout the group, and we will strengthen our efforts in both business and ESG aspects while becoming even more aware of our corporate social responsibility. Finally, on page 36, we summarize the drivers for our future growth along with our development roadmap. We believe that as semiconductor devices become more multi-layered and three-dimensional, there will be more opportunities to take advantage of our expertise in batch ALD and treatment. In the short term, demand for DRAM and logic, including mature nodes, will increase, followed by market recovery for NAND. In the medium term, sales expansion for Logic GAA generation increase the demand for leading-edge DRAM, and new products for SIC power devices will drive growth. In the long term, there are inflection points such as the transition to 3D DRAM and Logic CFET. By providing products and services that meet the needs of each of these markets, we aim to realize a balanced portfolio and achieve medium to long-term growth. Regarding medium and long-term initiatives, we would like to hold our first IR Day on the morning of June 18th to provide a detailed explanation. We plan to invite a guest speaker from applied materials. Details will be announced shortly, and we sincerely hope for your attendance. That covers my presentation. Thank you for your attention.