Kokusai Electric Corp

The Electric Corporation will begin the presentation of the financial results for the first quarter of fiscal year ending March 2026. Thank you very much for participating today. My name is Matsumoto from Corporate Strategy Division and Public Relations and IR. Let me introduce the participants today. Representative Director, President, CEO, Katsunori Tsukada. Senior Vice President and Executive Officer, Financial Accounting, Yoshitaka Kawakami. Today's proceedings will begin with the presentation of the financial results for the first quarter. and the forecast for the full year by Kawakami, and it will be followed by the outlook explained by Tsukada. Today's session will be using the Zoom webinar, and the Q&A session will be conducted in Japanese. Participants can choose to listen to simultaneous English as well. This presentation is intended for institutional investors and analysts only, so we will limit the questions only from the analysts and institutional investors. Please refrain from recording the presentation. Without further ado, let us now begin the presentation. Mr. Kawakami, please start.

I am Kawakami, Executive Officer and CFO. Thank you for joining us today for the Kokusai Electric Financial Results Briefing. First, I will provide an overview of our first quarter financial results and full year performance forecasts. The following are disclaimers, which I will skip. First, an overview of the first quarter financial results. Page 4 are the highlights. Detailed explanations will follow using the subsequent pages. Page 5 is a summary of the consolidated earnings for the first quarter. Compared to the same period last year, when there was a concentration of equipment shipments to Chinese locals, the first quarter saw a decrease in both revenue and profit. Revenue and profit decreased also compared to the most recent quarter, but for the fiscal year ending March 2026, we planned for both sales and profit to be skewed towards the second half, and as such, the first quarter results were generally in line with the plan. The gross profit margin was 42.9%, which was lower by 2.1 points compared to the same quarter of the previous year, since last year saw a higher profit margin from the concentrated equipment shipments to the Chinese locals. However, compared to the full year results of the first previous fiscal year, there was a 0.3 percentage point increase that is generally in line with the plan. This was owing to the increase in higher ratio of high-value added products in equipment sales despite the more than 10-point decrease in sales ratio to Chinese locals. Additionally, order intake for the first quarter was approximately 53 billion yen, largely in line with the plan. Page 6 details the year-on-year changes in sales revenue and adjusted operating profit for the first quarter. In the first quarter, overall revenue decreased by 21% compared to the same period last year. The decrease in equipment sales to Chinese locals was due to a concentration of shipments of legacy equipment included in the service business for DRAM during the first quarter of the previous fiscal year, while equipment shipments returned to normal levels in the current quarter. Adjusted operating profit decreased by 44% year-on-year, primarily due to the significant decline in sales. Page 7 shows quarterly revenues by business segment. In the first quarter, equipment sales decreased by 28% compared to the same period last year, while service sales decreased by 6%. Compared to the most recent quarter, the ratio of service revenue increased significantly owing to service sales increase while equipment sales decreased. Page 8 shows the sales of legacy equipment for the 300mm device business and the 200mm or smaller equipment included in the service business broken down by application. In the first quarter, NAND sales increased by 116% compared to the same period last year, while sales for DRAM decreased by 73% and logic boundary decreased by 8%. Page 9 shows sales revenue by application divided into global and China domestic markets. I will first explain the comparison between the first quarter results and the most recent quarter regarding sales to global markets on the left side. Investments into the next generation NAND transition progressed in the first quarter. leading to growth in NAND-related equipment sales. On the other hand, DRAM and Logic Foundry equipment sales decreased. However, our plan is second-half focused, and the recovery trend for advanced devices continues. Service sales increased owing to the recovery of sales of legacy equipment and increased component sales. Next, moving on to sales to Chinese domestic customers on the right side. I will explain the first quarter results in comparison to the most recent quarter here as well. NAND-related equipment sales increased significantly in the first quarter, owing to the recovery of investments by major manufacturers. On the other hand, DRAM equipment sales decreased significantly due to the impact of major manufacturers entering an investment low. Logic Foundry equipment sales decreased due to weak investments by emerging manufacturers despite steady investments by major manufacturers. Service sales increased owing to growth in component sales and the recovery of legacy equipment sales. The sales ratio for China domestic markets decreased by 2%. 3 percentage points from 41% in the previous quarter to 38%. Page 10 shows sales revenue by shipment destination. Sales by destination increased year-on-year for Japan and Taiwan and increased for Japan quarter-on-quarter. Sales to the US decreased both year-on-year and quarter-on-quarter with sales ratio at 3%. Page 11 shows the quarterly balance sheet trends. Total assets resulted in the same total amount as the previous quarter end with increased inventory with production increase while there was a decrease in cash and cash equivalents, trade receivables and other receivables. Total capital increased by 2.7 billion yen from the previous quarter end primarily owing to increase in retained earnings. Page 12 shows the main financial indicators from the quarterly balance sheet. The equity ratio increased by 0.8 percentage points from the end of the previous quarter to 58.2%. Net debt remained largely in line with the plan at 17.5 billion yen. Page 13 shows the quarterly cash flow. Operating cash flow exceeded investment cash flow, resulting in free cash flow of 2 billion yen. Cash flows from financing activities resulted in an expenditure of 4.4 billion yen due to dividend payments and other items. Page 14 shows quarterly R&D expenses, capital expenditures, and depreciation and amortization expenses. R&D spent for the first quarter was 3.9 billion yen. The ratio of R&D spent to sales revenue increased to 7.4% due to sales revenue decline. R&D expenses for the fiscal year ending March 2026 are expected to increase by approximately 20% compared to the previous fiscal year. Capital expenditures for the first quarter totaled 2.3 billion yen. Going forward, we plan to invest a total of 20 billion yen over the two fiscal years ending March 2026 and 2027 to newly build a demonstration center in the United States. As a result, capital expenditures for the fiscal year ending March 2026 are expected to increase by approximately 10% compared to the previous fiscal year. Depreciation expenses for the first quarter amounted to 3.4 billion yen. Due to the impact of large-scale capital expenditures in the previous fiscal year, depreciation expenses are expected to increase by approximately 10% compared to the previous fiscal year. Next, we will explain the full year performance forecast for the fiscal year ending March 2026. Page 16 contains the highlights. Detailed information will be provided using the following pages. Please see page 17. There are no changes to the earnings forecast as well as the dividend forecast for the fiscal year ending March 2026 that was announced at the time of the full-year earnings call for the fiscal year ended March 2025. The guidance for the fiscal year ending March 2026 projects a 2% increase in revenue compared to the previous fiscal year, a 4% decrease in adjusted operating profit, and a 5% decrease in adjusted net income compared to the previous fiscal year. The gross profit margin is expected to increase by 0.2 percentage points from the previous fiscal year. The initial plan that had already factored in a decrease of 12 billion yen in sales for general purpose DRAM due to the indirect impact of tariff policies has been kept as is. The sales mix compared to the initial plan includes adjustments in the timing of new equipment sales and modifications, as well as adjustments in the timing of equipment shipments, and shifts between applications. However, there are no changes to the overall full-year earnings forecast. Considering the lead time from production to shipment at our company, the accuracy of the shipment forecast for the second half will improve by the end of the first half. Therefore, we will provide a more detailed explanation of the second half forecast, including the indirect impacts of tariff policies at the time of the second quarter earnings call.

Page 18 shows the breakdown of sales divided between global markets and the local Chinese market. The graph was presented at the four-year financial results announcement on May 13, and I will now provide an oral update on the current outlook compared to that. First, in the memory segment for NAND and DRAM, as we expected, technology investments driven by device generation shifts are progressing, and equipment demand is projected to increase. Compared to the initial assumptions, there are some fluctuations and differences in strength amongst the four units, NAND and DRAM, for global markets and NAND and DRAM for the local Chinese market. But overall, memory demand is expected to proceed roughly in line with the initial plan. However, for DRAM in global markets, compared to the initial assumption, there seems to be more demand for modifications included in the service business than for new equipment demand. Additionally, for DRAM in the local Chinese market, shipment timing is becoming uncertain and it is necessary to closely monitor order timing. next for logic and foundry and other non-memory segments there are differences in strength between advanced node for global markets mature node for global markets and the mature node for the local chinese market nevertheless we will aim to achieve the initial plan overall for the non-memory segment that concludes my presentation I am Tsukada, representative director and president and CEO. I will now provide an outlook for the future. Page 20 shows our outlook on the business environment. In the semiconductor device market, active investment related to generative AI continues and investment in NAND has started to recover. On the other hand, the recovery in general-purpose DRAM remains slow, and the mature node logic confoundry market continues to be sluggish. Based on this situation, we forecast that WFE market in 2025 will remain at the same level as in 2024, in line with our previous outlook. Compared to our earlier forecast, NAND is slightly negative, DRAM is slightly positive, and logic and foundry is slightly negative. These are the trends we are seeing. For 2026, there are still many uncertainties, but if factors such as tariff policies and export regulations do not worsen from the current situation, we expect mid-single-digit growth. Beyond that, heading into 2029, we believe that the demand for equipment for advanced devices, especially those related to AI, will continue to rise. On page 21, we have summarized the business environment and our company's situation by application. Since the announcement of the four-year financial results for FY March 25, the updates are as follows. First, regarding NAND, demand in global market is not as strong as expected, while demand in China is stronger than expected. Second, for DRAM, demand in global market is stronger than initially expected, particularly with an increase in modification-related demand. Meanwhile, shipment timing for the local Chinese market remains uncertain. Third, for logic and foundry, demand for mature nodes in global market is weak. In the NAND segment, technology investments aimed at device generation changes are driving increased equipment demand both globally and locally in China. We expect that this technology investment to continue not only through the fiscal year March 26, but also into the fiscal year March 27. Additionally, for the local Chinese market, we anticipate further investment aimed at expanding production capacity. For DRAM, with the advancement of HVM, we expect continued equipment demand for generational upgrades and capacity expansions in advanced devices. Although modification demand is higher than initially expected, we still anticipate the demand growth to continue in FY March 27. General-purpose DRAM recovery remains slow, and we continue to take a cautious view, capturing the indirect effects of our tariff policies. While investment in China has entered a pause period, we expect a recovery in FY March 27. or large confoundry demand for equipment for advanced nodes, especially GAA, is expected to continue growing. Investment in mature nodes has been weaker than expected. However, in China, major manufacturers continue to invest, and we expect further investment to continue in line with the Chinese government policy to buy made-in-China devices. For power devices, investment in the Chinese market continues, and we expect the demand for our products to keep growing. In global market, investment remains stagnant, but we have secured initial PORs for new products, and we expect these to contribute to revenue as the market recovers. Looking at the competitive landscape, Chinese equipment manufacturers are gaining that presence in batch diffusion and CVD equipment. However, in the field of high-difficulty film VT position, where we excel, Chinese players currently have no significant presence. Our market share in batch AOD equipment is expanding. Going forward, while continuing to monitor trends among local Chinese equipment makers, we will remain focused on expanding both TAM and our market share in the advanced device segment. Page 22 shows the transition in our product mix. There are no changes to the product mix outlook from our initial forecast. In FY March 26, demand for NAND equipment is recovering, and the sales of mini-batch ALD systems are expected to grow significantly. As a result, the combined share of batch ALD systems and single wafer treatment is expected to reach 70%. Although the ratio of sales to local Chinese customers who typically offer relatively high profitability is expected to decline in FY March 26, the gross profit margin is still projected to surpass that of the previous year. On page 26, we show the semiconductor device development roadmap along with our catalysting growth potential. There are no changes to the strategies and the medium-term targets we have explained so far. Our target timing for achieving the medium-term goals remains tied to the year when the WFE market reaches US$120 billion. As semiconductor devices become increasingly multi-layered, miniaturized, complex, and three-dimensional, we believe there will be growing opportunities to leverage our strength in batch ALD and single wafer treatment systems. We expect to achieve revenue growth that exceeds our overall WFE market growth. In addition, with a higher mix of high-value added products and lower SG&A expenses ratio due to increased revenue, we expect adjusted operating profit to grow at a faster pace than revenue. Finally, please refer to page 24. On July 10, KKR sold a portion of shares of our company, resulting in a change of their ownership ratio. We were informed that KKR transferred approximately 30 million shares, just over half of the approximately 55 million shares it held as of the end of March 25, to institutional investors through a securities firm. As a result, KKR's ownership ratio dropped from 23% to 11%. KKR is no longer our largest shareholder and is also no longer classified as a related party of our company. That concludes our presentation. Thank you very much for your attention.