Kokusai Electric Corp

We will now begin Kokusai Electric financial results briefing for the second quarter of the year ending in March 2026. Thank you very much for taking the time to join us today. My name is Matsumoto from public relations and IR department, and I will serve as the moderator. First is the introduction of today's speakers. Mr. Kazunori Tsukada, representative director, president and CEO. Thank you. Mr. Yoshitaka Kawakami, Senior Vice President, Executive Officer, and CFO. Thank you. Today's agenda is as follows. First, Mr. Kawakami will present the consolidated financial results for the second quarter and the full year forecast. Next, Mr. Tsukada will provide an outlook going forward. After that, we will move on to the questions and answers session. This briefing is conducted via Zoom webinar, and both the presentation and Q&A responses will be in Japanese. Participants may also choose English through simultaneous interpretation. As this briefing is intended for institutional investors and analysts, questions will be limited to this audience. Thank you for your understanding. we kindly ask that you refrain from video or sound recording or taking photographs. Now, let us proceed to the presentation. Mr. Kawakami, please go ahead.

I am Kawakami, Managing Executive Officer and CFO. Thank you for joining Kokusai Electric's earnings call today. First, I will go over our second quarter results as well as our full year earnings and dividend forecasts. These are disclaimers that I will skip. First, starting with an overview of the second quarter results. Page four, carry the highlights. Since both sales and revenue and all profit figures for the first half of the fiscal year exceeded our previous forecast, we have today announced the difference between forecasted and actual figures for the first half interim period of the fiscal year ending March, 2026. Details will be discussed from the next page and beyond. Page five shows the consolidated earnings summary for the second quarter and the cumulative second quarter. For the second quarter, July to September, both revenue and profit increased compared to the same period last year, as well as the most recent previous quarter. For the first quarter, sales increased year on year, while profits decreased due to changes in product mix and advanced investments for the future. Compared to the previous forecast, sales and profits both exceeded expectations owing to our bringing forward sales of some equipment that was originally planned for the second half to the second quarter in response to the anticipated change in demand dynamics. The sales brought forward primarily involved NAND equipment and logic foundry equipment for local Chinese manufacturers. Additionally, a portion of upgrade products for global manufacturers included under the service business were also brought forward. The gross profit margin for the first half of the fiscal year was 42.2%. Although this was a 2.6 percentage points lower than the same period last year, where profitability was extremely high owing to the concentration of equipment shipments to local Chinese manufacturers, it was generally in line with the plan. Regarding the interim dividend, we resolved today to pay 18 yen per share as previously forecasted and announced the notice concerning dividend from surplus interim dividend. Page six details the year-on-year factors affecting revenue and adjusted operating profit for the second quarter. Compared to the same period last year, the second quarter saw growth, primarily in equipment sales to local Chinese manufacturers, as well as service revenue resulting in an overall revenue increase of 33% year-on-year. We will explain the increase-decrease by application later. Adjusted operating profit increased 28% year-on-year, where increased sales and other factors absorbed the decline in gross profit margin due to changes in product mix and higher SG&A expenses. Page 7 shows the year-on-year factors affecting the cumulative results for the second quarter. Overall revenue increased by 2% year on year for the first half since service revenues grew, while equipment sales to local Chinese manufacturers decreased. Equipment sales to manufacturers worldwide saw declines in logic foundry equipment and other equipment such as SI power devices. However, NAND equipment sales grew. Sales of equipment to Chinese domestic manufacturers saw a significant decline in DRAM-related shipments, which saw concentration in the same period last year. However, NAND-related sales grew substantially, and Logic Foundry-related sales also increased. Service revenues grew, primarily driven by upgrades to existing equipment. adjusted operating profit decreased 17% year on year due to the decline in gross profit margin caused by changes in product mix and increased advanced investments such as R&D spend for the future growth. Page eight shows the quarterly sales breakdown by business segment. In the second quarter, both equipment sales and service sales increased compared to the same period last year, as well as the most recent previous quarter. For the cumulative second quarter, upgrades and modifications in the service business increased, replacing new equipment sales. Consequently, equipment sales slightly decreased year on year, while service sales increased, raising the service sales ratio to a slightly higher level of 38%. Page 9 shows sales by application for the 300mm equipment that constitutes the equipment business and the 200mm and smaller legacy equipment included in the service business. For both the second quarter and the first half of the fiscal year, sales for NAND and Logic Foundry applications increased year-on-year. On the other hand, sales for DRAM applications halved. This was partly due to some new equipment sales being replaced by upgrades and modifications within the service business, and partly due to the impact of major Chinese DRAM manufacturers being in an investment lull. Page 10 shows sales revenue by destination. In quarter two, sales to South Korea and China increased year on year. For the cumulative second quarter, sales to South Korea and Taiwan increased, while the sales ratio for the U.S. decreased to 3%, and the sales ratio for China decreased to 47%. Page 11 shows sales revenue by application, divided into sales to global manufacturers and sales to local Chinese manufacturers. For global manufacturers in Q2, driven by aggressive investment by device manufacturers, equipment sales for NAND and DRAM, along with service upgrades and modifications, grew compared to the most recent previous quarter. For Chinese domestic manufacturers in Q2, equipment sales for NAND and Logic Foundry increased compared to the previous quarter, while equipment sales for DRAM also began to increase, rebounding from the low point of Q1, which was a transitional period. Due to the impact of some orders from Chinese domestic manufacturers being brought forward from the second half of the year, the sales ratio to Chinese domestic manufacturers temporarily increased to 44% in the second quarter. Page 12 shows a quarterly balance sheet trends. Total assets at the end of the second quarter increased by 1.8 billion Japanese yen compared to the end of March 2023-2025, owing to increase in inventories and tangible fixed assets despite decline in operating credit and other credits. Total equity increased by 12.1 billion Japanese yen compared to the end of March 2025, owing to an increase in retained earnings. Page 13 shows key management indicators from the quarterly balance sheet. The equity capital ratio increased by 2.5 percentage points from the end of the previous quarter to 60.7%. Net debt was largely in line with plan at 10.6 billion Japanese yen. Page 14 shows quarterly cash flow. In the second quarter, operating cash flow inflows exceeded investment cash flow inflows, resulting in free cash inflows of 7.1 billion Japanese yen. Cash flow from financing activities resulted in outflows of 6.4 billion Japanese yen, primarily due to repayments of borrowings. Page 15 shows quarterly R&D expenses, capital expenditures and depreciation and amortization. R&D expenses progressed as planned for the second quarter at 4.8 billion Japanese yen with the R&D expense ratio to revenue at 7.4%. The forecast for March 2026 R&D expenses remain unchanged at approximately 18 billion Japanese yen, a 20% increase year-on-year. Capital expenditures for the second quarter totaled 5.2 billion Japanese yen. We are currently advancing the construction of a new U.S. demonstration center representing a major capital investment totaling 20 billion Japanese yen over the two-year period across fiscal year ending March 2026 and March 2027. Consequently, while capital expenditures for the fiscal year ending March 2026 was previously projected to increase by 10% year-on-year, a portion is now expected to be recorded in the fiscal year ending March 2027. Therefore, capital expenditures for the fiscal year ending... March 2026 are now projected to decrease by 10% compared to the previous fiscal year, amounting to approximately 18 billion Japanese yen. Depreciation expense for the second quarter was 3.5 billion. Due to depreciation of the Tonami plant completed in the previous fiscal year, depreciation expenses for the fiscal year ending March 2026 are expected to increase by 10% year-on-year, reaching approximately 14 billion Japanese yen. Next, I will explain the full year earnings forecast and dividend forecast for the fiscal year ending March 2026. Page 17 shows the highlights. As sales in each profit category for the fiscal year ending March 2026 are now expected to fall below the previous forecast, we have revised our full year earnings forecast and announced the notice regarding revision of full year earnings forecast today. The specific details will be explained in the following pages. Please turn to page 18. Sales revenue has been reduced by 6% and adjusted operating profit by 20% compared to the previous forecast since sales of certain equipment anticipated for the second half are now expected to be delayed into the fiscal year ending March 2027. Sales are expected to be delayed due to equipment sales for NAND to manufacturers worldwide totaling 9 billion JPY and equipment sales for DRAM to local Chinese automakers totaling 5 billion JPY. These sales are projected to be realized in the fiscal year ending March 2027. If a larger percentage decrease in profits compared to the decrease in sales revenue is due to the reduction in gross profit caused by delayed sales and the ratio of SG&A expenses, including upfront investments, becomes relatively higher as sales revenue decreases. This is not a structural change, and profitability is expected to improve as sales expands. Furthermore, as primary factors for this earnings forecast provision is a temporary sales decline due to delayed shipments, annual dividend forecasts will be kept unchanged. Page 19 compares the current earnings forecast with the previous forecast and summarizes the factors contributing to the increase or decrease. Regarding revenue, compared to initial expectations, shifts occurred between equipment sales and upgrade modifications, as well as varying strength across applications. However, downside factors and upside factors excluding sales deferred to the fiscal year ending March 2027 are expected to offset each other. Therefore, we made a downward revision of 14 billion JPY from the previous forecast. Excluding this delay, we have lowered the forecast for NAND by 5 billion JPY and for Logic Foundry by 4 billion JPY compared to the previous forecast. For DRAM, as some new equipment sales are now expected to be replaced by upgrade modifications, equipment sales were reduced by 4 billion Japanese yen from the previous forecast. However, upgrade modification sales were increased by 14 billion Japanese yen, resulting in a net increase of 10 billion Japanese yen. Adjusted operating profit was lowered by 10.8 billion Japanese yen from the previous forecast due to reduced sales resulting from the delay, the accompanying decrease in production volume for the current period, and a decrease in gross profit resulting from changes in product mix. Page 20 shows the breakdown of sales between global manufacturers and local Chinese manufacturers comparing the previous forecast with the current forecast. The left side shows sales to global manufacturers, where equipment sales were reduced by 36 billion JPY compared to the previous forecast, while service sales was increased by 18 billion JPY, resulting in a net decrease of 18 billion JPY. For NAND, we stated during the Q1 earnings that equipment demand was not as strong as initially expected. In addition to that, we now anticipate some sales will shift to the next quarter. For DRAM, as mentioned during the quarter one earnings call, some new equipment sales are expected to be replaced by upgrade modifications. Therefore, equipment sales were lowered and service sales were raised. Combined equipment and modification sales are expected to increase more than anticipated. For the logic foundry segment, GAA-related demand is growing largely as expected, but we have lowered our forecast for mature nodes where recovery is lagging. Next, for the Chinese domestic manufacturers on the right, we have raised equipment sales by 6 billion Japanese yen compared to the previous forecast, while lowering service sales by 2 billion Japanese yen, resulting in a net increase of 4 billion Japanese yen. For NAND and Logic Foundry, as mentioned during the first quarter earnings call, equipment demand has been stronger than initially expected, leading us to raise our forecast. For DRAM, since part of the sales is now expected to shift to next fiscal year after shipment timing was adjusted, as mentioned during the first quarter earnings call, it is leading to a downward revision of the forecast. As a result, the sales ratio for local Chinese manufacturers for the fiscal year ending March 2026 is expected to increase by four percentage points from the previous forecast of 33% to 37%. Page 21 shows sales to global manufacturers and sales to Chinese domestic manufacturers in chronological order from the fiscal year ending March 2023 to the revised forecast for the fiscal year ending March 2026. Sales to manufacturers worldwide have been on an upward trend since bottoming out in the fiscal year ending March 2024. For the fiscal year ending March 2026, sales to NAND and DRAM customers along with growth in services centered on upgrades and modifications are expected to increase by 9% compared to the previous fiscal year. On the other hand, sales to local Chinese manufacturers for the fiscal year ending March 2026 are expected to decrease by 20% compared to the previous fiscal year. This is due to a decline in sales for DRAM amid an investment lull despite growth in sales for NAND and Logic Foundry. Sales to DRAM are expected to resume an upward trend after the fiscal year ending March 2027 as the investment lull ends. As the revenue growth pace for global manufacturers is faster than that for Chinese domestic manufacturers, the sales ratio to Chinese domestic manufacturers is expected to decline to around 30%. Page 22 shows sales revenue by business segment. Due to the revision of our forecast, some new equipment orders will be replaced by upgrade and modification projects within our services businesses. Consequently, for the fiscal year ending March 2026, equipment sales are projected to decrease by 15% compared to the previous fiscal year, while service sales are expected to increase by 20%. As a result, the equipment sales ratio is projected to be 61%. Phase 23 shows installed revenue by application combining sales to global manufacturers and local Chinese manufacturers. For NAND, while we have lowered our forecasts this time, it is expected to double compared to the previous fiscal year. For DRAM, sales are expected to decrease by 45% compared to the previous quarter. This is due to a significant decline in sales to local Chinese manufacturers combined with the impact of some equipment sales to global manufacturers being replaced by upgrade modifications. For Logic Foundry, revenue is expected to decrease by 11% compared to the previous quarter. This is due to the delayed recovery of mature nodes and the impact of interposer demand, which was a 9.7 billion in the previous quarter, entering a transitional period this quarter. For legacy equipment, 200 millimeters and below included in the service to business, demand is expected to remain at the same level as the previous quarter due to the slowdown in demand.

Page 24 shows revenue by destination. Compared to the previous year, the sales mix to Japan, Korea, and other Asia is expected to increase, while the mix to China, US, and Taiwan are expected to decrease. Regarding tariff policies, our contracts are generally based on delivery at airports or ports near production sites, so we do not bear tariffs on equipment. Therefore, there has been no direct impact. At present, there is no indirect impact either, but we will continue to monitor potential indirect effects such as device makers revising investment plans due to economic downturns or rising costs. Export regulations have not caused direct or indirect impacts either. We will continue to monitor the situation. That concludes my explanation. I am Skoda representative director, president, and CEO. I will now explain the outlook going forward. Please turn to page 26. First, based on the revision of the March 2026 earnings forecast, I will explain the sense of the course for March 2027. Let me begin with the business environment surrounding our company. We had expected WFE in 2025 to be flat year on year, but considering the recovery of the Chinese market, we now see it slightly exceeding the previous year. Our view of WFE in 2026 remains unchanged. Mid single digit growth, around 5% year on year. While there are signs of increasing demand for AI related In my memory, lately, this has not yet been factored into our market outlook or our business plans. As explained earlier, ¥14 billion worth of equipment sales are expected to be delayed from March 2026 to March 2027. These include NAND equipment to non-China and DRAM equipment to China. and based on discussions with customers, the likelihood of selling them in March 2027 is high. For March 2027, including the delayed portion, we expect more than 10% growth in combined sales of equipment and upgrade modifications. Even excluding the delayed portion, we aim for growth of 5% or more. Page 27 shows the outlook for the business environment. In the semiconductor device market, generative AI demand is expected to continue driving capital investment by device manufacturers. For high-performance DRAM and logic foundry, active investment for generational shifts and production capacity expansion is expected to continue sustaining growth in equipment demand. For NAND, in addition to current equipment demand for generational shifts, there are expectations for NAND to replace server hard disk drives and DRAM. However, it will take more time to assess how this will translate into concrete equipment demand. For mature node logic foundry, Chinese manufacturers are maintaining investment at a considerable scale, and equipment demand is expected to stay at current levels. But non-Chinese manufacturers continue to restrain investments. Nevertheless, device demand is gradually recovering, and we expect equipment demand to rebound in the not too distant future. Page 28 summarizes the business environment and our situation by application. First, regarding NAND. At the time of the first quarter results announcement, we stated that demand from Chinese manufacturers was stronger than expected, while demand from non-China was weaker than expected. In the second quarter, the concerns became more pronounced. Although for non-China, equipment demand is increasing due to generational shift investments. We feel that investments in DRAM are being prioritized, so non-investment is likely to be slower than we anticipated. Demand for equipment in March 27 is expected to exceed that of this year, but we are not currently assuming capacity expansion investments. On the other hand, for China, generational transition and capacity expansion investments are progressing faster than we expected, and equipment demand is expected to continue in March 2027. Next, regarding DRAM, at the time of the first quarter results announcement, we stated that non-China demand for equipment, especially modifications, was stronger than expected, while shipment timing for China was getting fluid. In the second quarter, both the expectation and concern materialized. For non-China, investments for generational shift and production capacity expansion are progressing in parallel, and combined demand for equipment sales and upgrade modifications has exceeded our expectations. Demand in March 2027 is also expected to surpass this year's level. For Chinese manufacturers, after shipment timing adjustments, some equipment sales were delayed. However, having passed the investment transition period, we expect investments to become active again in March 27. Next, regarding logic foundry. At the time of the first quarter results announcement, we stated that demand for mature nodes from non-China, particularly in Europe and the US, was weak. In the second quarter, this concern materialized. For non-China, demand for advanced node equipment, mainly GAA, continues to grow. but recovery in mature node demand is expected to be slower than we anticipated. Notably, GAA-related equipment sales increased from 2.7 billion yen last year to 8.8 billion yen this second quarter year-to-date. Although interposer demand has entered a transition period, we will continue to make proposals to create and expand demand for advanced packaging. For China, investments by large manufacturers have been stronger than expected, and we expect investments to continue going forward. Finally, regarding power devices, sales of existing products have been steady, but equipment demand is showing signs of slowing. Going forward, we aim to capture demand shifts toward new products such as high temperature activation annealing associated with migration to 200 millimeters and trench gate adoption and pursue growth. Page 29 shows the transition of product composition. With March 2024 being the bottom, the mix of high value added products such as batch ALD compatible equipment and single wafer treatment equipment has started to increase. In March 26, sales of mini batch equipments are increasing in line with the recovery in demand for NAND equipment. The ratio of high-value-added products in March 26 is expected to reach 70%. In March 27, the ratio is expected to rise further, leading to improved gross profit margins. Chinese manufacturers are emerging in areas such as batch diffusion equipment and CVD-compatible equipment. However, in the field of highly difficult film formation where we excel, they have no presence, and our market share in batch ALD equipment continues to expand. we will continue to monitor the trends of Chinese manufacturers while focusing on expanding TAM and market share in advanced edge devices. Page 30 is our usual material summarizing the semiconductor device development roadmap, our catalyst and growth potential. There are no changes to our medium to long-term strategies and goals. Our view that the timing for achieving medium-term target will be when WFE reaches $120 billion also remains unchanged. As semiconductor devices become more multi-layered, miniaturized, complex, and three-dimensional, opportunities to leverage our strength in batch ALD equipment, especially mini-batch equipment and single wafer treatment equipment, will increase. our belief that we can sustain sales growth exceeding WFE growth. This remains unchanged. Although mass production of 3D stacked DRAM and logic CFET is expected to be slightly delayed, we will increase new PORs in vertical channel transistor DRAM and GAA 1.4 nanometer generation. With a higher ratio of high value-added products and lower SG&A ratio due to sales expansion, we will achieve a faster pace of adjusted operating income growth than sales growth. Please turn to page 31. Applied Materials, which had been our largest shareholder, sold part of its shares in our company to institutional investors through a securities firm on October 8, reducing its ownership ratio from about 15% to about 10%. As a result, KKR, which holds about 11% of our outstanding shares, once again became our largest shareholder. Page 32 shows the topics of management and business activities in the first half. In September 2025, we signed a joint development agreement with ASMPT of Singapore regarding semiconductor packaging technology. We are not yet at the stage to present specific goals or results, but by combining our advanced thin-film formation technology with ASMPT's high-precision bonding technology, we aim to develop optimal solutions in the semiconductor 2.5D and 3D packaging fields, which are expected to be applied to next-generation high-performance computing and AI. Finally, page 33 summarizes the ESG initiatives in the first half. In July 2025, we received the highest rating in CDP's 2024 Supplier Engagement Assessment. In the Supplier Engagement Assessment, This evaluates companies' efforts to address climate change issues in their supply chains. Our company has been engaging in business activities conscious of the environment across various fields, and these efforts were recognized. This concludes my presentation. Thank you for your attention.