Kokusai Electric Corp

This is Kawakami, Senior Vice President and CFO. Thank you very much today for participating in the financial results briefing of Kokusai Electric. At the beginning, I will explain the third quarter results and the full year forecast. Here are the disclaimers for you to note. First is the third quarter results summary. Page four is the highlight. I will go over the specifics from the next page onwards. Page five is consolidated results summary of the third quarter and third quarter year to date. Although the October to December third quarter saw a decrease in revenue and profits year on year and quarter on quarter, both revenue and profits were in line with a revised forecast released at the time of the second quarter results. The third quarter year-to-date saw slight decrease in revenue year-on-year, and each profit line decreased year-on-year due to changes in the product mix and upfront investments for the future. The lower gross profit margin for the third quarter and third quarter year to date, year on year and quarter on quarter, is because of the decrease in production volume and changes in product mix in the second half, as we explained at the second quarter results. Orders received in the third quarter was 62 billion and exceeding expectations. We expect the same trend to continue in the fourth quarter. R&D expenses, capital expenditures, depreciation, and amortization were largely in line with expectations. Page 6 shows third quarter year-on-year factors for change in revenue and adjusted operating profit. The third quarter, year-on-year, saw increases in upgrade modifications of existing equipment's performance and functionalities instead of new equipment sales, primarily in DRAM sector, resulting in an increase in service revenue. Conversely, equipment sales declined due to a moderation in sales to China's domestic DRAM sector and in our advanced packaging, which had been robust in the same period last year. Consequently, overall revenue decreased by 7% year on year. I will explain the ups and downs by application later. Adjusted operating profit decreased by 90 percent year-on-year, mainly due to a decrease in gross profit resulting from lower sales and other factors. Page 7 shows cumulative third quarter factors for changes year-on-year. As in the third quarter, Cumulative third quarter sales saw a significant increase in service revenue due to an increase in upgrade modifications for DRAM equipment resulting in new equipment sales as well as land equipment sales growth. On the other hand, as in the third quarter, overall sales revenue decreased by 0.9% year-on-year due to a settling down of sales of DRAM to China and of our advanced packaging. With regards to adjusted operating profit, due to a decrease in gross profit resulting from changes in product mix and a reduction in production volume, coupled with an increase in SG&A expenses reflecting upfront investments in future-oriented research and development, adjusted operating profit decreased 18% year-on-year. Page 8 shows quarterly revenue by business. In the third quarter, following the first and second quarters, part of equipment demand was replaced by upgrade modifications, resulting in a decrease of equipment revenue year-on-year and quarter-on-quarter, while service revenue increased. The same trend was seen for cumulative three quarters, with the service revenue ratio increasing to 40%. Page nine shows sales by application for the 300-millimeter equipments comprising the equipment business and the 200-millimeter or less legacy equipments included in the service business. In the third quarter, while equipment sales for major applications decreased year on year, sales for DRAM equipments continued to increase quarter and quarter, continuing on from the second quarter. Cumulatively, for the third quarter, sales of NAND increased year on year. The significant decline of DRAM sales was due to a decrease in equipment sales to China, which had been active in the same period last year, and the fact that a portion of equipment sales was replaced by upgrade modifications, which fall in the service business. Page 10 shows revenue by destination. For both the third quarter and the cumulative third quarter, revenue generated from Japan and South Korea increased year on year, while revenue generated from the U.S. and China decreased. For the cumulative third quarter, the revenue ratio of the U.S. decreased to 3%, and that of China decreased to 42%. Page 11 shows sales revenue by application divided between non-China and China manufacturers. sales in the third quarter to non-China manufacturers grew, driven by increasing demand for AI-related products. Compared to the quarter before, sales increase include equipments for DRAM and Logic Foundry, as well as upgrade modifications primarily for DRAM included in services. The third quarter sales to Chinese manufacturers turned upward in DRAM emerging from the transitional period for investment. In Q3, while sales to non-Chinese manufacturers increased, sales to Chinese manufacturers decreased, resulting in the mix of Chinese manufacturers falling to 31%. Page 12 shows the quarterly balance sheet trend. Total assets at the end of the third quarter increased by 10.6 billion yen compared to the end of March 2025 due to decreases in trade and other receivables and increases in inventories and tangible fixed assets. Total equity increased by 16.7 billion yen from the end of March 2025 due to increases in retained earnings and others. Page 13 shows key management indicators from the quarterly balance sheets. The equity ratio at the end of third quarter was 60.4 percent, down 0.3 percentage points from the end of the previous quarter. Net debt was largely in line with the plan at 8.1 billion yen, a decrease of approximately 2.5 billion yen from the end of the previous quarter. Page 14 shows quarterly cash flows. In the third quarter, operating cash flows exceeded investment cash flow outflows, resulting in free cash flow of 7.3 billion yen. Cash flow from financing activities amounted to outflows of 4.3 billion yen, primarily due to dividend payment. Page 15 shows quarterly R&D expenses, capital expenditure, and depreciation. Third quarter R&D expenditure was 4.2 billion yen, progressing as planned, with the R&D ratio to revenue reaching 7.4%. The R&D expenditure forecast for March 2026 remains unchanged, and an increase of approximately 20% year-on-year to around 18 billion yen. Capital expenditure for the third quarter was 4 billion yen. For the fiscal year ending March 2026, capital expenditure is forecast to decrease by 10% year-on-year to approximately 18 billion yen. Currently, as a major capital investment, we are constructing a new U.S. demonstration center involving a total investment of 20 billion yen over the two-year period of March 2026 and March 2027. Depreciation for the third quarter amounted to 3.6 billion yen. Due to the depreciation of the autonomy plan completed in the previous fiscal year, depreciation for the year ending March 2026 is expected to increase by approximately 10 percent year-on-year, reaching around 14 billion yen. Next, I will explain the full-year forecast for the fiscal year ending March 2026. Page 7 explains the highlight. I will explain the specific details on the following pages. Page 18 is the forecast for the fiscal year ending March 2026. Revenue and profits for the third quarter progressed in line with the revised forecast announced at the time of the second quarter results. As the fourth quarter is expected to follow a similar trend, there is no change to the full year earnings forecast. There is also no change to the dividend forecast. However, third quarter order intake exceeded expectations, and with stronger inquiries to equipment for high-performance devices, we have revised our production plans for the fourth quarter and beyond. The effect of this production increase will be realized in the fiscal year ending March 2027. Page 19 summarizes the factors contributing to the ups and downs in earnings of the forecast for the year ending March 2026 versus last year actual. There are two main factors driving the increase in revenue. One is increased sales of NAND equipments trending upwards, both to non-China and China. The other is non-China sales of DRAM equipment benefiting from brisk capital expenditures and DRAM upgrade modifications, which is included in service. Conversely, there are two major factors contributing to the decrease in revenue. Firstly, as mentioned earlier, sales of DRAM equipment for China, where last year's aggressive investments have settled down. The other is the decrease in equipment sales for logic foundry to non-China. decline in sales of equipment to non-China logic foundry is attributable to the delayed recovery in demand for mature notes and the moderation in demand for advanced packaging, which was robust last fiscal year. Sales for advanced notes continue to show an upward trend, with cumulative sales of GAA-related products in the third quarter increasing significantly to 12 billion yen, a 2.4-fold increase compared to the previous year. However, the full-year target of 20 billion yen is not likely to be achieved. Regarding adjusted operating profit, we anticipate a 24.8 percent decrease compared to the previous quarter. This is due to reduced sales and production volumes. A decline in gross profit resulting from changes in product mix and increased SG&A expenses associated with upfront investments. Page 20 presents chronological revenues to non-China and China from the fiscal year ending March 2023 through to the full year forecast for the fiscal year ending March 2026. sales to non-China continues to be on an upward trend since the bottom March 2024. For March 2026, we anticipate a 9 percent increase year-on-year driven by growth in equipment sales for NAND and DRAM and increased service revenue, mainly from DRAM upgrade modifications. For March 2027, demand for equipment for advanced devices is expected to continue sustaining the upward trend in our revenue. On the other hand, sales to Chinese manufacturers are expected to decline temporarily in March 2026. Although sales of NAND and logic firmware equipment are projected to increase in this period, Sales of DRAM equipment are anticipated to decrease significantly due to an impact of an investment transition period. Overall, a 20 percent decrease compared to the last fiscal year is expected. From March 2027 onwards, DRAM equipment sales is expected to recover, and revenue trends should turn positive. Further, as the pace of revenue growth for non-China is faster than that of China, the proportion of sales to Chinese manufacturers is expected to decline to around 30%.

Slide 21 shows the revenues by business. Upgrade modifications, which are recorded as revenue in place of equipment sales, are influenced by device manufacturers' capital investment trend in the same manner as equipment sales and are also correlated with trends of WFE. Accordingly, going forward, we will separately disclose the revenue from upgrade modifications that is included within service revenue so that the equipment revenue, revenue from equipment of 200 millimeter and below, and upgrade modification revenue can be viewed together. We plan to present aggregated historical data as soon as it becomes available. At the time of the second quarter results briefing, we explained that because a portion of equipment demand had been replaced by upgrade modifications within the service business, the service revenue ratio for the fiscal year ending March 26 was expected to be 39%. For reference, upgrade modification revenue for the fiscal year ending March 26 is expected to increase 2.5 times year-on-year to 28 billion yen, and the service revenue ratio excluding upgrade modifications and decrement of 200 millimeter and below is expected to be approximately 21 percent. Page 22 shows equipment revenues by application combining revenue from global manufacturers and Chinese local manufacturers. This chart does not include upgrade modifications. We plan to disclose application-level data for upgrade modifications once aggregation becomes available. However, the majority of upgrade modifications in the FY ending March 26 are expected to be related to DRAM application. For the fiscal year ending March 26th, NAND-related equipment revenue is expected to double compared to the previous year. DRAM-related equipment revenue is expected to decline by 47 percent due to the impact in investment in China and replacement equipment sales with the upgrade modification. Logic and foundry-related equipment revenue is expected to decline by 11 percent due to a delayed recovery in demand for matured node and declining demand for advanced packaging. With regard to equipment, the SIC and GAN power devices were 200 millimeter and below included in the service business. Revenue is expected to remain at the same level as the previous year due to the slowdown in demand. 23 shows the revenues by destination. Compared with the previous fiscal year, the revenue share for Japan, South Korea, and other Asian region is expected to increase, while revenue share for China and the U.S. and Taiwan is expected to decline. No direct impact in our business with the Chinese local manufacturer has been observed as a result of the state of Japan-China relations. In addition, No Japan impact from trade friction has been observed at the factories operated by global manufacturers in China, and the cap is continuous. We will continue to closely monitor indirect impacts, including export regulations and tariff policies in various countries, as well as effects on procurement. I am Tsukada, President and CEO. I will explain the outlook going forward. Please turn to page 25. First, I will provide an update on the outlook for the business environment. In the semiconductor device market, demand related to generative AI continues to drive capex by device manufacturers, and the investment in equipment for high-performance devices is expected to increase further. On the other hand, CapEx in mature node logic and fund reinvest application is slowing in Europe, the U.S., Asia, and China, and recovery is awaited. There is no change in expectations for medium to long-term growth, but we feel that the overall semiconductor device market may grow at the pace exceeding our previous assumptions. Regarding the size of the WFE market in calendar year 2025, at the time of second quarter results briefing, we held the view that it would slightly exceed the previous year. However, the prevailing view is now that AI-related investment exceeded expectations slightly, and we recognize that the market likely settled at approximately a five-year-on-year increase. For calendar year 26, assuming a further increase in AI-related investment, we revised our view from around a 5% YOY increase, as explained at the second quarter briefing, to around a 10% year-on-year increase. We expect the timing at which the WFE market reaches a scale of 120 billion U.S. dollars to be as early as 2027 or at the latest 2028. On page 26, I will provide an update on the directional outlook for the FY March 27, which we explained at the time of the second quarter briefing. Since late November, inquiries for equipment for leading its devices have strengthened, and we feel that turning point has been reached. At present, including carryover from the FY March 26, orders for equipment to be recognized as revenue in the FY March 27 have been accumulating at the level exceeding the assumptions made at the time of the second quarter briefing. In particular, in line with market trends, demand for equipment for advanced DRAM and logic foundry application has strengthened. At the time of the second quarter result briefing, we explained that we aimed for a year-on-year growth of more than 10% in FY27 revenue, combining equipment sales and upgrade modifications. However, in light of the current situation, we have revised our view and believe that growth of more than 20% is achievable. Even excluding the carryover from the FY, the March 26th, we aim to achieve year-on-year growth of more than 15% exceeding overall market growth. Page 27 summarizes the business environment by application and our status. Sections that have been revised since the second quarter briefing are underlined, and we have also added our outlook for the fiscal year ending March 27. First, regarding NAND. For global manufacturers, generational transition investments are progressing. However, investment in DRAM is being prioritized, and cautious investment in NAND is continuing. At our company, we are not assuming production capacity expansion investment, and we expect the revenue growth to continue in the FY March 27 through generational transition investment. On the other hand, for Chinese local manufacturers, both the generational transition investment and production capacity expansion investment are continuing. For FY March 27, we believe the first half will correspond to an investment transition However, we expect to be able to record a meaningful level of revenue in the second half due to active investment. Next, DRAM. For global manufacturers, investment aimed at the generational transition and high-performance devices and the production capacity expansion is proceeding in parallel, and demand for both equipment and upgrade modification is expected to increase. As demand for commodity DRAM is also recovering, we expect a growth rate in FY March 27 to exceed that of the previous year. For Chinese local manufacturers, the investment lull has ended, and equipment sales have been recovering since second half of this fiscal year, and we expect revenue in FY March 27 to increase. Next, regarding logic and foundry. For global manufacturers, sales of equipment for leading-edge nodes centered on GAA continue on the upward trend. In the fiscal year ending March 27, we expect the growth in equipment sales for FinFET 3 nano generation nodes, as well as recovering equipment sales for advanced packaging application driven by the acquisition of new PORs. For material note applications in Europe, U.S., and Asia, we believe that conditions bottomed out in FY March 26, and we expect sales to recover beginning in the FY March 27. For Chinese local manufacturers, while investment by emerging manufacturers is slowing, Active investment by major manufacturers is expected to continue in the FOI March 27, and we anticipate continued revenue growth. Regarding power devices, while our POR share has increased and sales of existing products have been steady, there are signs of the slowdown in equipment demand. Going forward, we aim to achieve growth through increased demand for new products such as high-temperature activation annealing equipment accompanying the shift to 200-millimeter wafers and trench gate structures. Page 28 shows trends in product mix. There is no change to the outlook for product mix since the second quarter briefing. After bottoming out in FY March 24, the proportion of high-value-added products, namely batch ALD-capable equipment and single wafer treatment equipment, has begun to increase. In the FY March 26, in line with the recovery in demand for NAND-related equipment, sales of mini-batch systems, which are high-end models of batch deposition equipment, are expected to increase. And the ratio of high-value-added products is expected to reach 70 percent. In FY March 27, sales of high-value-added products are expected to increase further. Page 29 is a slide summarizing the semiconductor device development roadmap along with our catalysts and growth potential. As the semiconductor devices continue to advance toward greater layering, miniaturization, complexity, and three-dimensional structures, opportunities to leverage our strength in our bat ALD-capable equipments, particularly mini-bat systems, as well as single-wafer treatment equipment, are expected to increase. Accordingly, we believe that we can sustain revenue growth exceeding WFE growth. In addition, through an increase in the ratio of high value-added products and revenue growth accompanied by reduction in the SG&A expense ratio, we maintain our view that we can achieve a pace of growth in adjusted operating profit that exceeds the pace of revenue growth. Efforts to acquire new PORs for new next-generation devices in order to realize these goals are also progressing, and we plan to provide an update on the status of POR acquisition at the time of the four-year results announcement. Please turn to page 13. Our major shareholder, Applied Materials, sold a portion of their holdings of our company's shares to securities firms as of January 30th, and the securities firms subsequently resold those shares to institutional investors. As a result, Applied Materials' ownership ratio declined from 10 percent to about 5 percent. Although Applied Materials is no longer a major shareholder as a result of this transaction, there is no change in the business relationship between our company and Applied Materials. Page 31 are the key activities for management and the businesses. and ESG initiatives. At the Semicom Japan held in December last year, we conducted a panel exhibition of a newly developed high-insulation heater with superior environmental performance. Compared with the conventional heaters, this new heater can significantly reduce power consumption, thereby contributing to reductions in GHG emissions through our customers' business activities. In addition, our Toyama site obtained the highest rating platinum status in the RBA VAP audit. We will continue to promote corporate activities in compliance with the RBA code of conduct throughout our entire group. That concludes my presentation. Thank you very much for your attention.