Kokusai Electric Corp

We will now begin Kokusai Electric Corporation's earnings presentation for the fiscal year ended March 26. Thank you very much for joining us today despite your busy schedules. My name is Matsumoto from the Corporate Communications Department, and I will serve as today's moderator. First, let me introduce today's speakers. Kazunori Fukada, Representative Director, President and CEO. Yoshitaka Kawakami, Senior Vice President and Executive Officer. As for today's agenda, Mr. Kawakami will first explain the consolidated financial results and through your forecast, followed by Mr. Tsukada, who will discuss the future outlook. After that, we will move on to the Q&A session. We expect today's meeting to conclude at around 5.15 p.m. Today's presentation is being held as a live webcast via Zoom. If the stream is interrupted or the video freezes during the presentation, please wait a moment and reconnect. The presentation and Q&A session will be conducted in Japanese. Participants may also choose simultaneous English interpretation. Mr. Kawakami, please begin. Zoom is quite free.

I am Kawakami, Senior Vice President and CFO. Thank you for joining Kokusai Electric's financial results briefing today. First, I will explain our financial results for the fiscal year ended March 2026 and earnings forecast for the fiscal year ending March 2027. These are disclaimers. I will not go into them. First, here is the consolidated financial summary for the year ending in March 2026. Page 4 is the highlight. Specific details will be explained from the next page onwards. Page 5 is the summary of consolidated financial results for the fourth quarter and the full year. In the fourth quarter, both revenue and profits decreased year on year, but both revenues and profits slightly exceeded the revised forecast announced at the second quarter financial results. Mainly, service revenue was on the upside, and growth profit margin also improved then expectation. For the full year, although revenue and profits decreased year on year, the previous forecast was exceeded in revenue by 5.1 billion yen, adjusted operative income by 3.2 billion yen, and adjusted net income by 2.3 billion yen. Along the upside in adjusted net income, we will increase the U.N. dividend by 1 yen from the previous forecast of 18 yen to 19 yen. As a result, the annual dividend per share is 37 yen combined with the interim dividend of 18 yen. Consolidated payout ratio to adjusted net income is 25.3%. Bookings in the fourth quarter were approximately 104 billion yen, and bookings for the full year were 264 billion yen, exceeding our assumption by about 30 billion yen. The booking backlog at the end of the year was 165 billion yen, and the strong momentum in inquiries is expected to continue into the year ending March 2027. R&D, capital expenditure, and depreciation were more or less in line with the forecast. Phase 6 shows the factors for the fourth quarter year-on-year changes in revenue and adjusted operating income. In the fourth quarter, compared to the same period last year, mainly for DRAM, upgrade modifications that improve the performance and functions of existing equipment increased instead of new equipment sales, which led to an increase in service revenue. On the other hand, overall revenue decreased 4% year-on-year due to restabilization in sales of equipment for China DRAM, which was active in the same period last year, resulting in equipment sales decrease. Changes by application will be explained later. Adjusted operating income decreased 17% year-on-year, mainly due to a decrease in gross profit stemming from lower sales and an increase in SD&A expenses. Page 7 shows the full-year factors for change. For the full year, similar to the fourth quarter, upgrade modifications for DRAM included in service sales grew significantly. In place of new equipment sales, in addition to an increase in equipment sales for NAND. On the other hand, with the coming down of equipment sales for Chinese DRAM and our advanced packaging, overall revenue decreased by 2% year-on-year. Adjusted operating profit decreased by 18% year-on-year due to a decline in the gross profit margin caused by a drop in production capacity utilization from lower production volumes and changes in the product mix, coupled with increased SG&A expenses from upfront investments such as R&D for the future. Page 8 shows the quarterly revenues by business. In the fourth quarter, continuing from the third quarter, a portion of equipment demand was replaced by upgrade modifications leading to a service revenue increase both year-on-year and quarter-on-quarter. The full year showed a similar trend, with service revenue up 27% year-on-year, accounting for 40% of total sales. Page 9 shows revenues by application of 300mm equipment, which comprise the equipment business, and 200mm or smaller legacy equipment included in the service business. In the fourth quarter, although equipment sales for major applications declined year-on-year, but compared to the quarter before, equipment sales for DRAM and logic boundary increased. For the full year, compared to the previous year, equipment sales for NAND increased by 90%, equipment sales for DRAM by 44%, and logic foundry sales decreased by 11%. The significant decrease in equipment sales for DRAM was due to a drop in Chinese DRAM equipment sales, which were active previous year, and the replacement of some equipment sales with upgrade modifications in the service business. Page 10 shows revenue by destination. In the fourth quarter, revenue from Taiwan and South Korea increased both year-on-year and quarter-on-quarter, while revenue from China decreased. For the full year, revenue from the U.S. and China decreased year-on-year, lowering the U.S. revenue ratio to 3% and China revenue ratio to 39%. Page 11 shows non-China and China revenues by application. In the fourth quarter, sales to non-China manufacturers surged by 20% overall compared to the preceding quarter, with equipment and service sales increasing across all applications due to rising AI-related demand. Fourth quarter sales to Chinese manufacturers saw an increase in equipment sales for DRAM quarter-on-quarter, having gone past the investment transition period. Logic foundry equipment sales also increased, showing a recovery trend. In the fourth quarter, similarly to the third quarter, sales to non-China manufacturers increased, while sales to Chinese manufacturers decreased. causing ratio of China sales to decline further to 26%. Page 12 is the balance sheet trend. Total assets at the end of March 2026 increased by 18.1 billion yen from the end of March 25 due to an increase in cash and cash equivalents and an increase in PP&E equivalents from investments for a demo center in the U.S. Total liabilities decreased by 5 billion yen from the end of March 25 due to the repayment of borrowings, despite an increase in contract liabilities from the receipt of advances. Total equity increased by 23.1 billion yen from the end of March 25 due to an increase in retained earnings. Phase 13 shows key management indicators of the balance sheet. The equity ratio at the end of March 26 rose by about 4 points from the end of March 25 to 61%. Regarding cash and debt relationship, we eliminated net debt due to an increase in cash and paying down interest-bearing debt resulting in a net cash position of 6.6 billion yen At the end of March 26, we achieved a net cash position one year earlier than expected. In accordance with our shareholder return policy, we have resolved to acquire up to 5.3 billion yen of our shares which was disclosed today. We plan to cancel the acquired shares as a general rule. Phase 14 is the full-year cash flow. Free cash flow for March 2026 was 31.8 billion yen as operating cash flows exceeded investment cash outflows. Free cash flow is expected to remain positive in March 2027. Page 15 covers full-year R&D expenses, capital expenditures, and depreciation. We are investing in R&D and CapEx in line with our mid-term plans Anticipating demand recovery and mid to long-term demand increases, R&D expenses were 18.3 billion yen, about a 20% increase year on year. R&D expenses for March 27 are expected to increase by about 10% year on year. For capital expenditures, we recorded 16.9 billion yen, a decrease of about 20% year-on-year. Going forward, in addition to regular capital expenditure, we are currently constructing a U.S. demo center totaling 20 billion yen as a large-scale capital investment aimed at opening in January 27, which means CapEx for March 27 are expected to increase by about 60% year-on-year. Depreciation was 14.3 billion yen, a 10% year-on-year increase associated with large-scale capital investments. Depreciation for March 27 is expected to increase by about 10%. Next, I will explain the full-year earnings forecast for the fiscal year ending March 2027. Page 17 is the highlight. Specific details will be explained from the next page on. Phase 18 is the forecast for the fiscal year ending March 2027. In the fiscal year ending March 2027, semiconductor device manufacturers are expected to accelerate investments in generational shifts and production scale expansion, mainly for advanced devices. In our earnings for the year ending March 27, we aim to achieve revenue and profit growth above market by leveraging the technical superiority of our equipment for advanced devices. Specifically, we forecast year-on-year increases in revenue by 19%, adjusted operating profit by 27%, and adjusted net income by 26%. Gross profit margin is expected to be 42%, 0.8 points higher year-on-year by improvements in production capacity utilization and product mix changes. Dividend forecast is 47 yen annually, a payout ratio of 25.6% to adjusted net income in line with our shareholder return policy. Phase 19. Starting from fiscal year March 27, we will change our business classification. 200mm equipment, used equipment, and upgrade modifications that were included in service business will be moved into equipment business to be more aligned with the WFE market. Phase 20 summarizes the factors for change in the March 2027 forecast compared to the previous year using the new standard. Overall revenue is expected to increase by 19% year-on-year, supported by a 39% increase in equipment sales to non-China and a slight 6% increase in service sales despite a slight 3% decrease in equipment sales to China. As for adjusted operating profit, we forecast a 27% year-on-year increase because of higher sales and gross profit margin improvements due to increased capacity utilization from higher volumes and changes in the product mix absorbing the increase in SG&A expenses.

Page 21 shows forecasted equipment sales by application and service revenue. For reference, figures under the old standard are also shown. Driven by the innovative AI demand, semiconductor device manufacturers are expected to further accelerate investment in high-performance devices through technology migration and capacity expansion. Against this backdrop, we expect DRAM-related sales to increase 36% year-on-year, and logic and pantry sales to increase 38%. For NAND, investment is expected to continue focusing on technology migration, and even under that environment, we expect NAND-related sales to increase 7% year-on-year. Under the new standard, service revenue will mainly consist of parts sales and maintenance services and is expected to account for 19% of total revenue. Page 22 presents revenue trend under the new standard from FY March 23 through FY March 27 forecast divided between non-China customers and China device manufacturers. Revenue to non-China customers have been on the recovery trend since bottoming out in FY March 24, and we expect growth to accelerate further in FY March 27. We forecast NAND-related revenue growth of 50%, DRAM-related growth of 30%, and logic and foundry growth of 50%. Overall revenue to non-China customers are expected to increase 30% year-on-year. Meanwhile, Revenue to China devices manufacturers are expected to decline slightly by 2% year-on-year. Although logic and foundry and DRAM sales are expected to increase, non-equipment sales are projected to decline significantly due to temporary slowdown in investment by major device manufacturers. From FY March 28 onward, we expect the non-equipment revenue to recover and return to a growth trend. Since revenue to non-China customers are growing faster than revenue to China device manufacturers, the ratio of revenue to China is expected to be 29% and remain around that level going forward. Page 23 shows revenue by destination in our forecast. Compared with the previous year, revenue to Japan, the U.S., Taiwan, and Korea are expected to increase, while the China revenue ratio is expected to decline to 34%. At present, we have not seen any direct impact from export controls or tariff policies in various countries, but we will continue to closely monitor both direct and indirect impacts. Page 24 shows forecasted revenue by equipment category. Figures under the old standard are also shown for your reference. For FY March 27, the ratio of high-value added product is expected to reach 71%. As the generational investment progresses across each device area going forward, we will accelerate the introduction of high-value added products. This concludes my presentation. I am Tsukada, President and CEO. I will explain our future outlook. Page 26 shows our market share trend. The bar chart on the left shows market share data from Gartner Research. The deposition market mainly consists of tube and non-tube categories, and we classify our batch deposition systems in the tube category. Treatment systems are included in the RTP and oxidation diffusion category. In 2025, our share in the batch deposition market rose 8 percentage points year-on-year to 49%. The chart on the upper right shows the deep breakdown of the batch deposition equipment market. In the batch ALD compatible equipment segment, our market share reached 80%, as shown in the pie chart. In 2023, the batch ALD compatible equipment market and our revenue declined due to reduced land investment. However, since 2024, the market has recovered steadily, and both our revenue and market share have continued to increase. The lower right chart shows the breakdown of the treatment equipment market. Within the plasma gate modification tool segment, where our single-wafer treatment systems are categorized. Our market share declined slightly in 2025. We believe this was mainly because China local makers, which had invested aggressively in 2024, entered a temporary investment slowdown phase in 2025. Our single wafer treatment systems are also being increasingly adapted for DRAM applications. Since DRAM-related revenues are expected to expand significantly in FY March 27, additional NAND investment could lead to further market share gains. Page 27 shows our outlook for the business environment. In the semiconductor device market, demand related to generative AI continues to drive capital investment by device manufacturers, and investment in high-performance devices is expected to increase further. On the other hand, investment in mature node logic foundry is slowing, not only in the U.S. and Asia, but also in China, and the recovery is still awaited. That said, our medium to long-term growth expectations remain unchanged. In fact, we believe the overall semiconductor device market could grow faster than previously expected. Regarding WFE market size in calendar year 26, at the time of our third quarter results briefing, we projected year-on-year growth of 10% plus alpha, Given stronger-than-expected AI-related investments, we have now raised that outlook to 15%, an upward revision of roughly 5 percentage points. Page 27 provides an update on our POR wins in 3D NAND. In FY March 27, we expect major manufacturers to continue technology investment for their 200-300 layer generations, which are expected to account for more than 80% of total NAND-related equipment sales. For generations above 200 layers, we continue to maintain and expand the PORs for batch ALD-compatible systems centered on our latest mini-batch deposition systems, as well as for single-wafer treatment systems. As device migration progresses, demand is expected to increase for replacing conventional deposition systems with our latest models, as well as for upgrade modifications supporting recovery in our NAND-related equipment revenue. As devices continue to become more highly stacked, We intend to further expand the POR wins for our flagship mini-batch ALD compatible systems and single wafer treatment systems, providing customers with higher value-added solutions. Page 29 provides an update on our POR wins in D1. In FY March 27, we expect major manufacturers to continue technology investment in the D1C and D1D generations. Revenue related to D1C and D1D are expected to account for roughly half of total DRAM-related equipment revenue. We have already secured the PORs for single Wi-Fi treatment systems in DRAM starting from the D1B generation, and we expect significant revenue growth in FY March 27. Looking ahead, as DRAM technology evolves toward the D0 generations and vertical channel transistor DRAM, device structures will become increasingly finer and more complex. As a result, we expect more opportunities for adoption of batch ALD-compatible systems and single wafer treatment systems. Page 30 provides an update on our POR wins in GAA. In FY March 27, investment in first-generation GAA is expected to continue following the previous year. We have already secured PORs for first-generation GAA and are actively promoting proposals for second-generation GAA as well. Sales related to GAA in FY March 26 came in at 15 billion yen below our previous forecast of 20 billion yen. For FY March 27, we forecast revenue of 20 billion yen. Thereafter, around FY March 28, as the industry transitions to second-generation GAA, we expect additional opportunities for adoption of VAT ALD-compatible systems and treatment systems, which should support further revenue expansion. Revenue related to advanced packaging were 3 billion yen in FY March 26, and we expect FY March 27 revenue to remain at least at the same level. While continuing to expect additional customer investment, such as multi-site investment deployment, we will also continue promoting new applications. Page 31 provides an update on our medium-term management objectives. At our IR Day held in June 2024, we announced our medium-term management plan and targets. Given significant changes in the market and the environment since then, we have now revised the plan. Our original medium-term target assumed a WFE market size of $120 billion or more. We now expect to achieve this target no later than FY March 29. Second, starting from FY March 27, we changed our business classification by transferring upgrade modifications and revenue of 200 milliliters and used equipment from the service business to the equipment business. As a result, the target revenue mix has been revised to approximately 80% equipment business and 20% service business. Third, we revised our target revenue composition by application. Previously, the target mix was 25% DRAM, 25% NAND, and 50% logic and foundry plus others. Reflecting rapidly growing demand for AI-related advanced devices and slowing maternal logic investment, we revised the mix to 40% DRAM, 20% NAND, and 40% logic and foundry plus others. We will continue driving our growth strategy to achieve these medium-term objectives. Page 32 explains our acquisition of new land adjacent to the Tonami Manufacturing Center. In October 24, we began operations at the Tonami site and have been expanding production capacity across the group. in anticipation of future semiconductor market growth. However, the semiconductor market is now expected to grow faster and larger than originally anticipated. Accordingly, we decided to acquire additional land adjacent to the Tonami site where we can effectively utilize existing supply chains and logistics infrastructure. We plan to use the site for a range of initiatives including production and R&D expansion to support future market growth. Page 33 summarizes semiconductor device roadmaps, the business environment, and our growth catalysts. As semiconductor devices continue evolving towards multi-layering, more miniaturization, complex and three-dimensional opportunities for our core technologies, particularly batch AOD-compatible systems, especially mini-batch systems, and single-waiver treatment systems are expected to increase. Accordingly, we believe we can continue achieving revenue growth above overall WSE market growth. We also remain committed to achieving adjusted operating profits growth at a pace faster than revenue growth through a higher mix of high-value added products and lower SG&A ratios resulting from revenue expansion. To achieve these goals, we will continue pursuing new POR wins for new generation devices while steadily advancing toward our medium-term objectives. This concludes our presentation. Thank you for your attention. This concludes our presentation. We will now begin the Q&A session. If you would like to ask a question, please click the raise hand button on the screen. If you would prefer to submit your question in the text form, please click the Q&A button. When submitting questions in the text form, please include your company name and your name. Your information will not be visible to other participants, and I will read your questions on your behalf. Please press the raise hand button on your screen. When you are called on by the moderator, please unmute yourself and them state your company name and your name before asking your question. Tamura-san, please.