Kokusai Electric Corp

We will now begin the financial results briefing of Kokusai Electric for the first quarter of the year ending March 2027. Thank you very much for joining today out of your busy schedules. I will be serving as the moderator, Matsumoto, from Corporate Communications. It is a pleasure. Firstly, I will introduce today's speakers. Mr. Kazunori Tsukada, Representative Director, President and CEO. Hello. Mr. Yoshitaka Kawakami, CFO and Senior Vice President. Hello. The proceeding is, at the beginning, Mr. Kawakami will present the first quarter consolidated results and the full year forecast. Next, Mr. Tsukada will present the outlook going forward. After which, we will have questions and answers and plan to finish at around 4 p.m. Today's briefing is broadcast live online via Zoom. If the stream disconnects or the video freezes during your viewing please wait a moment and try reconnecting. The presentation and answers during questions and answers will be delivered in Japanese. Simultaneous English interpretation service is available to the participants. As today's briefing is intended for institutional investors and analysts, please be advised that questions will be limited to institutional investors and analysts. Thank you for your understanding in advance. Please also refrain from recording or taking photos. We will now begin the presentation. Mr. Kawakami, please go ahead.

I am Kawakami, Senior Vice President and CFO. Thank you for joining us today at Kokusai Electric's earnings call. I will first go over our first quarter financial results as well as full year earnings forecast. These are disclaimers that I will omit explaining. First, here is an overview of our first quarter financial results. Page 4 are the highlights, where I will explain the specifics from the next page and onwards. Page 5 presents a summary of our consolidated financial results for the first quarter. Both revenue and profit increased quarter on quarter as well as previous quarter. This was owing to uptick in service revenue mainly from component sales and others, resulting in both revenue and profit exceeding our initial forecasts. Revenue of 75.4 billion yen set a new record high for a single quarter. The gross profit margin of 40.7% saw a 2.2-point decline year-on-year where the proportion of NAND-related equipment sales was high. However, compared to the previous quarter, it rose by 1.3 points owing to production utilization increase in others. Furthermore, the increase in revenue led to a decline in the ratio of SG&A expenses and profit margins from adjusted operating income onwards rose both year-on-year as well as the previous quarter. The first quarter orders received totaled approximately 140 billion yen, exceeding initial forecasts by about 67 billion yen. The increase was particularly significant for DRAM for China, as well as for Nansoul to non-China and China. This strong demand is expected to continue into the second quarter. Page 6 details the factors contributing to the year-over-year changes in revenue and adjusted operating income for the first quarter. Revenue increased by 46% year-over-year to 75.4 billion yen owing to growth in non-China equipment sales. Adjusted operating income increased by... 59% year-over-year to ¥17.4 billion as gross profit rose owing to a significant growth in sales despite the total gross profit margin decline due to the product mis-exchange. Page 7 shows quarterly equipment and service sales by application. In the first quarter, although sales for NAND decreased by 34% year over year, sales for DRAM increased by 158%, and sales for Logic Foundry increased by 82%. Although sales for DRAM decreased by 2%, in the most previous quarter, sales for NAND increased by 84%, and sales for Logic Foundry increased by 38%. Page 8 shows equipment and service sales by application, broken down into sales to non-China manufacturers and sales to China manufacturers. In the first quarter, sales to non-China manufacturers saw increases in equipment and service revenue for major applications both year-on-year and compared to the previous quarter, resulting in a 75% year-over-year increase and a 23% increase versus the previous quarter. Sales to local Chinese manufacturers in the first quarter saw an increase in equipment and service sales for Logic Foundry applications, both year-over-year and the previous quarter. Yet, year-over-year NAND segment equipment sales going through a transitional period resulted in a slight 3% decrease year-over-year. Compared to the previous quarter, sales rose 18%, marking a recovery trend, following the low point in the fourth quarter of the previous Furthermore, while sales to non-China increased year on year, sales to China declined, resulting in a fall to 25% for share of sales to China. Page 9 shows revenue by destination. First quarter sales to China decreased year over year, but increased quarter over quarter. Outside of China, sales increased in all regions both year over year as well as the previous quarter. The percentage of sales to China remained at 28%, the same level as the previous quarter. Page 10 shows the quarterly trends of the balance sheet. Total assets increased by 11.2 billion yen compared to the end of fiscal year ending March 2026, owing to increase in inventory from production growth as well as increase in trade and other receivables. Total liabilities increased by 5.6 billion yen compared to the end of the fiscal year ending March 2026 due to increased trade and other payables from increased production. Total equity increased by 5.6 billion Japanese yen compared to the end of the fiscal year ending March 2026 primarily owing to an increase in retained earnings. Page 11 shows the key financial indicators from the quarterly balance sheets. The equity ratio decreased by 0.4 percentage points from the end of the previous fiscal year to 60.6%. In addition, we maintained our net cash position from the end of the previous fiscal period, with net cash standing at 6.6 billion yen. Page 12 shows quarterly cash flows. Operating Cash Flow Cash flow inflows exceeded investment cash flow outflows, resulting in free cash flow of 6.6 billion yen. Cash flows from financing activities resulting in an outflow of 6.4 billion Japanese yen due to dividend payments and buyback. Page 13 shows quarterly R&D expenses, capital expenditures, and depreciation expenses. Research and development expenses for the first quarter totaled 4.5 billion yen. The ratio of R&D expenses to revenue fell to 5.9%, owing to increase in revenue. R&D expenses for the fiscal year ending March 2027 are expected to increase by about 10%, year-on-year projected to total approximately 20 billion yen. Capital expenditures for the first quarter totaled ¥4.8 billion. We are currently investing a total of ¥20 billion to construct a demonstration center in Oregon, USA, aiming for operational start in January of 2027. Consequently, capital expenditures for the fiscal year ending March 2027 is expected to increase by about 70% year-on-year to approximately ¥29 billion. Depreciation expenses for the first quarter total 3.9 billion yen. This figure is expected to remain at a similar level going forward and is expected to increase by about 10% year-on-year reaching approximately 16 billion yen. Next, I will explain the full year earnings forecast for the fiscal year ending March 2027. Page 15 shows the highlights. Details will be shared starting on the next page. Please turn to page 16. We are revising the earnings forecast and dividend forecast for the fiscal year ending March 2027 that was announced on May 13th at our full-year earnings call for fiscal year ending March 2026. Revenue was expected to significantly exceed the previous forecast owing to a substantial increase in sales in the equipment business. We have revised the first half forecast upwards by 6% to 161.0 billion yen, a 37% increase year-over-year, and a full-year forecast upwards by 21% to 340 billion yen. A 45% increase year-on-year. We have also revised our profit forecast upwards in line with the revenue increase. Adjusted operating income has been increased by 10% to 39.2 billion yen, a 55% increase year-on-year. And a full year forecast has been raised by 42% to 86 billion, an 81% increase year-on-year. Adjusted net income for the first half was revised upwards by 11% to ¥27.8 billion, a 60% increase year-on-year, and a full-year forecast has been raised by 40% to ¥60 billion, a 76% increase year-on-year. The dividend forecast has also been raised in line with the upwards revisions to adjusted net income. With the interim dividend forecast increased by ¥9 from ¥23 to ¥32 and have revised our year-end dividend forecast upwards by ¥9 from ¥24 to ¥33. As a result, the projected annual dividend is expected to be ¥65 per share and the consolidated dividend payout ratio based on adjusted net income is projected to be 25.2%. Page 17 summarizes the factors contributing to changes in the earnings forecast for the fiscal year ending March 2027, comparing it to the previous forecast announced at the earnings call for fiscal year ending March 2026. Revenue is expected to exceed previous forecasts for both equipment sales to non-China and China, as well as for service revenue. Therefore, we have raised the forecast by 21% from the previous forecast to 340 billion yen. In addition, profitability is expected to improve due to product mix changes, and as such, the gross profit margin has been raised by 1 percentage point from the previous forecast of 42% to 43%. Regarding adjusted operating profit, owing to a significant increase in sales and a rise in gross profit margin, we have raised the forecast by 42% from the previous forecast to 86 billion yen. Page 18 summarizes the factors contributing to changes in earnings forecast for the fiscal year ending March 2027 compared to the previous fiscal year's results. Revenue is expected to increase owing to higher sales of equipment to non-China customers, higher sales of equipment to China and higher service revenue and is projected to increase by 45% compared to the previous fiscal year. Adjusted operating profit is projected to increase by 81% year-over-year owing to higher sales, as well as rise in total sales gross profit margin from improvement in production capacity utilization resulting from increased production volume and a total gross margin improvement from product mix changes where the increase in SG&A was absorbed.

Page 19 shows chronologically revenue in non-China and revenue in China from March 23 to March 27 forecast. Revenue in non-China bottomed in March 24. Since then, the revenue increase trend has been continuing with greater acceleration in March 27. Non-China revenue forecast is revised 14% upward compared to the last forecast driven by stronger than expected demand for NAND and logic and foundry equipments including advanced packaging. NAND sales are expected to grow 95%, DRAM sales 39%, and Logic and Foundry sales 89% year-on-year. Each application is expected to grow significantly, totaling non-China revenue growth of 49% year-on-year. Now, revenue in China is revised upward by 39% compared to the last forecast, a 37% increase year-on-year with greater than expected increase in DRAM equipment demand. For China NAND sales, in the last forecast, we expected a sharp fall due to major device manufacturers' investment transition period, but are now projected to drop only slightly as demand has been increasing recently. March 28 onwards, we expect China NAND equipment sales also to shift to a growth trend. With faster than expected pace of revenue growth in China, China revenue share rose 4 points compared to the previous forecast to 33%. We expect the share to trend around 30% going forward. Page 20 shows revenue forecast by application of equipments and service. In March 27, driven by generative AI demand, we expect semiconductor device makers to accelerate CAPEX for generational shifts and capacity expansion, mainly in high-performance devices. Therefore, equipment sales are projected to grow strongly across all applications, NAND up 49%, DRAM up 61%, and Logic Foundry up 65% year-on-year. Page 21 shows revenue forecast by destination. Revenues are projected to grow across all regions year on year. China's share is expected to reach 38%, partly due to active capex by non-China manufacturers for their plants in China. While export controls and tariffs have no direct impact currently, we will monitor closely together with potential indirect impacts. Page 22 shows revenue forecast by equipment High value added equipments are expected to account for about 70% of equipment sales in March 27. We will accelerate the adoption of high value added products as generational shift investments progress in each application. This concludes my presentation. I am Kazunori Tsukada, President and CEO. I will explain our future outlook. Page 24 outlines our business environment. Our view is that in the semiconductor device market, AI-related demand will continue to strongly drive capex, especially in high-performance devices among device manufacturers. On the other hand, non-AI-related industrial equipment uses are in a recovery phase, awaiting full recovery. For the mid to long term, our view remains unchanged that the overall semiconductor device market will grow at a pace faster than expected so far. Regarding the calendar year 2026 WFE market size, during our March 26 earnings announcement, we projected a 15% year-over-year growth, to around $120 to $125 billion, but with AI-related investments accelerating further, centered on DRAM and NAND, we have raised our outlook by about 10 percentage points, now expecting year-over-year growth of over 25%, reaching around $140 billion. Page 25 provides an update of our mid-term management plan. When we announced the March 26 results, following changes in the market environment, we reviewed the timing of achieving the mid-term plan. We now expect to achieve our revenue target of 330 billion yen in March 27, two years ahead of schedule. Sales mix by application is also approaching target levels as a result. For the mid-term adjusted operating margin target of 30% or higher, we aim to achieve in March 28 through operating leverage coming from larger scale of revenues. We will build higher profitability by raising the mix of high-value added products with device generational shifts, reducing production costs via higher utilization rate, and controlling fixed costs and SG&A. Page 26 covers production capacity and sites. Capacity utilization is expected at an average of 70 to 80% in the first half, over 80% in the second half of March 27, and higher next fiscal year. Production lead time is currently around eight months. While current capacity secures our 340 billion yen revenue forecast for March 27, we are expanding capacity to meet increasing demand March 28 and beyond. We are evaluating rapid capacity expansion on newly acquired land next to the Tonami plant while ramping up production engineer recruitment and putting in various measures. Through these efforts to increase production, monthly unit production capacity is targeted to reach 2.5 times of the March 25 level in 10 years. Page 27 outlines shareholder returns. It is our management priority to deliver stable, continuous, and proactive returns to our shareholders. And the basic policy is a consolidated payout ratio of around 20 to 30% of retained earnings. Following this policy, with a revision to the guidance, we raised our annual dividend forecast by 18 yen for March 27. Further, following the shareholder return policy, we announced share buybacks at the time of financial results announcement for the year ended March 26 and have subsequently announced the cancellation of these treasury shares. We completed the up to 5.3 billion yen share buyback, resulting in purchases of about 570,000 shares on July 27th. All acquired shares will be canceled on August 31. Finally, page 28 summarizes the semiconductor device development roadmap, business environment, and our catalysts. Semiconductor device makers are rapidly accelerating capex for high-performance devices for generational shifts and production capacity, and they are also expected to increase capex for general-purpose devices. For NAND, we are optimistic that capacity expansion investments will finally resume. While for DRAM, CAPEX is likely to become more active for generational shift and capacity expansion driven by AI. In logic and foundry, we can expect more device manufacturers to implement CAPEX for GAA. And in advanced packaging, our film deposition technology is our competitive advantage, and we can expect to win new PORs. For the evolution of semiconductor devices, we are actively collaborating with customers on the development of next-generation devices and will further promote proposals aimed at securing new PORs. In particular, we will create opportunities for our batch ALD-compatible equipments and single-wafer plasma treatment equipments or strengths, and aim for sustainable sales growth faster than the WFE market alongside a highly profitable business structure. Thank you very much for your attention.