Sumco Corp Ord

Thank you for your participation today. This is the results briefing for Q4 of the fiscal year ending December 2022. Before starting the presentation, allow me to confirm today's materials, which consist of three items. The brief statement on consolidated financial results for Q4 fiscal 2022, the announcement regarding revision to dividend forecast, and the presentation deck entitled Results for Fiscal Year 2022. This will be a roughly one-hour briefing, which will end at 5 p.m. Next, a disclaimer. The estimates, expectations, forecasts, and other future information discussed here and shown in today's materials were prepared based on the information available to the company as of today and on certain assumptions and qualifications, including our subjective judgment. Actual financial performance or results may differ substantially from the future information contained in this material due to risk factors including domestic and global economic conditions, trends in the semiconductor market, and foreign exchange rates. We will have presentations today from Representative Director, Chairman and CEO, Mayuki Hashimoto, and Vice President, CFO, Michiharu Taki. Hiroshi Ito, General Manager of Accounting, is also on hand. Chairman and CEO Hashimoto will discuss our forecasts in operating environment to be followed by an explanation of the financial results by CFO Taki. We have set aside time for a Q&A session as well. I will now hand over to Chairman Hashimoto. I am Chairman Hashimoto. I will start with the overview on slide 5 of the presentation. These are the Q4 results. Q4 sales were 117.4 billion yen, operating income 29.7 billion yen, ordinary profit 27.9 billion yen, and net profit attributable to the owners of the parent was 18.5 billion yen. The results were well ahead of our forecast at all levels. The only divergence versus our forecast was the dollar-yen assumption. The yen was slightly stronger than we had expected. Turning to our Q1 forecast, we are guiding for sales of 105 billion yen versus Q4's 117.4 billion yen. We expect operating income of 23 billion yen and ordinary income of 25 billion yen. For net profit attributable to owners of the parent, we are guiding for 45 billion yen, reflecting extraordinary gains of 30 billion in the form of negative goodwill we expect to incur related to the acquisition of Mitsubishi Materials' semiconductor polysilicon business. CFO Taki will go into more detail on this later. Our guidance implies a 6.7 billion yen queue-on-queue decline in operating profit. The background is, first of all, a 5.2 billion yen impact from the Forex assumption. This accounts for the majority of the decline. In addition, we have factored in higher costs. Overall volume is expected to decline slightly as a result of the absence of the leap year day in February this year, as well as lower production levels owing to regular maintenance at Nagasaki. The market correction is challenging, especially in P.W., PW is the main product for subsidiary FST, so volumes at FST are likely to be down slightly. Having said that, the FST volume decline will not be that large. These factors should be offset by higher prices, which will have a positive impact of 5 billion yen. The combination of the various factors is projected to lead to a Q-on-Q drop in profits of 6.7 billion yen. Next slide, please. Given the strong performance in fiscal 2022, we have chosen to raise the annual dividend guidance to 81 yen per share. This represents a dividend payout ratio of 40.4% versus our previously stated target of around 40%. Next slide, please. This is the market environment for silicon wafers. First, looking back to Q4, demand for 300-millimeter wafers varied quite significantly by customer. I have been involved in this business for a very long time, but one key feature of the current correction is this variance by customer. Typically, when the market had been weak, demand from all players had been similarly weak and when the market was strong, all of the players showed strong demand. This time, however, the variance between customers has been marked. Some players have been relatively resilient, while others fell sharply, resulting in a large gap between individual companies. For 200 millimeter, automotive demand has remained strong. Although there are industries where there are demand corrections, Sumco's wafer production remained at virtually full capacity utilization, and we have continued to be able to sell everything we produce. In contrast, for 150 mm and smaller diameters, there has been a strong correction in consumer electronics applications, slightly depressing demand. On Q4 prices for both 300 and 200 mm, LTA prices are being firmly maintained throughout the industry. There is not much change in spot prices either, although Samco does very little spot business. Turning to the outlook for Q1 of fiscal 2023, on 300mm, I commented earlier on this in talking about the situation at FST, but we are seeing a strong correction in memory. On the logic side, however, we had already been seeing a variance in demand by customer. That said, overall, we expect the correction to be relatively mild for logic. If we look at automotive, demand coming from chip makers focused on auto applications has remained firm. For 200mm in Q1, smartphone demand is, of course, weak, but demand from automotive and industrial applications remains strong. We expect the trend to be relatively flat in Q1. For 150mm and smaller diameters, the correction in end demand in consumer applications is ongoing. we expect the correction to continue. On price trends for Q1, as appears to be the case for our peers, we expect LTA prices to continue to be maintained. However, there might be some pockets of slight weakness for spot prices. However, Sumco doesn't have much in the way of spot to begin with, so spot trends are unlikely to move the needle for Sumco. Looking at the outlook going forward, for 300 millimeter, we expect that first half will be the bottom for the correction in memory, but we expect second half to be relatively lackluster as well. For logic, the situation is very different from customer to customer. We expect that the correction will be relatively short in duration, lasting only through the first half, and subsequently showing a relatively smooth recovery. Automotive and industrial application demand should maintain the firm trend seen so far. Overall, we expect Sumco's production to remain firm given solid demand. Automotive and industrial application demand in 200 mm should also remain firm. The correction in 150 mm and smaller diameters is relatively large. We expect this to persist for some time. Next slide, please. Slide eight shows the wafer trend for 200 millimeter by quarter. The red line is the trend for last year. As you can see, industry production remains capped at the ceiling. I believe this level of 6 million wafers per month probably represents the limit. The fact that volumes are largely unchanged from last year suggests the industry is running at full capacity utilization with the potential for further improvements in productivity having reached their limit. Given this situation, the industry is not able to increase production volume in response to demand, so conditions are likely to remain stable. Next slide, please. This is the same chart for 300-millimeter wafers. On this chart, you can see that there was a step-up in volumes in Q1 2022, but since then, you can see that volumes have remained largely flat at the ceiling. This reflects the fact that the industry has reached the limits of brownfield expansion. The next increase can only come from greenfield expansion. So until greenfield capacity comes online in 2024, it continues to be the case that volume is unlikely to increase significantly, even if demand picks up. Next slide, please. Recently, we have seen many countries indicate a strong interest in developing local leading edge semiconductor manufacturing capacity. What are we talking about when we say leading edge? The current leading edge is 2 nanometer, and the current mainstay technology is FinFET, which is the second from the left. But going forward, gate all around is considered to be necessary to make progress beyond 2 nanometers. This is a very challenging technology. At this point, only the top three are able to do this, and even within the top three, there are differences in technological capabilities. The technology to achieve LDP miniaturization exists, but for gate all-around, debris or crystal defects are much smaller, and the contamination tolerance is quite restrictive. Front and back surface flatness is also viewed as very challenging. However, for gate all-around, crystal orientation is yet another consideration, so achieving this will be a high hurdle indeed. My impression is that things will change dramatically. Next slide, please. This shows demand for server-use 300-millimeter wafers based on server unit volumes. Servers are also being used in data centers, so unit volumes should show relatively solid growth. What is weak now is PCs and smartphones. Data centers are growing. Near-term wafer demand from servers is around 1.7 to 1.8 million wafers per month. In four years' time, demand is estimated to be at around 2.5 million wafers, a hefty increase of 700 or 800K. Next slide, please. This shows demand forecasts for smartphone use 300-millimeter wafers. In contrast to servers, smartphones are seeing a relatively large correction. At the same time, there is the ongoing transition to 5G. 5G silicon consumption is 1.7 times larger than 4G. These two opposing trends cancel each other out, so the decline in terms of wafers is likely to be relatively mild. 2023 is likely to be down year on year, but there should be a recovery in 2024 with unit volume showing steady growth thereafter in our view. Next slide, please. This slide shows auto sales forecasts broken out by vehicle type. Automotive remains firm, but if we look at EVs, they are expected to account for more than 50% of auto sales by 2026. ADAS adoption is also similarly expected to pick up. Next slide, please. So what is the difference in silicon consumption between ICE and XEV? Roughly speaking, an ICE vehicle currently consumes about 10 square inches. This compares to silicon consumption of around three times higher for XEV combined with ADAS. As noted earlier, XCV sales and ADAS adoption are expected to increase, so this growth trend should remain unchanged. Next slide, please. So how much wafer demand is represented by automotive devices? Currently, automotive demand for 300mm wafers is estimated at around 500 to 600k wafers per month. In four years' time, this is expected to rise to 1 million wafers per month. So automotive will drive an increase in wafer demand of 400 to 500K. So if we think about overall wafer demand, it is likely to increase by around 1.5 to 2 million wafers per month over the next four years. Next slide, please. This shows current customer wafer inventory levels. As you can see, there has been a sharp increase in inventories. Although I can't really say too much about it, if you look at inventory levels for each chipmaker, there are companies where inventory is up sharply and others where the increase is not that large. There is significant variance in inventory levels between individual companies. Next slide, please. This shows customer 300mm wafer inventory broken out into logic and memory. The bar chart seemed to suggest that the increase in wafer inventory and memory makers is more moderate than logic, with inventories rising sharply at logic players. However, we are seeing a clear divergence between the winners and losers in logic. Conditions at individual logic makers differ widely. This makes it tough to generalize. This is where logic and memory are at at this time. I think it is better to explain the situation using the graph on the next slide. So how should we analyze what is happening with inventory? This chart plots trends for inventory price and demand for 300 millimeter logic use epi wafers. The orange line is inventory volume on a monthly basis. The rising blue line reflects trends in consumption or demand. What this chart tells us is that for logic, even in the event of a correction, the magnitude of a correction tends to be relatively shallow and generally only lasts for four quarters before a recovery. Near term, we are entering a slight correction phase, although there are differences between individual companies. But even if it is a correction, the level of inventory compared to historical levels is not that high. So even if there is a correction, we would expect the correction to be of relatively short duration and modest in terms of the magnitude of the downturn. Next slide, please. This is the same chart, but for polished wafers. If we look at historical trends for polished wafers, when there is a correction, the duration is typically longer at around six quarters. As well, generally, a recovery is very sharp. If we look at the current correction, we can see that inventory levels compared to historical levels are quite elevated. This also suggests that a correction could be more prolonged than logic. We believe that first half 2023 is likely to be the bottom, with the market starting to pick up sometime in the second half. However, our view would be that it would be tough to have high expectations for this year. That said, I would expect to see a solid rebound sometime in Q4. One feature of PW is that any rebound tends to be quite sharp, which means that it is necessary to be prepared. Near term, the market is in the midst of a relatively tough correction. Next slide, please. This is the outlook for supply demand, including historical data, which we always share with you. We expect 2023 to be flat, reflecting current brownfield capacity. The industry will start to ramp up greenfield capacity, but the new capacity may be slightly surplus to requirements this year. However, delaying CapEx now would mean that the capacity wouldn't be ready if demand surges in 2024. I believe, given this, that everyone in the industry will execute on CapEx as planned. This completes my section of the presentation. I will hand over to CFO Taki to talk about details of our earnings. I, Taki, will present the earnings in more detail. Next slide, please. As touched upon at the beginning of the presentation, both sales and operating profit were up year on year. Full year sales rose 100 billion yen year on year to 441 billion yen, largely in line with our expectations. OP doubled year-on-year to 109.6 billion yen. Ordinary profit also roughly doubled to 110 billion yen. As discussed previously, the corporate tax amount increased in the absence of offsets as a result of the depletion of cumulative loss carry-forwards. Also, the net loss attributable to non-controlling interests widened as a result of the strong profitability of FST, which led to an increase in deductions. CAPEX was 130.8 billion yen, also doubling year-on-year, mainly related to the start of greenfield investments such as utility facilities and the construction of a physical shell, which came up for verification during the year. Depreciation also increased. OPM for the full year was 24.9%, EBITDA margin was 38.4%, and ROE was 13.9%. The average forex rate for 2022 was 131 yen to the dollar. Please turn to the next slide. This is the analysis of changes in operating income. First, the sequential analysis. Sales and operating profit were virtually unchanged queue on queue, so no major moves. Costs rose 1.7 billion yen, mainly the result of increases of around 0.5 billion each for labor costs, maintenance costs, materials costs, and electric power costs. Depreciation was also up queue on queue. Sales-related variance was impacted by regular maintenance conducted in November at the mainstay 300mm plant, which depressed volume. However, on the back of the weak yen, there was a positive contribution from Forex, in particular in Q4, when the yen weakened beyond 140 yen to the dollar, resulting in the 3.1 billion yen positive. On the right, we show the year-on-year change for the full year. Sales increased 100 billion yen year-on-year. The large increase can in part be attributed to Forex, which contributed 40 billion yen to the top line. There was also a contribution of more than 30 billion yen from higher selling prices. Volume also increased for an impact of around 30 billion yen year-on-year. We show the analysis of change in operating income in the bar chart below. OP increased 58.1 billion yen year-on-year. costs increased 20 billion yen. Labor cost increases were a major contributor at 8 billion yen. This is due to front-loaded hiring for greenfield expansion. We increased headcount to expand production for an impact of 5 billion yen, and per-employee costs also increased on higher bonus payments as a result of improved profitability, pushing up labor costs by 3 billion yen. The next largest element was electric power costs, which rose 6 billion yen. Surging materials prices raised costs 2 billion yen, and maintenance expenses were up 4 billion yen. Effectively, costs related to increased production and unit prices for electric power are rising, and materials costs were also up. Depreciation was up 8.2 billion yen. On sales-related variants, the contribution from prices was 33 billion yen, as mentioned before, with volume increases contributing another 20 billion yen, a combination of both 300 and 200 millimeter. Forex had a sizable positive impact of 33 billion yen. Next slide, please. Slide 25 shows the balance sheet and cash flow statement. As a result of higher profits, cash and time deposits on the balance sheet increased 34.7 billion yen. Accounts receivable, finished product, and work in progress also increased on the back of higher sales and increased sales volume. Raw materials and supplies rose 0.5 billion yen. The reduction in polysilicon inventory within this was 9 billion yen, which was offset by an increase of around 10 billion yen in materials inventories, which we considered important from a BCP standpoint, given we are running at full capacity. Tangible assets rose 73.5 billion yen on the back of higher capex. Other liabilities increased 58.8 billion yen, while interest-bearing debt was flat. We discussed this previously, but our joint venture subsidiary in Taiwan, Formosa Samco Technology, took in advance payments and deposits on LTAs of roughly 26 billion yen. Also, on tax expenses, we discussed this when talking about the profit and loss statement, but the actual tax payment will happen in the next fiscal year, so the increase in other includes a hefty 15 billion yen increase in income tax payable. If we look at the capital account, retained earnings increased 49.3 billion yen, reflecting the impact of 70 billion yen in net profits after deducting the payment of dividends. Down below, optically, the shareholders' equity ratio appears to have fallen slightly, but equity per share improved to around 1,500 yen. The DE ratio is as shown here. On the cash flow statement, operating cash flow was 179.4 billion yen, while investment cash flow was an outflow of around 130 billion yen. Free cash flow was 53.1 billion yen. After dividends paid and other adjustments, we get to the net increase in cash and time deposits highlighted earlier of 34.7 billion yen. Next slide, please. These are the forecasts for Q1. On a queue-on-queue basis, we expect sales to decline around 12 billion yen. We also project a drop in OP to 23 billion yen. The projection for non-operating income and expenses is positive. We had put on forex contracts through Q1, which will generate currency gains. We project ordinary profit of 25 billion yen. Under extraordinary gains, we expect to incur negative goodwill on the acquisition of Mitsubishi Materials' polysilicon business. We estimate a difference of 30 billion yen between our acquisition price and the NAV of the business we are buying, which we will recognize in Q1 as an extraordinary gain. After deducting for corporate tax, we forecast net profit of 45 billion yen. We project depreciation of 14.5 billion yen down slightly year on year. This reflects the fact that we are into a new year and have made progress on depreciation. We show a number of management metrics at the bottom of the table. Next slide, please. This is the analysis of change in operating profit. Sales are projected to fall 12.4 billion yen queue on queue. This breaks down into a 10 billion yen negative impact from lower volumes, a 7 billion yen negative from forex impact, but a positive 5 billion yen impact from higher selling prices, the result of a step up in LTA prices with the start of a new fiscal year. On the back of this, OP is expected to fall 6.7 billion yen cube on cube. The main factor is higher costs. We expect cost increases to persist into this year. Inflation continues to push up raw materials prices for an impact of around 1.5 billion yen. We also expect the unit price for electric power to also continue to rise and have factored in a 1 billion yen increase. We also expect to see increases in R&D and labor costs. Base wages are expected to rise, but that will happen in April, so not Q1. In total, we therefore expect costs to rise 3.7 billion yen. Depreciation is expected to improve 2 billion yen as a result of progress on depreciation and the start of a new fiscal year. Under sales-related variance, the positive impact of higher selling prices of 5 billion yen due to 300mm LTAs is expected to be offset by 5 billion yen resulting from lower volumes. The drop in volume is partly a function of a lower number of days in February as well as the impact of regular maintenance. Project a negative 5.2 billion yen forex impact as a result of yen appreciation due to setting our forex assumption at 131 yen to the dollar. Looking at the analysis of year-on-year change for Q1 on the right, the year-on-year negative impact of costs is expected to be a sizable 9.8 billion yen. Materials and supply costs are expected to rise 3 billion yen year-on-year. We expect electric power unit prices to rise for an impact of 3.5 billion yen. Labor costs will rise 1.5 billion yen year-on-year. Repair and maintenance costs are expected to increase 1 billion yen year-on-year. Effectively, all costs are rising. Depreciation is also expected to increase. For sales-related variance, we expect a 4 billion yen positive, reflecting the positive 5 billion yen impact of higher selling prices with the start of a new fiscal year. We expect a 6.6 billion yen year-on-year positive from Forex for Q1, based on an assumption of 131 yen to the dollar. All of the above factors combined contribute to largely unchanged OP year-on-year for Q1. Next slide, please. As you can see on slide 31, you can see the trend has shifted to a slight decline in sales and profits for Q1. That said, EBITDA remains elevated. This completes my remarks. Mr. Shibuya, thank you. We will now open the floor to questions. We ask you to kindly limit yourself to one question each. We will start with Mr. Enomoto of B of A Securities. Mr. Enomoto, I would like to know if the 300mm LTAs are functioning properly. With demand weaker in the March quarter, particularly for memory, are the LTAs ensuring that customers respect their volume commitments? For example, are customers nearly extending delivery to sometime later this year? I suspect that customers will respect the LTA prices, but please comment on how well the LTAs are working. Chairman Hashimoto. With regard to volume commitments under LTAs, we are seeing some slight adjustments from customers, particularly memory players. We aren't really seeing customers ask for lower prices, but what they are asking for is to push out the shipment timing for a portion of the volume. In our case, FST is being impacted by a decline in volumes from Chinese customers, but this is unrelated to the LTAs. A customer is now unable to buy even replacement parts for fabrication equipment. As a result, they have reduced production levels significantly, which has led to a decline in wafer demand from this customer. Apart from this particular customer, however, most appear to expect a recovery at some point. Some have pushed out deliveries to later this year. There are others that have asked to push out volume by effectively adding to the term of the LTA. There have been a variety of responses. However, customers are respecting the overall volume of the LTAs, although at the fringe there appear to have been some shifts between customers. It appears that this is also the case for our peers. Under the terms of the contracts, it is possible to force customers to take volume even if they have cut production levels and have full warehouses, but we prefer to engage with our customers to find common ground. In Q1, we intend to maintain production levels without reductions. To date, wafer makers' inventory levels have been very low, so there is a need to raise inventories back to more normal levels as well. So, as you can see, that has been the extent of the correction to this point. Mr. Enomoto. Understood. Thank you. Mr. Shibuya. Thank you, Mr. Enomoto. Next is Mr. Ikeda of Goldman Sachs. Mr. Ikeda. In looking at your Q1 forecast, I believe that you are assuming a decline of around 10% for 300mm wafers in line with your peers. If we look at past history, in the March quarter of 2019, there was an overall decline of around 4%, followed by a more moderate correction. This time, I believe the overall decline to be quite large. However, Sumco does significant business with the chip makers considered to be amongst the winners, so relative to your peers, I think you are better positioned. Compared to the last downturn, the March quarter drop is quite large. How are you thinking about the slope of recovery in Q2 and beyond? Also, do you still expect customers to feel that wafers are in short supply in 2024 and beyond? Please talk about how to think about a recovery. Chairman Hashimoto, as you know, we have very good relationships with chip makers that are strong in automotive. These players are actually saying that they want to increase wafer intake rather than reduce it. However, the situation appears to be quite different depending on sector. The situation for memory appears to be very tough, with many announcing production cuts. We are seeing some impact from this. That said, the proportion of memory use at Sumco is lower than at our peers, so we aren't seeing a large correction, but we are impacted by China. For logic, the magnitude of the correction is not that large, with the exception of one customer. What is happening with this customer is not so much the impact of a correction, but instead, this customer may be falling behind. I think what determines winners versus losers is the success of each player in the market. Overall, for logic, I think the correction will be mild and that there will be a recovery in second half. From that perspective, I think the 10% decline expectation is for the total market, including 150mm and smaller diameters, where the decline is likely to be acute. If you look just at 300mm, I don't think the correction is that large. I think that there isn't much of a correction in 200mm either. 150mm, on the other hand, is very tough. In terms of the outlook for 2024, I don't really have any concerns as far as logic goes, but memory may need more time to work down inventories. I suspect memory may be relatively weak for 2023, only really rebounding in first half 2024. That said, I am not that worried about memory either. Mr. Ikeda. Understood. I have one follow-up. On page 22, the demand forecast for 2023 is flat. Should we interpret this to mean that you expect a decline in first half but a recovery in second half? Chairman Hashimoto. I think first half will be the bottom. I expect logic to rebound in second half. Memory should also improve in second half, but I don't expect memory to show as strong a recovery as logic. That's because inventory levels for memory are elevated. Mr. Ikeda. Understood. Thank you. Mr. Shibuya. Mr. Ikeda, thank you. Next is Mr. Watabe of Morgan Stanley MUFG Securities. Mr. Watabe, my question is about the gray line for price trends that you saw on pages 20 and 21. When you look at the last five years, although demand was down, the price trend on this chart suggests prices did not fall. In actual fact, I suspect there were times when prices did fall. This time, should we expect price trends to be similar because of the LTAs? Please comment on the actual price trends. Chairman Hashimoto. When you look at the chart, it clearly shows that prices prior to 2013 were volatile, but with the introduction of LTAs, prices remained stable and were not impacted by supply demand changes. My sense is that customers are respecting the LTAs. I say this because if you look at the peak in 2018, there were customers that signed LTAs. Although it was rare, subsequently there was a customer that did not respect the LTAs. However, at the next peak, this customer was unable to source wafers. We understand that this customer went on an apology tour, but I believe this experience was a lesson to customers that they need to respect the LTAs in times of volatility. I think there has been a broad acceptance that this is the case. Mr. Watabe. Understood. Thank you. Mr. Shibuya. Thank you, Mr. Watabe. Next is Mr. Miyamoto of SMBC Nikko. Mr. Miyamoto. With regard to greenfield investments, you mentioned that a delay in investing would mean you could not keep up if demand in 2024 recovers. Given this, I expect that you will continue to invest in line with your initial plan. Are you still expecting a gradual stepwise ramp-up from Q3? If so, will depreciation increase from Q3? If possible, can you talk about the scale of CapEx you expect next year? Chairman Hashimoto, we are executing on CapEx spending exactly in line with our plan. However, FST is lagging slightly as a result of issues in procuring materials. Japan capex is exactly on schedule and I have no intention to slow down. On capex spend, I will defer to CFO Taki. CFO Taki. As you can imagine, capex activity will be at a high level with facilities and equipment being brought on site. As such, total capex spend for 2023 is likely to be high. There will be a wave of investment in 2023. Japan capex spend for this year is likely to be around 200 billion yen. Taiwan is likely to be 100 billion yen this year. Mr. Miyamoto. Thank you. Will depreciation increase from Q3? CFO Taki. It will increase, of course. Mr. Miyamoto. Understood. Thank you. Mr. Shibuya. Thank you. Next is Mr. Okazaki of Nomura Securities. Mr. Okazaki, referring to page 25, how should we think about costs? You indicated your intention to raise base salaries. For this fiscal year, can you provide a range for how much you expect costs to increase? I do understand that there will be some variables that may change. You also just touched upon depreciation, but can you give us a sense for the scale of depreciation on a full year basis for the new fiscal year? Also, in Sumco's case, I understand that it is your policy not to pass on increases in fuel and raw materials costs, even with LTAs, which is different than your peers. Can I confirm that your policy in this area is unchanged? CFO Tucky. Obviously, given the expected installation of significant facilities and equipment, CAPEX levels on a verification basis will also be relatively high. Depreciation last fiscal year was around 60 billion yen. I would expect to see an increase of around 20 billion yen year on year. Obviously, this will depend on utilization levels. Chairman Hashimoto, on the question of the degree to which cost volatility is reflected in prices, I think it is the same for our peers. We don't have commitments down to the level where we agree in advance to tie a certain increase in prices to a fixed scale of cost increases for items such as electric power. That said, if there is a huge surge in costs for items such as transportation costs, we can and do engage with our customers and make adjustments. Mr. Okazaki, understood. Thank you. Mr. Shibuya. Thank you, Mr. Okazaki. Next is Mr. Nakahara of Tokai Tokyo Securities. Mr. Nakahara, with regard to the acquisition of the polysilicon business, does this mean that you will see polysilicon prices decline? Or, given you will need to invest in R&D, should we temper our expectations? Please talk about the impact that the polysilicon business will have on Sumco. Chairman Hashimoto. If we look at the historical trends for polysilicon, once every 12 to 13 years, the market experiences shortages. Polysilicon is a process industry, so when shortages hit, everyone rushes out to expand capacity. The last time was in 2009. At that time, Samco bought very large amounts of polysilicon, ending up with a huge inventory, which was a bad experience for us. We are starting to see shortages in polysilicon now. For instance, for relatively simpler solar-grade polysilicon, prices used to be around $10 to $15, but at the peak last year, it was over $40. So we are starting to see shortages on an overall basis. So first of all, although the acquisition does not fully cover all of our needs, it does ensure that we have access to a steady supply. It also gives us a good idea of costs and allows us to make plans. When the market gets tight, Polysilicon tends to see dramatic price action. In 2009, prices got as high as $80 or $90. As prices rise, it can lead to panic buying. By having internal capacity, this means Sumco does not need to engage in such behavior. Also, when dealing with leading edge, the requirements for polysilicon are very demanding, so quality is a major issue. Rather than having to make detailed explanations to vendors every time and pay a premium for product or run the risk of losing know-how to external parties, having in-house capacity is a positive. Going forward, we will be able to make high-purity polysilicon in-house. Obviously, we have an understanding of the business, so costs would not get that high, although vendors would want to charge a premium. Having this capacity in-house will be an advantage in R&D. Also, the situation for trichlorosilane is precarious. Only two companies in Japan can supply it. One is Mitsubishi, and the other is Tokuyama. Because it is a hazardous material, it's almost impossible to import from overseas. If Mitsubishi were to exit, that means that Japan would only have one domestic supplier, Tokuyama. Given that a significant proportion of what we produce is epi, a situation where there is only a single source would be a problem. So we also wanted to lock in a supply of trichlorosilane. I expect that there will be moments when we will be glad to have the capacity and other moments where we might feel that having the capacity in-house actually leads to higher costs. When the market has an oversupply, suppliers will say that they are willing to sell cheap. When the market is tight, they press for higher prices. The polysilicon makers could have their customers over a barrel. Without polysilicon, we can't even make a single wafer. Given our experiences, although it doesn't fully cover all of our requirements, having this capacity in-house is a good thing. There will be better stability in prices and supply. I believe there will be big benefits to having this operation in-house. Mr. Nakahara. Thank you. Mr. Shibuya. Thank you. Next is Mr. Nishiyama of Citigroup Securities. Mr. Nishiyama. My question is about 300 millimeter wafer demand. Volume is expected to decline 10% Q on Q in the March quarter, but your demand forecast for 2023 is flat. Hypothetically, if March quarter volumes fell 10% and you assume that there will be a recovery in second half, that suggests that you would need to see growth of around 20% in second half on a half on half basis to achieve flat volumes on a full year basis. Based on what you know of customer inventory, do you believe that this is achievable? If we look back at the previous cycle, the bottom for semiconductors was early 2019, but the end of wafer inventory adjustments only came in 2020, so there was a gap in timing. This time, should we expect that there won't be much of a time lag between the recovery in semiconductors and a reduction of inventories? Chairman Hashimoto. If you have a 10% decline in first half, it is possible to achieve flat growth on an annual basis if second half grows 10%. Our view of 300mm is that the correction is not as large as 10%. If you are looking at PW, then the magnitude of the correction could be larger. But actually, PW for discrete components for automotive applications, or IGBT, are actually up, so not everything is down. What's down is memory use wafers. Within logic, PC and smartphone use is down, but demand for industrial applications and data center use is strong. The current situation is not one that lends itself to generalization. My sense is that the decline is not as large as 10% if we assume that it will be flat on an annual basis. In Sumco's case, the proportion of logic is high. We don't necessarily have full visibility for the overall market, but that is my view. Customers are also saying they expect a rebound in second half, although this doesn't apply to memory. Also, only a few logic customers are reducing production. Putting it all together suggests that volume in 2023 will be flat. Mr. Nishiyama, when you say flat year-on-year, I would like to confirm that you are not saying that it will be flat versus the fiscal year-end level, but instead flat compared to a monthly average for the last 12 months. Chairman Hashimoto, yes, but when we get into the second half, we should see positive year-on-year growth. Mr. Nishiyama, understood. Thank you. Mr. Shibuya. Next is Mr. Yoshida of CLSA Securities. Mr. Yoshida. Can you provide an image of the direction of quarterly profits this fiscal year based on what you have said so far? You are expecting volume to rise in second half, but have also said that spot prices may come under slight pressure and depreciation will rise in second half. I am assuming that the Q1 Forex assumption remains constant. Chairman Hashimoto. Mr. Probably depreciation will rise significantly, so I don't think we can hope for a performance similar to last year. The reason why we don't expect sales to fall that significantly is because we benefit from the impact of higher selling prices given that LTA prices step up in the new year. So even if there are slight pushouts, I don't think sales would fall that much. That said, given that we have been executing on our investments, depreciation will definitely be up, obviously. The increase in depreciation will weigh down profits, which is likely to mean we can't match last year figures. CFO Taki. We expect to see a positive contribution of 5 billion yen per quarter as a result of selling prices rising for a 20 billion yen contribution for the full year, but this is likely to be offset by an increase in depreciation of 15 to 20 billion yen. The remaining question is what happens with cost increases? But if volume were to increase in second half, that might mitigate the impact of cost increases. Mr. Yoshida. Thank you. Mr. Shibuya. Next is Mr. Watanabe of Mitsubishi UFJ Securities. Mr. Watanabe. I would like more color on the acquisition of the polysilicon business. On page 11, when you refer to gate all around, you mentioned crystal orientation. Is there any relationship between this and your acquisition of the polysilicon business? Chairman Hashimoto. Not really. Mr. Watanabe. Thank you. Mr. Shibuya. Next is Mr. Yamada of Mizuho Securities. Mr. Yamada, on page 11, you discuss gate all around and the transition to 2 nanometers. In addition to crystal orientation, I think there is also added value in layering. Given that SAMCO has strength in epilayers, I believe that you can achieve significant added value. Can you comment on this, or is it still too early to say? Chairman Hashimoto, wafers for gate all around are technologically very challenging. Only two companies are able to supply wafers to the one company that is furthest ahead on gate all around. Other players aren't even capable of providing samples. This suggests that the transition will represent a very significant change. We are certainly strong in EPI and have been able to provide wafers to the customer. We understand that the customer is adding further layers to the leading edge wafers we provide, so it is necessary to supply layers to support this process. There is also significant process in 3D driving demand for carrier wafers or interposers, so we are also seeing diversification of wafers. Gate all around is very difficult. We struggled, but we're ultimately able to develop a wafer. This will be a very challenging era. Mr. Yamada, I have high expectations for Samco. Thank you. Mr. Shibuya, thank you, Mr. Yamada. Thank you to everyone. We are grateful for your participation today. We will end the meeting here.