Earnings Call: Q2 2021

Oct 29, 2020

Now it's time for us to start to create external financial announcement for the second quarter of fiscal year ending in March 2021. Thank you very much for joining us today despite your busy schedule. I am Yasuda of IR department acting as a moderator in today's session. Now let me introduce attendees on our side. 1st, Mr. Tito Tinesh, Chief Corporate Director, Chairman of the Board. I am Tinesh, Thank you very much for joining us today. I'm very happy to see so many people. Next is Mr. Toshiki Kawai, Representative Direct President and CEO, I am Kawai, nice to meet you. Next, Mr. Yoshi Kazuno Nokawa. Corporate Executive Vice President And General Manager Global Business Platform Division Finance Unit. I am in Nokawa. Nice to meet you. We're all starting the presentation. Let me explain the flow of today's meeting. First of all, Mr. Nuno Kawa and Mr. Kawa will make presentations. After that, after until 6:30, We will have the Q And A session, entertaining questions from the audience. This financial announcement uses two channels on Webex, providing simultaneous interpretation between Japanese and English. As we mentioned in our email, You are kindly requested to use apps on PC or mobile terminals if you plan to ask questions. But if you do not plan to ask questions, you can use your telephones. Since this is submitting for institutional investors and analysts, we would appreciate your understanding that we receive questions only from institutional investors and analysts as usual. We will upload the audio contents of this meeting, both in Japanese and English It would be kind if you could also refer to them. Now, Mr. Nuno Kawa, Corporate Director, Executive Vice President, General Manager will present the consolidated financial summary. Mr. Nuno Kawa, please. Good afternoon. I am Nuno Kawa of Finance Unit. I'd like to present the consolidated financial summary of the 2nd quarter of this fiscal year ending in March 2021. Thank you very much for joining us today despite a very busy schedule. This slide shows the financial summary for the first half of this The net sales of the first half of fiscal twenty twenty one was JPY 668,100,000,000 31 point 4% increase on the year on year basis, which exceeds the financial estimates announced on June 18, 2020. The SPE net sales was 635,400,000,000, exceeding its affectations. This is because despite the travel restriction imposed due to the COVID-nineteen threat, The start up activities were performed smoothly, and some customers put forward to their capital investment plans from the second half of this year. For FPT, so it's activities were affected by the trouble restriction in the first quarter, thanks to the improvement achieved in the 2nd quarter. The FPD net sales in the first half of this year almost met our financial estimates. The gross profit was JPY 264,800,000,000, margin was 39.6%. The operating income was JPY 147,400,000,000 the margin was 22.1 percent, which was the above financial estimates announced on June 18th. This slide shows the quarter based financial summary. The net sales of the 2nd quarter was 353,300,000,000, 12.2 percent increase from the first quarter. The gross profit margin was 38.6 percent decreasing from the first quarter. This is partly because the FPD net sales show the considerable increase in the 2nd quarter to push up its proportion in the total sales. It is also because of the increase The operating margin was 20.8%, decreasing from the first quarter. This is primarily because of the increase of the R and D expenses. This is a graphic representation of the financial summary. This shows the settlement information. For SPE, the sales grew just like the case of the consolidated financial summary. The SPE sales was 1,000,000,000 and Sullivan profit margin was 25.8 percent. For FPD, along with the sales increase, the segment profit margin rose to 10.2% For the composition of net sales in the 2nd quarter, SPE sales accounted for 94% while the FPD sales accounted for 6%. This slide shows the SBE cells by region. The sales grew in every region. The sales in Korea and China in particular The second one from the bottom pink color, an orange one in Korea increased In China, the proportion of local customers show increase. This shows SBU equipment sales by application. From the bottom, logic and others accounted for 32% Logic foundry was 18%, nonthought by memory was 26%. And DRAM was 24%. The proportion of the sales to memory device manufacturer layers and to logic device manufacturer layers was 50 to 50. It shows field solution sales. In the second quarter, the sales of Field Solutions was 81,700,000,000. The half year sales, which is the total of the sales in the 1st and second quarter, amounted to 1,000,000,000 hitting the record high. Next, this slide shows the balance sheet. The total assets were jpy 1,276,700,000,000. Their breakdown is decrease of the accounts receivable in the inventories, an increase of cash and cash equivalent. On the right, liabilities and net assets, The net assets were 1,000,000,000 due to the increase of the retained earnings. The equity ratio was 69.4 percent. This shows the inventory turnover and accounts receivable turnover. The inventory general bill was 111 days. The accounts receivable turnover was 38 days, also at a relatively low level. My last slide shows the cash flow. The cash flow from operating activities was plus 53,100,000,000 The cash flow from financing activities were minus 1,000,000,000, and the free cash flow was 40 point 1,000,000,000. This concludes my presentation about the consolidated financial summary. Thank you very much for your time and attention. Now, Mr. Kawayi, our CEO, will present business environment and financial estimates. Mr. Kawai, please. Once again, I am Kawai. Thank you very much for joining us today. Now I'd like to talk about business environment and financial estimates. First of all, let me start with the business environment. For the WFE market this year, We have more positive outlook than 3 months ago, exceeding more than 10% market growth on the year on year basis. In calendar 2020, the WFE market is expected to hit the record high. For the PDF application equipment TFG ARI process market, there's no change in the outlook and we expect 15% growth on shows the developing market outlook by application. For Logic And Foundry market, we have more positive outlook than 3 months ago. Expecting high level demand exceeding the previous year. For DRAM and non blood type memory, There is no change in our outlook. The WFE investment of the DRAM manufacturer is expected to ring and change from the previous year, the negatively investment of nonweta minimally manufacturer is expected to increase by about 50% from the previous year. This shows business growth progress in the first half of fiscal year twenty twenty one In the first half of this fiscal year, there were some concerns about the COVID 19 impacts on the business. I mean, such circumstances, however, Both net sales and operating margin exceeded our financial estimates. The net sales increased by 31.4%. And the operating income increased by 43.9 percent on the A1 year basis. Despite the travel restriction, we successfully completed the startup activities through the collaboration between the overseas subsidiaries and the factories in Japan. The XP sales was higher than our estimates This is because the startup activities were performed smoothly, and some customers put forward their capital investment plans. The FPD business turned back to a recovery truck in the 2nd quarter, as the fab app activities were steadily proceeded. For the fuel solution business, though the logistics were restricted due to the COVID 19 impact, we achieved the sales growth This is attributed to the provisions of timely support to maintain high utilization rate of our customers fab by optimizing inventories at our local subsidiaries. In addition, our new production building started operations in July at tohoku factory and in August, TMI Nashi factory, we are now ready to address an increasing demand expected in the future. Next, I'd like to show the financial estimates. We have revise the full year financial estimates upward by reflecting steady progress in the first half of the year and customers additional capital investments. Specifically, the full unit sales is expected to be 1,300,000,000,000 being increased by 1,000,000,000. The operating income is expected to be JPY 281,000,000,000 being increased by JPY 6,000,000,000. This slide shows DSP new equipment sales focused by application. The net sales in the far south of fiscal 2021 was 1,000,000,000 exceeding the estimates announced on June 18th by 44,400,000,000. The full year net sales is expected to be JPY 910,000,000,000, which is JPY 30,000,000,000 more than the initial forecast In comparison with fiscal 2020 sales of 750 1,000,000,000, Accordingly, the full year sales of new equipment is expected to increase by about 20% from the previous fiscal year. The composition with the sales by application has been slightly revised to reflect the market environment. Next, I'd like to talk about the R and D expenses and CapEx plan. As I said earlier, in the first half of this fiscal year, new production building started the operation in tog Factory and Yamana Shifa 3. In November 2020, we plan to move our supply office to a new place, which will function as I will have for software development in Miyagi Faxstream And Fertil Imaging Systems, the of MiAG Technology Innovation Center is planned to be completed in September 2021, which is designed to promote the collaboration with our customers and suppliers. As you can see, we are planning a record high R&D expenses and CapEx in this fiscal year in order to ensure to realize steady growth in the future. So this shows debit and forecast, along with upward revision of both financial estimates in the first half of this year and full year financial estimates, we are planning to pay full year dividend per share of BRL675. This concludes my presentation. Thank you very much for your client attention. Now we will have question and answer session until 6:30. We will receive the questions both in Japanese and in English, but our attendees on the Japanese channel Please allow us to restrict questions asked by Taks Vaabali to only in Japanese. If you ask questions in Japanese, please hit raise hand button on the web Webex. For details, you are kindly requested to refer to the instructions attached to the email. I will announce the name of the Paraso who asks a question 1 by 1. Please check the chat box on Webex as our secretariat will inform you in advance that you will be the next person to ask a question. If you have question in English, please use the chat box to send the question in text together with your name and affiliation to disappear chariot. We cannot answer a question if no name or affiliation is given. On the Japanese channel, I will read out the question translated into Japanese and, changes for insights in Japanese, while on the English channel, it will be simultaneously translated into English on the real time basis. For the questions, Valerie asking Japanese, please allow us to limit one question with one follow-up question. For the English question sent in text, I am very sorry, but we will receive one question without a follow-up question. If you have some extra time toward end of the meeting, we'll receive additional question. Now let's move on to the first question. Is from Mr. Wadaki from Nomura Securities. Mr. Wadaki, please. Thank you very much. Can you hear me okay? Yes. Thank you very much for your concise and strong message. Thank you very much. I have one question. So to add next fiscal year, there are some concern that is trade fiction for China and U. S. And also Europe. Do you have such do you have any comment on that, please? I think We have the good business relationship, but as you know, there are quite a few geopolitical situation we are facing. So under these circumstances, I am not able to give you any, comments, specific comments. However, When you look at the market, as you know, ICT will be introduced and implemented very strongly. I'm sure there are some investment in the future. Therefore, as well as our company is concerned, we are going to lead the market in terms of our technology innovation. That's important for us. So I'd like to focus our efforts on further technology innovation. I have one follow-up question. So by application logic, I have some concern for logic. How do you see the condition of logic next year? When you look at WFE market, I want to say one thing today. So June this year, I said next year will be a big year. That's what I said back in June this year. Next year will be the big present. So the WFE market this year we are going to see the record high in the WFE market, but still we have COVID nineteen concerned the presidential election in the United States and also geopolitical concerns still remain. There are some issues. But next year, WFE, even if we're considering those factors, we I think next year, WFE market will exceed this year. Even if this year, we are going to hit the record high and year 2022 will be higher than 2021. So next year and year after, we also see maybe clears in a row. That's how we view the market for next year and, yeah, after In that sense, but we need to focus to prepare for the big years. So DRAM supply demand balance is one thing. 10 nanometer, the 7 nanometer, and 5 nanometer. MPU and GPU DVDs. And 5G mobile. And data center investments. So those 3 factors, as what Mr. Wataki knows, DRAM supplydemand balance, actually, maybe in firstquarternextyear. The demand will increase little by little because of the tight balance. For logic and foundry, so high speed CPU the 10 nanometer, 7 nanometer, and 5 nanometer, the demands will continuously increase And that's how we view the market. Thank you very much for your comment. It was very clear. Thank you very much. So next question. Mr. Yoshida ShieldSA Securities. I am Yoshida. Thank you very much. My first question actually is a kind of follow-up question of Mr. Varekki's question. So this year, next year and the after, when you look at WFE market, you said WFE market is expected to grow continuously and next year if WFE market grows What is the level of the market growth for next year? As by application, how do you view the application Are there any specific application which drive the WFE market growth, which application is expected to drive the market growth? Actually, so although I said Dick years, We must look at the market conditions very closely and carefully. Because the COVID nineteen spread this one on sleeve. Uncertainty, and we don't we also have the presidential election in the United States and geopolitical issue. Those things might have some impact on the macro economy. So we we need to be careful about the timing of those different factors. So on the quarterly basis, there are some shifts in our outlook. So for quant stably, it's specific for us to give you some comments. However, for our midterm management plan, 2024 to a year 2024, $65,000,000,000 to $70,000,000,000 that Etsy market size we expect. And we think the market grows steadily toward that size in year 2024. So, of course, the midterm, management plan, just look at the 4 years to come, but I think the direction of market growth is precisely correct. By application, you asked about. As for the specific application, which drives the Adobe market. Essentially 5g Infrastructure requires logicfoundry business and logicfoundry will start the capital investment and also for servers. DRAM, 3 d NAND and some other applications. So memory Maybe in the second half of the first quarter, memory is expected to recover from the second half of the first quarter next year. Thank you very much. I have one follow-up question. SPE new net sales, So you said there are some sales pulled forward, which region? And for memory, for example, DRAM in the the second half of this year, when you look at the competition, I think there are some adjustment for DRAM in the second half of this year. So when do you see the recovery of DRAM? So So you said the supply demand balance will be, changing from the first quarter. When do you think DRAM investment will start recovering? So as for the first half of this year, there are some increase. There are two reasons. The first reason is in June, when I announced our financial estimate in June compared with that time, so we are very happy to see logistics movement was rather smooth in the supply chain, including inside and outside Japan, we can see smooth operation in the supply end than expected. In China and other overseas markets, 3d NAND, So things are going very well. That's one of the reasons. And also 5G infrastructure, require certain devices. And there are some additional demands for that. So these are the factors to increase for the increase. For memory, DRAM recovery timing, how do you view the timing of recovery of DRAM? The timing of recovery of DRAM, the in calendar year, the second half of the first quarter, a little by little from the beginning of next year, the DRAM is expected to recover little by little. That's how we view the market. Thank you very much for your answer. Thank you very much, Mr. Yoshida. Thank you very much for your question. Next question is from Mister Yamamoto from Mizuho Securities. I am Yamamoto from Mizuho. Can you hear me? Yes. I can hear you very well. I have one question. For the gross profit margin improvement. This is here. So you have 1,000,000,000 and 40.2% is the, plan for the gross profit margin. So 1,100,000,000,000 your target is gross profit margin of 43 plus percent. That is your target for the midterm management plan. So now you have some sales getting closer to your target of mid, Monday plan. But why can you see the, rather low level of the gross profit, profit margin. Do you increase demand forward? What are some other reasons? That gross profit margin does not increase so much compared with the increase of the net sales. And what triggers the increase of gross profit margin in other words. Thank you very much for your question. For me, We have our target WFE Market. So there are 3 different models, financial models, I think you mentioned to our financial models. So when you look at midterm, long term perspective, 2, 3,000,000,000,000 on 30% So 2 to reaching in and 30% operating margin is a target. So that is our main scenario. Of 2,000,000,000 in sales and 30 percent of operating profit. When you look at the reality, as I said earlier, we can see very strong inquiries from the market. So the production a new technology development, and we are investing to the future growth to achieve the Mitra management plan. So we are now increasing R&D expenses to achieve the target, we say stipulate in the midterm management plan. That affects the operating margin and gross profit margin. But when you look at midterm, long term perspective, rather than the quality based, we are focusing more on the midterm, long term perspective. That's why Current gross profit margin looks a bit lower than the plan, as you pointed out, but we are steadily proceeding with our plan toward midterm management target. So R&D Expenses are expected to increase furthermore. I think that's the Tokyo electrons culture. On the other hand, top line could be increased fathom or at least what you see in the market, but is your impression for the top line? Principal what we think about in the midterm management plan based on the financial model We do have the fixed costs. And when you look at the business expansion, we need to utilize digital transformation to improve efficiency. At the same time, we need to be very active in the RNG investment. So top line improvement by improving top line we try to reduce the fixed cost per sales by which we can improve operating margin So top line need to be increased, but when you look at the market and our RNG activities, We are rather confident to achieve some improvement. Thank you very much for your answer. Thank you very much. Mr. Yamamoto, for your question. Next question is from Mr. Muriyama from JP Morgan Securities, Japan. Thank you very much, Anne Morayama. For 2 years to come, you said we're going to see 2 consecutive big years That's what you said. There is strong comment, but in order for you to pursue further growth, So when you look at the current situation, how do you improve your market share? Do you have any perspective in terms of the growth of your market share, could you share your idea with us, please? Thank you very much. We haven't changed our plan at all. So we are striving very hard to improve our market share It tuned system, film depositing, critical layers, the ALD, coverage, Well, conformity should be improved and also cleaning. And lithography related facilities, EUV lithography related process tools. So the centering on the etching and patterning process, we are going to improve our market share. And we haven't changed our plan. So if that is the case, so itching, LED, cleaning, So these are free course to improve what to drive the market share increase. That's what you said. But when it comes to etching, So three d nand layer stacking. Now from 96 layers, 128 players, maybe next year, 144 layers next year, I think. So from your viewpoint, 3, the non technology. How can I put it? I'm sure the technology getting more and more challenging. But still in order for you to further improve your market share, do you have any, idea for the trend of the 3 d nanotechnology shift? And how do you view that? And How do you plan to increase your market share for that? Would you just this is my follow-up question. Okay. So hack process and hack technology is really critical for us. In other words, the etching So now we have the multiple layers and etching speed, edge speed, well, edge rates should be improved. And also the profile should be precisely controlled speed, I mean, edge rate and high aspect ratio. And also the profile control. So these 3 are really critical for us. So that's where we can have some opportunities to introduce our message share. Thank you very much for your very thorough answer. So one thing I want to add, so your question, so what is the are you asking about current? So currently, 128 layers mass production has started and We are going to improve our share in the next generation from 128 layers after 128 layers. So when you say next, how many layers after 128 It depends actually. So each customer has different road map, so there is no good alignment. Okay. Some customers said 14x or 16x or 19x. So it depends on customer for the number of layers for next generation after 128 layers. Thank you very much. Thank you very much for your question. Next question is from Mr. Nakamura of Goldman Sachs Japan. Thank you very much. I am Nakamura from Goldman Sachs Japan. Thank you very much. Thank you very much. I have a question on China U. S. Trade friction. On Slide 8, you presented the sales by region for China, the cross border, 2nd quarter, you can see some increase in Chinese sales. Does that include the sales pulling forward from the second half of the year? And American manufacturers are not able to export their products so much because of the trade restriction. And does that have any positive impact on your business performance? Or yeah, 2021, you said the WFE market continuously grow. And the China local customers, how do you view the capital investment by the China local manufacturers? The US China trade friction is very critical at present. And for many of our customers, this issue is really critical. We are in the critical situation. I'm very sorry that we are not able to make any specific comment on that friction, tread friction between the 2 nations Last year, 20% of our business comes from China last year, maybe in the future, we maintain the same level, or we may see some increase in the proportion of our China business. However, as you're asking your question, there are several unknown factors or uncertainties. And as I said to Mr. Wagak Keith, So when you look at situation, the ICT is promoted furthermore and we are not pursuing the leading edge. There must be some investment and we must be ready for the future investment. For that purpose, we need to maintain our ability to promote technology innovation all the time, which is most critical for us. In that sense, we are investing a lot to the RNG, and we are accelerating our R and D investment. I'm very sorry. But I cannot give you some direct answer to your question, but this is how I can answer to your question. Thank you very much. One follow-up question. So the China local memory manufacturers, how do you view their investment for the future? Is it also difficult for you, Delta? Sorry, yes, it is difficult for me to answer to that question. Investment, we expect we hope there are some investment Mr. Nakamura, thank you very much for your question. Next question is from Mr. Hiroaka of Mel Lynch, Japan Securities. Thank you very much. I'm Hiroaka from Melend Lynch. My question is similar to the previous question, I'm afraid to say. SBE. You have a plan for SBE Business, and the leading foundry in China I think the your sales to the leading China foundries increases, and I think for the American manufacturers that have negative impact. So the fiscal year ending in March 2021, you may see some negative impact for that customer, but actually you said you have revised your, financial estimates upward So how would you view the increase or decrease of the sales to the China customers? So That's about the capital investment plan for each customer. And when I talk about product mix, that may in, can you say, have you imagined the investment plan of each customer? I'm sorry. I cannot answer to that question. Okay. Then I have different question as a follow-up question. So this time, R and D, you are accelerating and enhancing your R and D. Investment and software investment, development is to be done in this Sapporo, Iva, Miyagi, and Yamanashi, but Sappo is something new. Now you have the software development center. Are there any geographical reason that you selected support for software development? Okay. Thank you for your question. Actually, we do have, we did have saprol software development Office. This is nothing new for us. So including the employment or recruitment, we know the situation in Sao Paulo and in Hokkaido, that are talented software engineers, and we know that. So in the future, But when we use digital transformation, 1 more, 5 nanometer, 3 nanometer, and 2 nanometer, The device shrink was perceived. And as you know, for NAND, more than 200 layers need to be developed So criticality goes up further and further. So our process tool performance need to be improved. And sensing technology should be utilized so that we can change the tacit, knowledge to the explicit knowledge. And We do have domain knowledge. That is our strength, and data, silence, analysis, We do have the ability to analyze the data as well. So customer will ask us come up with much higher technology level, and we need to ask meet the customer's expectation in terms of the technology innovation. We want to improve the environment of the sample office so that we can bless up our ability to develop software. And from the viewpoint of SDGs, especially energy consumption, energy preservation. So customers are, of course, expected to produce the device with low power consumption So in the future, the yield process tool should be improved and also at the time ratios should be improved, which become more very important in the future. So we do have the domain knowledge, and we want to add specialization or ability of science, ability of analysis, then we can de the industry and also we can satisfy our customer service needs. Thank you very much for your answer. Thank you very much. Next question is from Segira of Liva Securities. Mr. Segira, please? I am Sigivra from Daiwa Securities. Thank you very much. So I have a question for competitors. So in China, I think in Japan, the creaming manufacturer is very active in increasing their market share. From your viewpoint, how do you view the competition? There are some risks of more severe, severe competition, not only for cleaning, but also the patterning process. Would you see some changes in terms of the competitive market frustration? All the time, For all applications, we are facing very severe competitions. So not only our company, but also our competitors, working very hard, competing each other. And that competition is good for our industry and good for our customers. That's for our customers. So every competitor is a wonderful company. So Tokyo Electron want to become only 1 or number 1 manufacturer in the industry, and we want to provide the technology customer will need in the future. Proactively so that we can provide our product to the high value added area by leveraging, knowledge. This is how we try to satisfy our customer. For competitions, I'm sure competition will continue all the time in the future. And what is important here. So Regarding commodity devices, we need to reduce the power consumption. We need to increase the speed, storage, and reliability, a new device, new package to be pursued as well. So technology innovation should be promoted continuously and technology innovation as long as technology innovation continues Market expected to grow continuously. So you mentioned to specific manufacturer and we want to compete each with each other in the future as well. I have one follow-up question. As someone said earlier, so 2 to 3 years to come, how would you improve your market share and which area has high probability to increase your market share. In the past, you mentioned to ALE metal filmdeposition gas, chemical, etch, full gate, or around? Are there any area that you may be able to increase your market share. If you have some specific application earlier, could you share that with us, please? As those areas that you mentioned right now, we are steadily Now proceed, visibility is getting higher. In our midterm management plan, on the quarterly basis, we review our progress against midterm management plan, And we look at the top line to check the condition. And when top line increases, we can proceed with our share improvement plan along with increasing the market. Itching, film deposition, gas chemical etching, and cleaning, critical processes, as well as lithography. In those areas, visibility is increasing or improving. Thank you very much. Thank you very much. Are there any other questions from the audience? We have 7 minutes to go. Maybe you can ask second question if you have any. Could you press the raise hand button, or could you give us your question through chat docs? Thank you very much. Have a question from Mr. Yoshida from CI All S. Securities, Japan. Thank you very much. I'm Yoshida. I have one clarification question. So SPE and FPD, In the second half of this year, when I look at your sales plan, net sales plan for each, so 3rd quarter and 4th quarter, what sort of direction do you have Usually, the 4th quarter sales is higher than the 3rd quarter sales. But how do you view the 3rd quarter and 4th quarter? Sales for Fbd and SBE. So may I answer to your question on behalf of IR? Our sales recognition is based on the CST completion setup and testing. And also business unit make commitment on the 6 months basis. So every 6 months, there are some trend of the sales. There is a tendency that sales increases from the third quarter to 4th quarter. There seems to be no more questions. Thank you very much for joining us. This concludes today's financial announcement. You very much for your participation despite your very tight schedule. Thank you very much. Thank you very much.