Earnings Call: Q1 2018

Jul 27, 2017

Thank you very much for joining us today despite your very tight schedule. Now we'd like to start financial announcement of Turkey Elektron. I am Sasagawa from IRA department acting as the moderator for today's session. First of all, let me introduce the attendees from our side. In the middle, we'll help Mr. Tito Tsinay, she's chairman of the board. Next Mr. Toshiaki Kawai, Representative Director, President and CEO. And next, Mr. Tituro Hori, Representative Director, CFO Executive Vice President. Then the first of all, we'd like to ask Mr. Hardy to make a presentation on the consolidated financial summary for the first quarter of this fiscal year. Okay. I would like to make a presentation about the consolidated financial summary for 1st quarter of year ending in March 2018. 1st slide please. On this slide, you can see the highlights. There are 3 highlights as usual. The first highlight on year on year basis, our sales was increased by 1,000,000,000. This represents 60% increase in sales. For the operating income increased by 1,000,000,000 on year on year basis this represents 148% increase. Next, the gross profit margin achieved 40% or more and operating margin exceeded 23%. As you can see, high level of profit margins are maintained. The progress is being made along with the initial plan, and let I will not touch up on the detail FPD settlement. The profitability of FPA settlement declined, but this is just because of the this quarter's figure, But when you look at 4 year profitability, it is expected to improve in line with the plan. So these are the 3 major highlights. Next slide please. Now you can see the financial summary and you can see 5 consecutive quarter's financial summary from the first quarter of last fiscal year. As you can see over here, you can see the first quarter of fiscal 2018, April to June 2017, This net sale was 1,000,000,000 and gross profit was 100000000041.1 percent operating income was 54,700,000,000 dollars, 23.2 percent income before income taxes was 55,100,000,000 net income was JPY 41,200,000,000. On the right hand side, you can see the changes from the previous quarter. Previous quarter means January, March 2017. Now you can see sales and profit declined from the previous quarter. However, when you just because of the comparison is for Q, but when you look at other quarters of fiscal year 2017, net sales and operating income and gross profit are more than the increase than the 3 quarters of the fiscal 2017. Now you can see the financial performance graphical representation as you can see over here the operating margin was 23.2%. So this is how you can see the increase of operating margin. And about the gross profit margin achieved 41.1 percent. So this is comparison between 4Q and 1Q after net sales was declined from 4Q, but still we can achieve 41% gross profit margin. So you can see mild increase in trend in the gross profit margin. As you can see over here. This slide shows segment information. First of all, for SPE, as you can see over here, 29.8 percent, that is the settlement profit margin. However, as you can see over here, when you compare 4Q and 1Q, there is some slight decrease in the corporate level profit margin, but for this segment profit margin, you can see increase just because of the adjustment on consolidation. So there are some fluctuation on quarter 3 summary, but when you look at full year performance or half year performance, you can see good leveled off information on fears. For flat panel display, as I said in the flat highlights, the profit margin has been declined This is again because of the very specific issue for quarterly basis, the product mix, but for time performance or profitability is well maintained as described in the initial plan. Sales by region is shown on this slide. In the previous quarter, January to March and when you compare this last quarter and this quarter, you can see some increase in Korea. On the other hand, you can see decline in Taiwan. So this is comparison on quarter to quarter basis. Next slide please. So this shows the SBE new equipment sales by application. In the previous meeting of finance announcement, we said that we are going to cease the disclosure of the information on orders, instead we try to enhance the contents of information of sales to be disclosed. And this is the enhanced information for the sales for DRAM, the non volatile memory, logic foundry and logic and others. So there are 4 different applications. And you can see the core tree sales by application. This is the new information we are going to disclose from this time and on. As you can see over here, compared with the January March this year, LogicFoundry accounted for 27%. The non volatile memory was comparable figure 27%. But from April to June this year, known blood dial memory accounted for 40%. As I said in the previous slide, The sales in Korea was increased and nonbodai memory sales proportion increase as well. So in Korea, NAND sales was increased in January sorry, April to June compared with January to March and foundry and DRAM in Taiwan was declined. This is what we learned from this graph. Again, this is newly disclosed information. The field solution sales is to be disclosed on the quarterly basis. So this is Field Solution Business. So compared with the previous page, the new equipment sales, Actually, there is no major changes in the quarterly basis for field solution business. In that way, trade solution is rather steady business, there are slight fluctuation from 1 quarter to another, but we have the We had the 1,000,000,000 for the first quarter of this year, previous quarter, over JPY 60,400,000,000, you can see, but slight mild increasing trend. We have the breakdown for FPD and SPE, but FPD sales for this field solution is around 1,000,000,000 plus. Now you can see balance sheet data. For assets, As you can quickly learn from this figure, the cash and cash equivalent compared with the 4th quarter, you can see the increase by 1,000,000,000 sorry, decreased by 1,000,000,000 from 1,000,000,000 to 1,000,000,000 because of the payment of the corporate income tax and dividend. And the accounts receivable remain unchanged, but inventory has increased by 1,000,000,000. So in the announcement of the midterm management plan, Our criteria to recognize cells is based on completion of setup and testing. So we'll 1st recognize these cells after the machine or Precess 2 is set up and testing is completed. That's when we recognize the sales. Because of that criteria for CST, you can see some increase in inventory. On the written side, you can see the liabilities and net assets. There is no nothing source particular for this. We don't have no we don't have any debt and equity ratio is about 70%, a little bit below 70%. Now inventory turnover and accounts receivable turnover. 1st of all, The purple line represents accounts receivable turnover. For this quarter, 57 days And there should be no problem in terms of the accounts receivable turnover. As for inventory turnover, 110 days slightly increased from the previous quarter. Again, as I said earlier, we shipped equipment to the customer sites And some equipment is waiting for installation that inventory increasing. About 30% of our invent about 30% of our inventory is the inventory under transportation or the equipment which are waiting for it installation at customer sites. And those process tools are now increasing. That's the reason why you can see some slight increase of the inventory turnover. There is no major problem in our nature of the business at all. Here you can see the cash flow The free cash flow was 1,000,000,000 for one thing, the cash flow from operating activity includes the payment of corporate income tax. That's the reason why you can see the decline in the free cash flow or cash flow from operating activity. And for you can see 1,000,000,000 in for the free cash flow from financing activities, there are attributed to the payment of the dividend. FY 2016 third quarter, you can see it almost the same cash flow from financing activities back in third quarter of fiscal 2016. There are there was 1,000,000,000, including the dividend and share buyback, but this time, the first quarter of this fiscal year, we have 1,000,000,000 only from the dividend payment. We think the payout ratio of 50% is most appropriate. That's our understanding. Thank you very much. That's all from me. Okay. Next, we have Mr. Kauai. He will be making a presentation of a business environment and financial estimates. Mr. Kawai, please. Once again, good afternoon. I am Kawai. Now I'd like to make a presentation as introduced by Mr. Sargawa, the business environment and financial estimate for this fiscal year. Next slide, please. First of all, when you look at the WFE market outlook, In the other day, when we made an announcement of the new midterm management plan, And as you can see over here, the WFE market will move up to the next phase. As you can see on this slide, you can see future growth drivers. But when I use some different perspectives, 3 eyes, namely: interface, intelligence and infrastructure, those 3 eyes will drive the growth of the future Semiconductor device business. Next slide please. So based on the midterm direction, as I said earlier, now you can see the business environment for this fiscal year. For SPE, we are the WFE CapEx is expected to grow by over 10%. Last time, I said about 10% of increase in WFE CapEx But 3 d NAND investment is rather strong. So now we say over 10% increase in WFE CapEx. Continuously three d NAND will be very strong. For FPD. So this is the demand for TFD ARA process FPD equipment remain unchanged About 30% increase is expected compared with the last year. Again, for FPT, G6 for mobile application, G10.5 and G11 and also OLED TV, G8, EXO or Inkjet Technologies. So those technology innovations are highly expected. Next slide please. So calendar year 2017 market growth and business opportunity by application. For NAND. As I said earlier, in the previous meeting, we set 25% to 30% increase on year on basis. That's what we said in the previous meeting. However, this time, we are going to say 30 percent market growth on year on year basis is expected. The SSD demand is rather strong. And because of the strong SSD demand, our major customer's investment is increasing in its trend, which is very clear trend So we said 30% increase is expected. For NAND bitgrowth, for SSD accounts for 60%. Continuously, SSD for data center is rather strong. And that is one of the major drivers in this field. For DRAM, 5% to 10% increase is expected and logic and foundry the same level of you can see a very promising future as we expected initially. Next slide please. So this is first quarter of fiscal 2018 and business progress is shown on this slide. For the SPE focus area, namely itching, film deposition and cleaning, our business strategy in this field We are very happy to say our business strategy is implemented as planned, especially for EHA, for 3 d NAND sleep process, That is a major one for DRAM and logic as well. We are increasing our share. ALD and cleaning as well we are happy to say that our progress is just in line with the plan. So for all the free focus area, we can expect the increase of G1015 and G11, we are establishing the leading position in those generations. The we are getting the business from the 2nd customer as planned and we are going to achieve high share for FPD equipment as well. One more issue, Miyagi Factory. By 2019, we are going to double our capacity For etching market trend on the midterm or longer basis is rather strong, And now we have the good progress for the share plan. So by 2019, we are going to double capacity in Miyagi Factory. For this, plan, we have several method to be introduced. One of them is building of the construction of the new logistic facility by the end of this year, we are going to complete the construction of new logistic facility. So from early next year, we can start using this new logistic facility. One more issue. We are working together with the suppliers and we are going to double the flow lines. That is 2nd measure, and also we are going to reduce stack time. So these are the measures to achieve the target to double the capacity by 2019 in manufacturing Now you can see the financial estimate for fiscal 2018. This is just as planned there is no change from our announcement made on April 28, 2017. You can see the information on detail. We are going to achieve record high profit for 2nd consecutive year. Next slide, please. For R and D expense, since CapEx plan, again, there is no change. So Alan expects its 94 1,000,000,000, CapEx 42,000,000,000 and depreciation of 1,000,000,000. So as I said in the midterm management plan announcement, maybe you can see 100 to 1 1,000,000,000 of R and D expenses for the future. So our growth strategy is driven by the technology and innovation and market expansion. So we are going to focus our effort in those area where we can see some technology innovation and market expansion, we have reorganized the business units for WET film deposition, etching, and flat panel and testing and field solution. So we are focusing on those areas. So we have the policy to develop competitive next generation products So R and D expenses, we tried to spend money for the basic technology development and higher Functionality of jumpers and next generation platform process 2 intelligence introductions. So these are the area we are going to focus on. Next slide please. Now you can see the dividend forecast Again, there are no changes from our announcement made on the April 28 2017. Based on the financial estimate, we are going to expect raised dividend per share more than 40% on year on year basis. And we can see the record high dividend on 4th consecutive year in this fiscal year. Thank you very much. Thank you very much for your kind attention. Now we'd like to entertain questions from the floor. If you have any questions, could you raise your hand and identify yourself by your name and affiliation, please? And today there are so many people who attending today's session. So could you link your question 1 and one more follow-up question only? Now are there any questions from the floor? Yes, the gentleman in the front row, please? Thank you very much. I'm more directly from Nomura Securities. It was very perfect business performance. I'm very much impressed with that. This fiscal year, there should be no problems, I want to understand the outlook of next fiscal year, flash should be okay So now there are some Taiwan major companies which has the rather redundant demand or MPU manufacturer foods are suffering from the PC business and DRAM Manufacturers suffering from the spot price reduction. Do you have any outlook for NICS fiscal year for those areas? In one word, next year, there should be no problem according to my understanding. It is true that For high end smartphone, business timing has been shifted a little bit But this is just a temporary timing adjustment, and there should be no problem in terms of their investment plan, so they are expected to grow as planned. So there should be no problem. What about MPU and DRAM? I understand TSMC has no problem, but what about MPU and DRAM? Everything are in line with the plan and we are having very positive outlook for everything. Thank you very much. FPD businesses rather in solid situation. Any other questions? Yes, the gentleman, the 2nd rule, please. Thank you very much. I am Ogawa from Goldman Sachs, Japan. I have a question on page 18. I have a question about share for hedging system. Clearly to 2017, hedging system share is increasing. That's what you said clearly earlier, according to my understanding in the past, so your performance was rather difficult when the logic investment was rather flat and NAND investment rather increasing, but now this time you said you are looking at increasing trend share for hedging machine. Could you give us more data information, DRAM, NAND and logic? How do you increase your share in those three areas? There any additional comments on those issues? For DRAM, we are That is for the patterning application in Korea for NAND flash memory, specifically 3 d NAND, as I said in my presentation, the slit is where we are gaining market share. So those 2 are making great contributions. For NAND in the previous meeting, You said the QX layer is a kind of barrier, but also for 6X layers, you are also increasing the share. Is that correct understanding? Yes, even for the existing generation, we are increasing our share. Yes, the gentleman in different law, please. Thank you very much. I am Mishin of Lamatoka, Aytor Research Center. Thank you very much. So the SML of the Nederland Million Financial Announcement according to SML, EUV orders and order backlog are growing rapidly. That's what they said. So your company's quota developer, you do have the high share in that area. So I have a question for EUV. What sort of schedule is expected for uvlicography. So the orders are announced, therefore, it's difficult for you to answer to my but that was that is my first question. Could you answer to my question, please? As I said earlier, reported earlier, for EUV, our share is very, very high growing rapidly. Therefore, Our schedule is almost synchronized with the SNLs plan. This is how we can recognize ourselves. That's our current plan For sales recognition timing, in our case, we use the completion of setup and testing that is our criteria. Therefore, there might be some slight difference in the timing of sales recognition between our company and SMM. However, the basic, can you say timing should be synchronized between 2 companies. According to SMS data, they said EUV is very expensive 1,000,000,000. Your quota developed compared with the conventional one, the or your quota developer EUV and Sography has some additional value. How much added value do you have for the EUV quota developer? I'm sorry I cannot give you any specific values. However, defect control and productivity enhancement. So we are making many business technology innovation from the quota side. And we are working on development to come up with better defect control and productivity. So from the end, that productivity enhancement on quarter side feature very, very high value added. So we have a lot of promising outlook for the future. 2nd question from my side. For NAND, you said earlier in your presentation, the the sales sorry, market's growth expectation is improved in your forecast. Japanese companies and Korean companies, however, are struggling for the 6x7 next layer. And in other words, they are yield. Is that so good? Once specific company is doing very well, I heard But when you look at the existing market, the 48 layer generation should remain area and every manufacturer are working very hard on the 6x7x area, but they are struggling. But because of the certain itching system is not provided as much as necessary. So do you have any comments on that? There are some shortage in the certain hedging machine is cracked. So we are not able to make any comments on the customer's yield information. But when it comes to the number of layers stacked and yield, rather than those two factors actually market itself is growing very rapidly. In other words, 3 d NAND demand is infinitely increasing. So because of that, the SPE vendors and IC vendors are having very good or strong outlook for the business opportunities because of the very strong demand of 3 d NAND. Thank you very much. So on page 18, itching machine capacity is to be doubled. That's what you said in your presentation, at present. Example, one, equipment have several chambers and are going to increase the number of chambers for each system or value added equipment is increasing and you are just increasing the number of the equipment to be launched? Or do you have the same number of jumper per tool but increasing the number of tools? Reduction. So how do you describe the increase in capacity of etching on page 18? In principle, number of layered stock is increasing, an aspect ratio is getting more and more challenging. At the same time, we need to improve hedging profile as well. So customer side, they may have 2 step edging or they are going to increase the number of players but have the one shot itching process. So there are 2 different approaches and they are discussing the possibility of the potential technologies for those future generation. But all customer's conditions and device structures are to be considered. So all those elements are considered when we decide to double our production capacity. So our value added, in particular for three d NAND, there is very strong demand from the market. In the area, we need to achieve high age rate and improved age profile. At the same time. So we need to work on those two areas. That's how we can enhance our value added. So the number of jumpers per tool now we have the number of layers that this increase and some companies that try to step itching or one step itching, but according viewer system, you just see the number of chambers per tool doesn't change so much but the number of 2 production is to be increased. That's your assumption. Yes, that's correct. So generation and customers structure the number of layers increasing. And as I said earlier, QX and next generation, in some cases, customer may think about 200 layers as a potential future. So for those area, We are going to focus on each rate so that we can improve or increase our value added. So the gentleman next to the previous gentleman, please. Thank you very much for your presentation. I am Miyamoto from Mitsubishi, FHA, Morgan Stanley Securities. I have a question for DRAM. So market outlook 5% to 10% increase as planned, but Askei Hynix and Samsung. So inquiries or from DRAM is increasing. So they are not able to catch up with the increasing inquiries for DRAM in their production. But from your viewpoint, DRAM inquiry is increasing is that how you understand the market situation and yet 28 team toward the year 2018, what sort of opportunities do you see for the DRAM? It's just flat or up plus 10 or plus 20 much increase can you It is true that for DRAM, again, we the market situation is very positive and strong. However, when I look at all the figures announced so far, of course, needless that we are aware of all those information announced and we have incorporated that information in our estimate as well. But having said that, even if we include those issues, but still the Wyoming query is further increasing, So timing of delivery is another issue to be considered. So for market forecast, the second half of this year and next year and all, we are now working on the investigation to come up with more data information. So short time term basis for DRAM, you can see positive increase. Is that how you understand the market situation? Yes, we are now working on investigation, but yes, we understand the positive for the DRAM market for the future. Next question please. Yes, the gentleman on the 3rd row, please. Thank you very much for your presentation. I'm Yoshita from Deutsche Securities. I have some follow-up question of the previous question. Next year, WFE increase is expected, but DRAM is also expected to increase, but what about others? Do you have any outlook for other application? I want to get some information by application please. Rather than by application at present, as we announced in our midterm management plan. So for 2020 or 2019, JPY 45,000,000,000 is the figure we announced. In the lowest scenario, still 1000000000 is a figure we announced for the future. I mean, those are circumstances. We're going to see what happens in next year and on. So that's how we see the future trend. So at present, Are there any application whose prospect is rather negative? Next year 2018, there is no application which is expected to decrease. That means all applications are expected to grow or just remain Yes, that's correct. Another question for DRAM, it's a positive increase in NAND foundry logic there are flat or positive growth for memory, just like the DRAM, discussed earlier, memory, including 3 d NAND, those are expected to grow considerably. For logic and for foundry, Again, steady increase is expected for the future. As for the order, 3 d NAND is number 1 followed by DRAM. Thank you very much. For this year, WFE increasing market size for 3 d NAND is a kind of driver for the market outlook increase. At each I see vendor do have the have devised their bit gross focused lower, but they tried to increase the weather output that's why they are investing large amount of money, which they try to increase yield and that's the reason why capital intensity is increasing So if a number of efforts increased, all capital intensity intensity is a major factor. According to my feeling, rather than the investment to improve the yield, they are trying to meet the increasing demands. That's the reason why they are increasing their investment. Thank you very much. Are there any questions? I have additional comments on the previous question. So they are trying to address the increasing demand, and they have decided investment to meet the demands. That's what I said earlier. One of the reason for that is actually we heard the customer plan from early stage and actually current status really means the initial customer's plan, actually enhancement of Yield is a kind of sudden need for the IC vendors. However, our customer's plan is really matched with the current status. So that's the reason why. The gentleman in the front office I am Utsumi from Tetsuvana Securities. Fund out. I have a question about fund out package, next generation technology and innovation. I think that has a big impacts. When you look at the outlook of the market, or electrochemical deposition for your company, what sort of impact do you see or expect for those new technologies? As you said, found out with a level package and 3 d stacked ICs So these are the part of the various technology innovation approaches And also we the semiconductor industry is to be driven by this kind of innovation as well. So short time basis for TEL testing system Encosa developer, the our system has been adapted by customers, So we have a lot of expectation for the business opportunities and we think this is promising market as well. Any other questions from the floor? Yes, the gentleman in the front row, please. Sorry. Again, I am Mishino from Tokai Tokyo Research Center. I have a question for FPD. I want to learn something from you. For G10.5. Business is now increasing. On the other hand, the OLED investment boom is coming back once again in China as well, the significant investment is about to start That's the current market situation. So your business opportunities are supposed to be increasing But how do you understand your business opportunity for G10.5 and G6 for OLED? How do you see your business opportunities in those areas? The first of all, for G10.5 and G11, For the first customer, we are very happy to say that we have delivered good results. For second customer, Delivery is not yet completed, but as planned, we are maintaining our business with high share, thus the current status. So for the front investment and we are going to see more investment, but now we have the upfront investment. We have established our position and we need to establish good technology. In that sense, we have some advantageous position. 4g6 substrate, in particular for itching system, We have PICB Hching system. And this PICP feature low power consumption for high density plasma to come up with high etching uniformity and we can reduce damages. So these are the benefits we can enjoy from CPICP. So after the release of PICP, all the customers have adapted this PICPHing system. And we will see the very, very big business opportunities for that particular product for OLED, the etching for OLED application is our system has been adopted, especially for OLED TV, IXO Technology, as I said in my presentation earlier, IXO Technology and also Inkcheck. Technology. The customers are now investigating those technologies, but we think that is promising area, one of the premise promising areas for large sized TV compared with the conventional system, with that using color felt, they can come up with low power consumption, also the resolutions of the screen is really high, which is very good, and low power consumption. We can have good solution for that. So we can see the good business opportunities as well. You talked about the inkjet technology. Have you what have the progress of progress of development, have you achieved about 90% of the development completion or are you still in this 60% of the completion of development. What is the progress of development for the adaption in the high volume manufacturing line, some verification is now being carried out so that we can establish the process And we are getting very good, promising data coming out from the verification of the technology. So maybe 70% or 80% of the completion of development so far. The remaining issues is timing of the start of high volume Manufacturing, also the degree of expansion of market, both scale and our customers are now observing market to see the opportunity of business. And we already tried to be ready for the start of mass production when the market is getting matured. The last question, you talked about EUV earlier, Korean company for foundry and DRAM the Korean company is going to install EUV for both foundry and DRAM the Dutch company made such kind of announcement as well, but for process, the DRAM foundry, I think they use UV lithography in different way, And what do you see this situation? And what is the market expansion for EUV? Do you think the foundry is a major driver for EUV technology and DRAM doesn't adopt so much EUV. Do you see some direct for the adoption of UV visa lithography tools, the major one is called the developer area, and our share on market is one of the approach we need to take and we have 3 focus areas in products. And also for customers, we are providing this single one and only strategic solution. For memory and for EUV, memory logic and foundry. For those three area, we are ready to take care of the three areas. So that is our responsibility for the market, especially excuse me. So do you mean you have each individual system for each application or do we have the one single platform to take care of 3 of them, memory logic and foundry? What is the correct understanding. So of course, for the customers, the equipment model itself will not be multiple. We have the 1 series process tool to take care of different products, but memory function or function necessary for logic or of course, customization requirement for customer need to be met. At the same time, the uptime ratio, production, productivity enhancement, and defect control. These are the area we can increase the area of edit. So this is how we try to approach the development of the quota developer for EUV. But in the case of logic, number of stack layer is more than memory. So you are happy more happier when you can sell your products to logic and foundry. In the case of DRAM out of 40 as maybe 5 to 10 masks that to be replaced for EUV for foundry out of 60 masks maybe 10 to 20 masks that to be replaced by the irbit geography. So out of 3 must be logic and foundry, whether the memory should be growing to take care of the EUV, riskigraphy, is that correct understanding? It might be true as far as I understand, I can say that even for DRAM the quiet technology innovation is necessary, even for the DRAM as well. So we do not just specifically focus on logic. I think both for logic and memory, we can do have the big expectations. Good expectations. Thank you very much. Any other questions? We do have some more time. No more questions. Okay, okay, there is some announcement. Today, our company announced the personal transfer relating to IOR activities, me, myself, as of October 1st, I'm transferred to the accounting department as vice president. Ever since 2010, I have been supported by all of you, and that's the reason why I can be acting as working in the IR department, especially through the discussion about corporate value, I learned a lot and become a big asset, my personal asset, really appreciate your long standing support. Thank you very much. Thank you so much. My successor is Mr. Hirayama of IR Apartment really appreciate your continued support to him as well. Thank you very much. Thank you very much. This concludes today's financial announcement. Thank you very much for joining us today.