Tokyo Electron Limited (8035) Earnings Call Transcript

It's time for us to start Tokyo Electron Finance announcement for the first quarter of fiscal year ending March 2027. Thank you very much for joining us today despite your busy schedule. I am Yatsuda of IR Department, serving as the moderator of today's session. I'd like to introduce today's attendees. Toshiki Kawai, Representative Director, President and CEO; Hiroshi Kawamoto, Senior Vice President, General Manager, CFO, Division Officer of Finance Division. First of all, Kawai will present the status related to the earthquake, which occurred in Kumamoto around 4:27 p.m. on July 28 and the impact of subsequent aftershocks.

Once again, this is Kawai. I would like to express my deepest sympathy to the people affected by the earthquake, which occurred with epicenter at Kumamoto region in Kumamoto Prefecture, and I sincerely pray for earliest possible restoration of the affected area. Our company has development and manufacturing sites of coater/developer, cleaning system and bonding system in Koshi City, Kumamoto Prefecture. Yesterday, on July 29, we closed the sites and assessed their status. And we have confirmed all employees in Kumamoto, including temporary and contract workers are safe. Some of the employees' family members got injured. But fortunately, we have confirmed they are not in serious condition. For manufacturing facilities and equipment, we identified water leakage in some locations, but there has been no damage identified to the buildings. Our partner companies manufacturing our equipment, 2 companies located close to the epicenter are temporarily suspending their operations to adjust machinery equipment, but the other partner companies have already resumed their operation. For suppliers, so far, serious damage has not been identified. We need to be prepared for aftershocks. But as of today, we believe we can return back to full operation early next week and impacts on our business performance are minor. Our product manufactured outside Kumamoto, including etch system, deposition systems and probers as well as the relevant suppliers are not affected. This is current status related to Kumamoto earthquake. We will keep paying close attention to safety and strive for early restoration.

Now we will move on to the presentations on first quarter of the fiscal year ending March 2027. Before starting the presentations, let me explain the flow of today's session. First of all, Kawamoto and Kawai will make presentations. After that, until 6:30 p.m. Japan time, we will have question-and-answer session where we will entertain questions from the audience. This meeting uses 2 channels of WebEx for simultaneous interpretation between Japanese and English. As we explained in our e-mail, you are kindly requested to use apps on PCs or mobile terminals if you wish to ask questions. But if you are not going to ask questions, you can use your telephones. Since this conference is intended for institutional investors and analysts, we would appreciate your understanding that we receive questions only from institutional investors and analysts as usual. We will post the audio contents of this conference in Japanese and English on our website within a couple of days. It will be appreciated if you could also visit our website. Now Mr. Kawamoto will present the consolidated financial summary. Kawamoto-san, please.

Good afternoon. I am Kawamoto of Finance Division. I'd like to present the consolidated financial summary of the first quarter of fiscal year ending March 2027. This slide shows quarterly financial summary. I will mainly refer to the figures in the blue box. In the first quarter, we generated net sales of JPY 732.3 billion, 2.9% increase quarter-over-quarter, reflecting our customers' positive attitude toward investment. Accordingly, gross profit was JPY 342.7 billion, 2.9% rise from the previous quarter. Both net sales and gross profit hit record high. Gross profit margin was 46.8%, remaining flat from the previous quarter. Operating income was JPY 211.4 billion, increasing by 2.8% sequentially. Operating profit margin was 28.9%, almost unchanged from the previous quarter. Net income attributable to owners of the parent dropped by 23.3% from the previous quarter to JPY 164.3 billion. This is because in the previous quarter, extraordinary income by selling strategic shareholdings was included. This is a graphic representation of the financial summary shown on the previous page on the chronological basis for your reference. This slide shows net sales by region. Sales in Taiwan increased by 18.9% sequentially and its proportion went up to 25.4%. Proportion to sales in China on the bottom was 30.4%, 3.6-percentage point increase quarter-over-quarter. On fiscal 2027 full year basis, proportion of sales in China is expected to be the low 30s percent level. This shows SPE new equipment sales by application. In the first quarter, from the top of this chart, sales to DRAM customers accounted for 32%, non-volatile memory customer accounted for 11% and non-memory accounted for 57%. SEP (sic) [ SPE ] new equipment sales were strong, just as in the previous quarter. In particular, sales to non-volatile memory customers increased by 32% quarter-over-quarter. This slide shows the Field Solutions sales. In the first quarter, Field Solutions sales increased by 15.5% sequentially to JPY 188.0 billion. Customers' fab utilization remains at the high level and parts and service sales grew by 13.7% from the previous quarter. Used equipment and modifications, including modifications from productivity enhancement showed particularly high growth rate of 20.5% from the previous quarter. This shows the balance sheet. Total assets were JPY 2.9554 trillion. Cash and cash equivalents were JPY 409.6 billion, decreasing by JPY 96.6 billion from the previous quarter, mainly due to dividend payment to our shareholders and tax payment. Notes and accounts receivables were JPY 544.0 billion, increasing by JPY 18.1 billion quarter-over-quarter. Inventories were JPY 751.5 billion, increasing by JPY 38.4 billion from the previous quarter. Although inventories increased slightly, inventory turnover showed improvement. Tangible assets were JPY 610.3 billion, increasing by JPY 21.0 billion from the previous quarter. For liabilities and net assets shown on the right-hand side, liabilities were JPY 812.5 billion, increasing by JPY 21.5 billion quarter-over-quarter. Net assets were JPY 2.1429 trillion, rising by JPY 72.9 billion sequentially. This slide shows the cash flow. Cash inflow from operating activities in the first quarter was JPY 118.7 billion. The cash outflow from investing activities was JPY 38.1 billion. The cash outflow from financing activities was JPY 117.4 billion, primarily due to dividend payment. Free cash flow was plus JPY 80.5 billion. This concludes my presentation. Thank you very much.

Now Kawai will give you the presentation on business environment and financial estimates. Kawai-san, please.

Once again, this is Kawai. I will present Business Environment and Financial Estimates. Let me start with business environment. WFE market outlook has been updated from April projection to $150 billion or more in CY2026 and $190 billion or more in calendar 2027. In both years, we expect 20% or more year-over-year growth. As shown in the diagram, sales for AI data center applications drive the WFE market. In 5 years from calendar 2023, which is inaugural year of AI through calendar 2027, sales to AI data center are expected to grow by 5x or more. AI data centers need a broad range of devices, not only GPU and HBM, but also DDR, CPU and 3D NAND and investment plans for advanced devices are accelerating. This slide shows AI evolution and semiconductor technology trend. AI is evolving from current generative AI to full-fledged implementation of agentic AI and physical AI. For CPU and GPU, device scaling keeps going further from current mainstream node of 3-nanometer, while backside PDN will be adopted to enhance power efficiency. DRAM is evolving from 1c node to 1d node. For HBM, the number of stacked DRAMs will increase from 12 to 16. NAND will be evolving to 300 layers and further to 400 layers. These drastic technology innovations will be realized just within 2 years to come. Conventionally, the fab space limitation was regarded as a bottleneck. To overcome this challenge, quite a few large-scale fabs to manufacture leading-edge semiconductors are now being constructed. This slide shows our midterm management plan that we produced back in 2022. We are working to achieve the goals for net sales of JPY 3 trillion or more, operating profit margin of 35% or more and ROE of 30% or more by the end of this fiscal year. For net sales, our outlook for the first half of this fiscal year exceed JPY 1.6 trillion, and we received stronger inquiries from the second half. We are getting more confident to achieve JPY 3 trillion or more. Also for ROE, we can expect 30% or more because of net income increase and capital efficiency improvement. Meanwhile, our business environment is changing more significantly than before. Export control triggered by U.S.-China trade conflict, tariffs, geopolitical impacts such as Middle East conflicts and prolonged Russia-Ukraine war, global-spread inflation and exchange rate fluctuation and changes in customers' investment plans. These emerging developments were not expected when we set up the midterm management plan. These changes in our business environment makes it challenging to achieve the goal of operating profit margin. For operating income, however, we are getting closer to achieve JPY 1 trillion through our steady ongoing efforts. In order to achieve the goals of midterm management plan and pursue higher level, it's critical to explore and enhance our earning power and cope with changes in the market appropriately. We will launch high value-added new models and upgrades in a timely manner. At the same time, we will enhance services by leveraging AI and robotics so that we can contribute to the improvement of yield and equipment uptime ratio in our customers' fabs. Epsira that we announced in December 2025 is our digital infrastructure to raise field productivity. As we announced expansion of collaboration with NVIDIA this month, we are going to promote development of solutions for agent AI and robotics. As there are many plans for construction of large-scale fabs in order to address scarcity of resources, it becomes critical to improve efficiency and reduce time of equipment start-up activities. We are exploring ways to further speed up equipment start-up activities even from the equipment design phase, including introduction of automation. In addition, we will optimize pricing to address soaring costs triggered by recent reinflation. By working on these initiatives, we strive to drastically improve profit margin and aim to achieve gross profit margin of 50% or more within around 2 years to come. This slide shows our progress and business opportunities identified through the initiatives I described. Let me start with business progress in fiscal 2027, this fiscal year. As presented in the previous financial announcement, coater/developer, etching system and advanced packaging are driving our sales growth in this fiscal year. For coater/developer, our new product, LITHIUS Pro DICE has been successfully adopted by customers, and we won PORs in multiple processes in advanced logic and DRAM. The full year sales of etch system of JPY 1 trillion are coming within our reach. Regarding hard etch for advanced DRAM, we are moving ahead steadily to win PORs of new models. For advanced packaging, prober sales show an outstanding growth and full year sales are likely to go significantly beyond JPY 100 billion. Evaluation of new model equipped with more sophisticated heat absorption technology is progressing well. Next, I will talk about future business opportunities. These highlights include what I presented in previous financial announcements. For etch system, cryogenic etch system for NAND with 400 layers will start to be deployed in customers' mass production line from calendar 2027. We have won POR for our new low-resistance metal deposition system, which is expected to make contribution to our sales in new application area. For bonder/laser-related system, we have both leading-edge front-end process technologies and bonding technology internally, we will contribute to address challenges in critical bonding process of various devices. With regard to etch system from DRAM interconnect process, which we are strong, along with rapid increase of DRAM investment, our 5-year cumulative sales to fiscal 2030 are getting closer to JPY 1 trillion, significantly exceeding our original guidance of JPY 500 billion. We launched Prexa SDP device prober for advanced logic in April. We are going to fulfill high level of customer expectations in advancing test processes. Next, I will present the financial estimates. With the backdrop of strong demand for AI servers, currently, we are receiving pull-in requests for delivery and additional orders from our customers. Reflecting our financial results of the first quarter and recent market dynamics, we have made upward revision to the financial estimate for the first half of this fiscal year. We expect net sales of JPY 1.62 trillion, gross profit of JPY 748 billion and operating income of JPY 458 billion and all of which are our half year record. For the second half of fiscal 2027, we expect another wave of acceleration in demand growth. Shipment will increase furthermore, especially for memory and advanced logic applications, and we expect powerful growth of momentum, stronger than that in the first half of this fiscal year. For impacts of geopolitical context such as Middle East situation and supply chain status, there are not any issues to be noted at present, but we will closely monitor the situation and take appropriate actions. This slide shows fiscal 2027 SPE new equipment sales forecast. New equipment sales in the first half of fiscal year are expected to grow by 45% year-over-year to JPY 1.24 trillion. The breakdown by application is shown on the slide. Driven by AI server demand, sales of our system for high-end devices are expected to increase. The new equipment sales in the second quarter are expected to hit quarterly record, topping JPY 700 billion. This slide shows our plan for R&D expenses and CapEx. There are no changes here. In fiscal 2027, we plan full year R&D expenses of JPY 330 billion. We will actively promote R&D to enhance foundation of technology competitive edge and support semiconductor technological innovation. For CapEx, we plan to spend JPY 190 billion on a full year basis. CapEx is mainly composed of acquisition machines for the development buildings whose construction was completed in previous fiscal year as well as construction of new Miyagi Innovative Production Center to be completed next summer as a smart fab. We will utilize robust infrastructure shown on this slide, capitalize on future business opportunities to maximize our corporate value. Next, I will present the dividend forecast. Following the upward revision of fiscal 2027 first half financial estimate, FY 2027 interim dividend is expected to be JPY 384 per share. This is also expected to be record high. The share repurchase is proceeding as shown here, in line with the program of up to JPY 150 billion decided in the Board of Directors meeting on May 29, 2026. We will conduct appropriate balance sheet management. As for stock split, we announced together with share repurchase, we will split each share of common stock into 5 shares with record date of September 30, 2026. By lowering minimum investment, we will make our shares more affordable for investors to expand the investor base. Finally, I will present the new management structure commencing July 1, 2026. Towards sustainable growth and corporate value enhancement of Tokyo Electron, we have established the structure to ensure to promote our growth strategy. The 7 corporate officers shown here are going to swiftly work on business management as the top executive team. We have newly established COO to power up both of the 2 wheels, namely strategy development and its implementation. CEO is responsible developing midterm management plan and further ahead growth strategies, raising corporate value, while COO is responsible for overseeing business operations and execution based on the strategies to ensure the implementation. In addition, we will clearly define person in charge of execution of each function business domain such as CFO in charge of finance to enhance velocity and effectiveness of management execution. I would deeply appreciate your continued support. This concludes my presentation. Thank you very much for your kind attention.

We will have question and answer session until 6:30 Japan time. [Operator Instructions] So first question is Yoshida-san from CLSA Securities.

On Slide 12, I would like to ask a question regarding WFE market. So outlook this year and next year, so $150 billion or more, $190 billion or more. When you look at the growth rate, if you have any figure for growth rate, I'd like to see that. And on the base of fiscal year, what sort of concept, Slide 17, you can see drastic growth towards the second half of this fiscal year, but towards second year from the first half of this year, what sort of plan do you have? So I want to get some comments for calendar year basis and also fiscal year basis.

First of all, regarding the proportion by application, breakdown by application, that's what you asked. So last year, proportion was 65% for logic, foundry and memory was 35%. This year, memory growth is rather drastic. Therefore, logic accounts for 60% and memory accounts for about 40%. That's the current status this year. So for 3 months, so the difference between fiscal and calendar year, there is no highlights. So the agentic AI inquiries is really strong. Agentic AI is a driver and HBM, NAND, not only GPU, but also CPU applications are now spreading. So by and large, agentic AI is driving the overall WFE market. Therefore, leading edge area is driving WFE market.

For memory, so could you give us some proportion between DRAM and NAND? And if you have any difference in composition this year and next year, could you let us know about the difference?

So $150 billion or more for this year. That's what I said. For DRAM, low $40 billion range. NAND, low to mid-$10 billion range; logic and foundry, mid-$80 billion range and factory automation and wafer-level packaging, about $10 billion. So this is the composition of $150 billion. So memory and logic/foundry composition -- so year-on-year growth rate is for DRAM, plus 30% or more. And NAND is plus 40% or more. Logic/foundry, plus 15% or more. So that's the breakdown for growth rate. CY '26 and '27, about 20% growth is expected from '26 to '27. But -- so there is no major change in proportion among different applications.

Next question is Shikanai-san from JPMorgan.

I want to understand the price issue. So could you give us some update of the past 3 months? So from second half of this year, can you see some contribution and demand is rather strong. So the gross profit margin of 50%, is it possible for you to achieve that target a bit earlier than expected? That's what I think. So could you share your idea with us, please?

For the price revision, we are very thorough, especially we are explaining to the customer about the impact of inflation very thoroughly. And so we need to enhance the capacity further more from the max capacity because of the demand increase. And we are getting support from supplier and resources, and we need to have some investment cost as well. So that's what we are explaining to our customers and pricing negotiation should reflect the current market status and little by little, customers are giving us -- the customers are understanding the importance of those factors. So maybe effects can be seen in the second half of this year, mainly in the fourth quarter of this fiscal year. I think we can see the considerable impact in the fourth quarter of this fiscal year. As for the gross profit margin, I said 50% or more. About your question, yes, what you say is almost correct. Early stage of next fiscal year, I think we can achieve the level of our target.

One follow-up question. About the price revision. So apple-to-apple, do you also proceeding with price revision as well?

The price revision or pass on costs to the price along with inflation for the existing models. Yes, we are giving very thorough explanations to the customers. And the customers are recognizing the needs of the price optimization little by little.

Next question is from Mr. Wadaki from SBI Securities.

This is Wadaki. Regarding WFE outlook, so you are rather bearish. So you said earlier, first half, the new -- plus 40% for the new equipment sales, I think that's close to my understanding. So WFE market is rather conservative. Because of the -- you cannot catch up with the demand or second half of this fiscal year, maybe if you say something true, we will be surprised. I think at present WFE market is getting much stronger. What is your take on this?

So $150 billion or more, that's what I said because there is a sufficient growth potential in the market. When you look at global situation, this is global WFE market outlook that I said earlier. So whether the capacity can catch up with the demand, when you think about maybe $150 billion or more should be the appropriate way to express the outlook of the WFE market. Next year, $190 billion or more, so at least $190 billion in calendar 2027. That's how we view the market trend. I understand the consensus among analysts, which is $200 billion and we don't have any disagreement about that. However, but there are the distribution or capacity, not only our company, but when you look at WFE on the global basis, this $150 billion or more for this year and $190 billion or more, I think this is rather appropriate outlook of the WFE market.

One follow-up question. Now China is accelerating the market furthermore, you can see the upward revision in the Chinese market. How do you think about?

Yes, that's possible. Thank you very much, I learned a lot from you.

Next question is from Shibano-san from Citigroup Global Markets Japan.

I am Shibano from Citigroup Global Market Japan. I have a question regarding capacity. Kawai-san said $150 billion or more or $190 billion or more, you understand the analyst does have much higher outlook for WFE market, and you recognize that. For example, 2027, you said rather than $190 billion or more, close to $250 billion over 2028, close to $300 billion. If that is required by the market. So maybe 2 years from now or 3 years from now, if the chip maker gives the appropriate forecast, so do you think it's possible for Tokyo Electron to address that kind of demand increase for the future?

So market is getting very, very strong, not only demand, as we said in our presentation, the logic -- so 3-nanometer is mainstream, but the logic node will shift to 2-nanometer node as well. And 3D NAND, 300 layers to 400 layers as well. DDR, 1c node to 1d node transition will taking place -- will be taking place. Agentic AI is now driving the demand for CPU for higher computing capability. Looking further ahead, high-performance computing will come and current bit computing, neuron and quantum computing. All those things will be supported by communication, higher-speed communication. So those things will be happening within 10 years to come. So the rapid acceleration will take place. In our company, 2 years, about 2 years road map or investment plan from customers, we do have some consensus with customers where customer gives us some information based on our partnership with our customers so that we can share 2-year investment plan together, and we do try to secure the capability to address or fulfill the customers' demand by looking at this kind of customer plan. So within Japan, we do have the supply chain cluster that's our strength. And 2 years -- ever since 2 years ago, we have been steadily preparing for the capacity enhancement based on the long-term investment plan or forecast. In 5 years and 10 years from now, a very strong growth is expected. As you said, the very rapid growth is expected. On the other hand, we must be very careful. So hyperscaler, for example, are now investing large amount of money in cash flow and also energy balance need to be considered as well. So if you ask us, we can -- we do have the capacity to the large numbers of the outlook. But within 2-year forecast, we are trying to get closer to the customers' demand. So we try to have high responsive capability. That's our strength so that we can fulfill the demand of the customers. And we talked about long-term issue, high-performance computing, the semiconductor growth, and we need to enhance the capacity for that purpose. As I said in my presentation, in particular, in Miyagi, we are now constructing smart fab. The labor productivity should be enhanced. And our employees' work life balance should be improved as well. So cost reduction and work-life balance enhancement, all those things are pursued at the same time.

If possible, Miyagi new production building before it becomes in operation, how much can you provide the equipment for WFE base? When the new production building is completed? Even you can -- what is the ultimate goal or capacity you can achieve? Do you have any figure that we can use as a benchmark?

Ultimately, the timing is to be put forward. Furthermore, in Miyagi, we have the innovative production center. If it's become operation, our capacity can be increased by 3x. The speed, we thought we have much -- a bit longer time span 2030 or later, but we need to accelerate our capacity expansion to address the rapid market growth. But you said 3x more capacity. We do have method already established. Therefore, to meet market demand increase, we need to accelerate the timing to achieve 3x more capacity.

Next question is from Shimamoto-san of Okasan Securities. Shimamoto-san, please.

I am Shimamoto from Okasan Securities. I have a question regarding optimization of pricing. You said there are some impacts or effects from fourth quarter. But what's the percentage of increase in pricing from the conventional current price? So TEL, the Tokyo Electron is very competitive. And your competitive edge is very, very high. Whereas suppliers' costs have been increased by 10%. If that is the case, price optimization by 20% or 30% might be achievable. Could you share your idea with us, please?