TOKYO ELECTRON LIMITED

IR

Q4 FY2020 Earnings Release Conference Q&A

TEL was able to meet its financial estimates, despite competitors failing to meet theirs due to the impact of COVID-19. I would like to know what factors led to this, and whether there might be a similar impact on TEL’s performance in the future?

The city-wide lockdown in the Wuhan region actually did impact our FPD business. However, in other regions facing restrictions, we were able to install equipment ahead of time by using local and expat employees, allowing us to meet our financial estimates.

With competitors’ production, shipping and installation of equipment restricted due to COVID-19, is it possible that TEL’s sales will fall behind even if you are able to produce and ship equipment as scheduled?

Our customers are working closely with leading SPE manufacturers to ensure their investment plans move forward as scheduled to meet semiconductor demand. In addition, the semiconductor industry is classified as an essential business in the United States. Although they may fall behind by around one quarter, at present we do not consider that there will be a significant impact.

As of the end of FY2020, what was the volume of equipment that could not be installed and sold due to COVID-19? Also, how do you keep the business running while travel and meetings are restricted?

Note that the volume of equipment unable to complete installation can be understood by looking at the difference between the sales forecast and the actual sales for the FPD business in FY2020.
In regions where travel restrictions are in place, we are currently using local and expat employees. Also, considering the possibility of a second or third wave of COVID-19, we are strengthening our local subsidiaries’ operations, while promoting remote support including service utilizing cameras. What’s more, we are also looking into increasing the number of expats to meet future increases in demand for equipment.

It is TEL’s view that there are no changes to customers’ investment plans at this time, but do you expect customers to review their investment plans according to the extent to which the macro economy declines due to COVID-19?

We are currently in the course of analyzing the impact on the macro economy. As we are yet to determine that impact, we did not disclose the financial estimates in this financial announcement.

Out of the NAND and DRAM investments, which will see the stronger recovery? Recently, with increased data center investment, could DRAM investment be brought forward? I would like you to compare this with your view three months ago.

We expect NAND investment will be stronger. DRAM is also continuing to recover. With the impact of COVID-19, although customers are first and foremost focusing on carrying out their original investment plans, we expect them to then add and bring forward further investments.

In times of economic downturn, the first thing that happens is OSAT companies reduce their investments, which is then followed by foundries adjusting their investments. However, as of yet there have been no such developments. What is your analysis of the reasons for this?

In addition to the proliferation of IoT, AI and 5G that we have mentioned previously, the importance of communications infrastructure is increasing with the rapid rise in data traffic. Semiconductors are essential in supporting these, and demand is strong for a variety of semiconductors, including those for 5G smartphones and data centers.

Could you tell us about the business environment for each application from the second half of CY2020 to CY2021?

Although we must keep an eye on the impact of COVID-19, we expect the WFE*1 market to continue growing from the second half of CY2020 through CY2021 according to customer investment plans. In addition to solid logic/foundry investments and NAND investment recovery trend, we expect DRAM investment to recover as well.

Although you said that NAND investment is in the course of recovering, actual NAND sales for Q4 were about 10 billion yen lower compared to the forecast three months ago. Was this due to delays in installing equipment for Chinese NAND customer?

In FY2020, equipment installation for some Chinese customers was somewhat impacted due to city-wide lockdowns. On the other hand, we were able to achieve our financial estimates by responding to accelerated demand from logic/foundry customers. With the Chinese market gradually settling down, we are re-starting operations by using local employees towards the market recovery. We are currently looking into the details of plans to install equipment.

While orders from customers to SPE companies are strong, it seems that some SPE manufacturers have concerns about procuring components. Does TEL have such a problem?

We are managing our component procurement and supply chains well, so there has not been any impact on shipping equipment at this point.

Could you provide some background behind not announcing the FY2021 financial estimates? Aside from delays with equipment installation, is there any risk that performance will be significantly impacted? Also, with high levels of R&D expenses and capital expenditure expected, how do you see the WFE market in CY2021?

As we are yet to determine the impact of COVID-19 on the macro economy, we did not disclose the financial estimates in this financial announcement. We see the impact on FY2021 performance due to delays with equipment installation as immaterial.
On the other hand, in order to maintain our capacity for technological innovation in the growing WFE market, we must continue to invest in growth, based on a solid financial foundation, with expected R&D expenses of around 135 billion yen.

While the company hasn’t announced its financial estimates, R&D expenses are expected to increase by around 12% compared to the previous fiscal year. Is this due to the fact that even if sales were to see a year-on-year decrease in the second half of FY2021, you would still expect to see continued growth in demand for equipment looking ahead to FY2022? Is there any information that could lead us to expect market growth in FY2022?

We would like you to understand that our continued proactive investment in R&D is because we have information expected to lead to market growth. Over a period of three years starting in FY2020, we will continue to invest 400 billion yen in R&D geared toward achieving our medium-term management plan.

I would like to ask about the growth rate of sales for each product in FY2021. Are there any products for which we can expect to see high growth due to the effects of the WFE investment mix?

In the Q3 earnings release conference, we stated that we felt comfortable with our competitor’s outlook of a WFE market growth rate in the high teens in CY2020. Although we must keep an eye on the impact of COVID-19, our view remains unchanged. In FY2021, we can expect to see not only strong logic/foundry investments but also memory investments. Accordingly, we can expect growth in products such as etch systems and coaters/developers. Also, along with the recovery in memory investments, we expect to see growth in film deposition systems and wafer probers.

Q4’s Field Solutions sales were particularly high. Could you provide some background? Have there been any changes in customer trends? Also, how much growth do you expect to see in Field Solutions sales in FY2021? Finally, can you also tell us about the installed base as of the end of FY2020?

There were no particular changes in trends regarding Q4’s sales increase. Field Solutions business is progressing according to plan. In FY2020, although our consolidated sales were down year-on-year, Field Solutions sales increased year-on-year. At the end of FY2020, the installed base exceeded 72,000.

Can you tell us the FPD business forecast for FY2021?

First of all, equipment installation in China’s Wuhan region is essential. This fiscal year, we expect sales to increase driven by investment in OLED, but we would like to refrain from providing any figures on that.

Can you tell us about the current inquiries and future prospects for gas chemical etch systems in GAA (Gate-All-Around) or FinFET?

Gas chemical etch systems are used for etching critical layers and are used in memory and logic/foundry. We expect it will continue to be used for a variety of applications. We are unable to comment on how deals are going with individual companies.

I would like to ask about the impact of the export control measures announced by the U.S. Department of Commerce on April 27, 2020. How does this impact TEL shipping to Chinese customers, and what kinds of responses are being considered?

We are currently reviewing the impact of these export control measures very closely.

WFE (Wafer fab equipment): The semiconductor production process is divided into front-end production, in which circuits are formed on wafers and inspected, and back-end production, in which wafers are cut into chips, assembled and inspected again. Wafer fab equipment refers to the production equipment used in front-end production and in wafer-level packaging production

The above content is a summary of question and answers session.