Q4 FY2023 Earnings Release Conference Q&A

Regarding TEL's CY2023 WFE*¹ market assumptions, why is the decrease rate on a YoY basis larger than those of your competitors? Can you also explain how your forecasts by application changed since your previous announcement of financial results?

We reduced the forecast for two reasons. The first is the fact that advanced logic/foundry investment plans are being revised. The second is that, as the memory manufacturers have announced, investments are being reduced. NAND inventory adjustments in particular have had a major impact.
Furthermore, as we announced our forecast at a later time than other companies, we have been able to incorporate the changes in customers’ investment plans to our WFE forecast, but we basically think that there are no major differences between us and other SPE manufacturers when it comes to our views of the WFE market.

You suggested that investments in mature nodes will be strong in CY2023, but what proportion of the WFE market overall will be comprised of mature nodes? We were previously informed that the mature nodes comprised roughly 40% of the logic/foundry investment in CY2022.

We think that approximately 40% of the WFE market overall, including memory, for CY2023, will be comprised of mature nodes. For your information, in terms of CY2022, we anticipated that roughly 30% would be comprised of mature nodes.

What are your views of the WFE market in CY2024? Three months ago, you explained that the WFE market for CY2024 will be at, or exceed, the levels for CY2022. Has there been any change to this forecast?

Though this will depend on macroeconomic conditions and the rate of inventory consumption across the market as a whole, we expect that the WFE market will be at a similar level to CY2022 in CY2024.
We believe that the "MAGIC*²" field, which features limited volatility, will lead recovery in the WFE market, and see steady growth.
Furthermore, new CPUs will promote the replacement of servers in CY2024 through CY2025, and this will accelerate the implementation of DDR5. Additionally, PC inventories are decreasing steadily partially due to PC replacement demands brought about by OS transitions. We can also expect smartphone demand to recover as macroeconomic conditions recover. It is our expectation that these background factors will lead to increased shipments of high-end devices.

Looking at your SPE sales by region on P.31 of the presentation material, sales in China are largely flat YoY for FY2023 at 496.7 billion yen. How do you forecast sales in China for FY2024?

About 26% of our sales in FY2022 came from China, but this decreased to about 24% in FY2023. For FY2024, we expect that sales in China will exceed 30%. This is due to the fact that there are many mature node customers in China, and that we expect this area will grow.

If the proportion of sales in China is to increase, one could also anticipate improvements in the gross profit margin due to customer mix and product mix. Could you tell us about your thoughts on the gross profit margin for FY2024?

Compared to the 44.6% gross profit margin from the previous year, at this point we expect that the gross profit margin for the full year of FY2024 will decrease by 1 point to 43.6%. This is due to the 23.0% decrease of sales in FY 2024 from the previous year. We are working to ensure that we catch up to the gross profit margin levels we saw in FY2023.

Looking at your new SPE equipment sales for FY2024, your plan indicates that sales in logic/foundry will grow in the second half. What will drive this increase in revenue from the first half to the second half? Please explain in terms of leading-edge versus mature nodes, and by region.

A major driving force will be mature nodes for the “MAGIC” field including IoT devices. This market is growing on a global scale, not just in China. In order to intensify our activities for this market, we newly established DSS BU*³.

The market consensus suggests that DRAM investments are unlikely to recover in CY2023. On the other hand, in your SPE new equipment sales forecast for FY2024 on P.20 of the presentation material, sales for DRAM are growing both in number and in proportion. Why does your sales forecast for DRAM exceed that of the market consensus? Is it because TEL's market share is growing, or are you seeing investments from DRAM customers returning?

This is due to the increase in TEL's market share, and the gradual recovery of the DRAM market conditions. Our sales forecast is based on customers' investment plans, which suggest that sales will slowly increase from the first half. Our four DRAM customers will be increasing their investments at different times, but they appear to be steadily bottoming out overall. It has been about a year since DRAM-oriented adjustments began in the first half of FY2023, and we expect investments will recover slowly.

Does the fact that you are increasing your share in the DRAM market suggest that the sales in DRAM for FY2025 will trend in an even more positive direction?

Acquisitions of PORs*⁴ are progresssing as expected, and we believe we can increase our market share. We are making good progress not just toward meeting our goals for FY2025, but also for the Medium-term Management Plan.

Regarding SPE new equipment sales forecast on P.20 of the presentation material. You explained that the WFE market for CY2023 saw a decrease of around 25% to 30% YoY, but TEL's YoY forecasts for the first and second halves of FY2024 show decreases of about 38% and 11% respectively. Considering the fact that we are starting to see some positive trends of increase in investments for mature nodes in China, could sales take an upturn in the second half?

Although we expect to see somewhat of an upturn in light of recoveries in market conditions, we will need to pay close attention to macroeconomic conditions such as inflation and relative increase of interest rates, and the progress of inventory adjustments for memory, particularly in NAND. As we anticipate some adjustments to logic/foundry for high-end devices depending on macroeconomic trends, our current view on recovery may shift by about one quarter in either direction. However, the sales forecast for SPE new equipment described in the presentation is based on comprehensive decisions, and we believe we can achieve our plans.

TEL's inventory levels are quite high, but is it fair to say that they are appropriate when taking into consideration the future increases in demand?

We have built up our inventory strategically, and believe the levels are appropriate. Although it is true that inventory turnover ratio has degraded, we will be ready to promptly respond to recovery in demand during the second half.

I wanted to ask about the FPD and field solutions sales forecasts. I understand that disclosures will be for single segment starting in FY2024, and the difference between the consolidated sales and the SPE new equipment sales forecast is equal to the total sales for FPD and field solutions. Based on this calculation, the total sales in question show a decrease of about 15% YoY compared to FY2024. What caused this decrease?

Concerning field solutions, parts sales have been trending extremely high in recent years. However, as utilization rates of customers' fabs have been decreasing recently, we are looking at things more conservatively. As for FY2024, we expect that parts and services sales growth will level off.

Why are cleaning systems performing so well?

There are multiple applications for cleaning systems. Among them, we are growing our market share in supercritical drying, and in SPM*⁵ cleaning which boasts a particularly large market, contributing to the strong performance. For SPM cleaning, we have achieved differentiation by combining the technologies of TEL Manufacturing and Engineering of America (TMEA*⁶) and Tokyo Electron Kyushu.

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. WFE refers to the production equipment used in front-end production and in wafer-level packaging production.

MAGIC (Metaverse, Autonomous mobility, Green energy, IoT & Information, Communications): A concept TEL has created to further expand business opportunities

DSS BU: Diverse Systems and Solutions Business Unit

POR (Process of Record): Certification of the adoption of equipment in customers' semiconductor production processes

SPM: Sulfuric acid-hydrogen Peroxide Mixture

TMEA: TEL acquired FSI International Inc. in 2012. In 2020 TEL FSI, Inc. was merged with TEL Epion Inc., and the company name changed to TEL Manufacturing and Engineering of America, Inc.

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