Q4 FY2019 Earnings Release Conference Q&A

I would like to ask what TEL’s views are concerning the emerging signs of recovery in the WFE*1 market that I have heard about from other industry players.

In logic and foundries, we expect investment in preparation for 5G and the high performance computing (HPC). In memory, we have heard from customers that particularly in non-volatile memory, they may proceed with inventory adjustments around this summer. After that, equipment orders and installations should pick up from the second half of CY2019 due to increasing memory demand driven by factors such as data centers. We hope that the market will move toward a V-shaped recovery beginning in CY2020.

On page 18 of the presentation materials, there is a statement about a recovery in memory investment. Is the view that NAND investment will recover sooner due to device prices not falling further because they are falling below their cash cost? Or do you think that DRAM investment will recover later because customer profit margins are still high and device prices will continue to fall?

Customers are adjusting their capital investment, and recently we are hearing that they are beginning to reduce their inventories. In the future, if large volumes of data are going to be used at a high speed due to the introduction of 5G, we can expect demand for memory in addition to high-speed CPUs. If demand increases from these factors, then investment will probably be restarted.

Regarding the CY2020 WFE market, which application can we expect to have the highest growth?

The market for logic and foundries continues to be strong, and we hope that there will be strong growth in demand for both DRAM and non-volatile memory.

Some of your competitors expect that memory market in CY2019 will be at the same level in both the first half and second half. Will the increase in sales in January-March CY2020 be a major contributing factor in the increase that is forecast in TEL’s sales for memory in the second half of FY2020? In addition, will sales be larger for greenfield or conversion investments?

We assume that there will be some effect due to the gap of three months between the calendar and the fiscal year. In addition, unlike many of our competitors which record sales upon shipment, we record sales when set-up and testing of the systems are completed, and this difference in accounting standards makes comparison difficult.
We believe that sales for conversion investments will become larger.

What were the results in sales to China in FY2019, and what is the forecast for FY2020?

As can be seen on page 29 of the presentation materials, SPE sales to China were about 200 billion yen in FY2019. This includes not only sales to local Chinese customers but also sales to the China fabs of foreign customers. In FY2020, sales to China will decrease along with the decrease in overall SPE sales, but there is no large difference from other regions in the decrease rate.

What is the outlook for the Field Solutions (FS) business in FY2020? GLOBALFOUNDRIES announced that is selling a fab to ON Semiconductor. Will this expand upgrade/modification opportunities for the FS business of TEL?

We are forecasting that although WFE capex will decrease year-on-year by 15-20%, FS sales will be about 278 billion yen in FY2020, nearly at the same level as in the previous fiscal year.
In the FS business, in addition to used equipment/modification, there is also the parts sales business which accounts for just under half of sales. Against the backdrop of the increase in installed base and the demand for semiconductors for IoT, we can expect stable sales and profit from used equipment/modification and parts.

I would like to ask about the FY2020 financial estimates on page 21 of the presentation materials. The gross profit margin for the second half (40.8%) is higher than in the first half, but why is it lower in comparison to FY2019? If the WFE market were to recover to CY2018 levels in CY2020, would the outlook for gross profit margin in FY2021 increase above 41%?

In addition to customer and product mix, investment to prepare for growth from FY2021 also has an impact on the downturn in gross profit margin in the current FY2020. Examples of this investment include costs for promotional activities for customer evaluations and development costs included in cost of sales for improving system performance. We have also increased capital investment and hired more staff, and the additional related costs will now be reflected through all of FY2020.
Regarding FY2021, following the financial model that we have presented before, at this time we expect that profitability will be improving compared to this fiscal year.

What is the half-year and full-year forecast for selling, general and administrative expenses in FY2020?

The full year forecast is 221 billion yen, of which 107 billion yen are forecast in the first half, and 114 billion yen in the second half.

What is the outlook for market share by product in CY2020?

We aim to maintain a high share in coaters/developers. In etch systems, in addition to a high share in logic, our share in memory rose last year, and we assume that it will contribute to an increase in sales if memory investment increases. In deposition systems, we are making progress in acquisition of POR*2 for semi-batch systems, and we anticipate customer investment for volume production. In cleaning systems, bevel cleaning applications are expanding for the purpose of improvements in customer yield.
We have placed our efforts into the areas in which we can (i) count on continuous technological innovation, and (ii) utilize our expertise, and that strategy is succeeding well. We are upbeat about CY2020 as well.

It looks like each flat panel display (FPD) manufacturer is starting to make a change to G8.7 in their investment plans for G10.5. What is the impact on business opportunities for TEL?

TEL’s PICP™*3 technology has been positively evaluated for various generations, not just for G10.5. We will continue to support the preparations that are required for further technological innovation, such as high-definition and flexible displays.

What is the outlook for investment in G6 FPD? We expect that some of the investments that have been postponed to CY2020 may recover in CY2019.

There is demand for small to medium-sized FPD in gaming and e-sports, and we believe that we can expect investments in the medium term as well.

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

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

PICP™: Plasma source for producing extremely uniform high density plasma on substrate

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