Q1 FY2023 Earnings Release Conference Q&A

You cited the macroeconomic slowdown, component shortages, logistical disruptions, and currency fluctuations as factors for the downward revision of the CY2022 WFE*1 market outlook. What is the impact from each of these things? Also, you revised down the outlook for logic/foundry, but please tell us the background information for this revision.

Currency fluctuations have the greatest impact. Most Japanese SPE (semiconductor production equipment) manufacturers sell their products in yen, and their share of the total WFE market is about 30%.
Compared to CY2021, the size of the WFE market in US dollar terms in CY2022 will be smaller than originally projected due to the current depreciation of the yen by about 20% since the beginning of the year. The next biggest impact is the risk of postponing the timing of recording sales to CY2023 onwards, mainly due to shortages of some parts and components. In addition, the willingness to purchase products such as smart phones and PCs is temporarily declining. In the last few years, purchasing of replacements of these products has run its course, and the uncertainty about the future of the economy is considered to be psychologically suppressing the willingness to purchase. In addition, regarding customer investment based on these, there is a concern that memory will require a slightly bigger adjustment than logic/foundry.

While you have revised down your outlook for the WFE market in CY2022, you have left TEL's financial estimates for FY2023 unchanged. Does this mean that TEL's sales level will not change, but the sales of other companies will decrease in the background? Alternatively, although TEL's sales will decline, have you left your financial estimates unchanged because they do not conflict with the disclosure standards of the Tokyo Stock Exchange?

Considering currency fluctuations, when yen-denominated sales are converted to US dollars, the WFE market will contract by about $5bn. The impact of this currency fluctuation is significant. On the other hand, we have left our financial estimates unchanged, taking into account the fact that there is no change in inquiries from customers at this time and that we have received new orders.

At the FY2022 earnings conference, you announced that the WFE market in CY2023 was expected to continue to grow positively. What is your outlook at this point? I would also like to know the outlook for each application.

Our customers are considering investment plans in light of various factors such as the macro economy and trends in each country, and we believe it is too early to comment on the outlook for the WFE market in CY2023. However, we believe that the WFE market will continue to grow while making some adjustments as the technological innovation of semiconductors toward the realization of digitalization and a decarbonized society continues, there is no change to the medium- to long-term outlook.

The environment in the semiconductor industry has deteriorated a little, but have you received requests from customers to cancel orders or postpone deliveries?

Some customers are considering or have already announced investment adjustments, but at this time we have not received any cancellations.

Regarding the outlook for the WFE market in CY2022, you have revised the outlook downward from "around 20% growth YoY" in the previous FY2022 financial announcement to the current outlook of "5 to 15% growth YoY". When did you decide to make this revision? Was SEMICON West held in mid-July this year the trigger?

We took into account the information obtained from discussions with the customers we met at SEMICON West and the exchange rate.

While you have revised your outlook for the WFE market downward, you have not changed your company's financial estimates. Are you expecting an increase in market share for each product?

We are making various efforts in the coater/developer, deposition, etch, and cleaning areas, and we expect to continue to outperform the market growth. In CY2022, currency fluctuations may negatively affect TEL's equipment share based on monetary value, but we believe that we can increase our process share, and we have high expectations for the future.

I have heard that TEL is successful in new areas such as cleaning systems with supercritical drying technology. Was it because of the application of the drying technology of the coater/developer?

Although we did not directly apply it, developing and manufacturing multiple equipment at a single site has led to the development of various know-how. There are some technologies, such as particle control, that can be used for multiple processes. There are also synergistic effects. Inside the company, the Corporate Innovation Division plays a central role in examining solutions that take into consideration future technological trends, such as packaging, and discussing with customers optimal approaches for the practical application of new technologies such as 3D DRAM.

Subtracting the Q1 results from the first half estimates for FY2023, gross profit margin for Q2 is calculated to be around 47%. I think it's a pretty high level, but is it possible to achieve it?

Considering the current exchange rate, although the fixed costs of the local subsidiary will increase, most of our products are sold in yen, so the impact on sales will be minimal. We have also taken measures to optimize costs, including fixed costs, so we have left our financial estimates unchanged.

What will be the impact on TEL of the tightening of export restrictions on semiconductor production equipment in leading-edge nodes to China by the US government?

So far, there is no impact from the tightening of regulations yet. We believe that if we can maintain our world-leading technological innovation capabilities, we will be able to achieve medium- to long-term growth while minimizing the impact of circumstances of specific countries and regions.

Regarding the operation status of the plants, you said there was a slight delay in shipments in FY2023 Q1, but what is the current operational status toward achieving the planned sales in the first half? Please tell us if there are any reassuring factors.

Our plants are extremely busy. With just over a month and a half left in FY2023 Q2, we hope that you will take it as a source of reassurance that we have not changed our full-year financial estimates from the previous quarter. Considering various factors at the moment, it is too early to comment on the outlook for CY2023, but in CY2022, the WFE market is expected to exceed $100bn. In the medium to long term, there is no change in our view that the market will grow in stages with repeated adjustments.

Assuming that the WFE market in CY2023 will remain flat or only increase slightly due to macroeconomic factors, etc., I think there is a possibility that TEL’s profits will not grow or slightly decrease in FY2024 due to upfront investment for medium- to long-term growth. Is there a case for prioritizing short-term profits and curbing upfront investment?

We aim to improve profits in the short, medium and long term at the same time. We continue to invest in the development of critical technologies in this fast-paced industry. In addition to new equipment, business opportunities for field solutions are increasing, providing more opportunities to offer products and services with high added value. We believe that we will be able to improve profits over the short, medium and long term by outperforming market growth by increasing our market share through the acquisition of new PORs*2.

Gross profit margin for FY2023 Q1 was 42.3%, a decrease of 4.4pts YoY on a comparable sales scale. What is the reason for this?

The main factors are the following: concentration of sales of highly profitable products in FY2022 Q1; payment for special bonuses in FY2023 for achieving the targets of the previous Medium-term Management Plan two years ahead of schedule; a slight increase in costs at plants; and an increase in personnel expenses at local subsidiaries due to currency fluctuations.

I would like to know how to allocate special bonuses to cost of sales and SG&A expenses.

Employees involved in manufacturing and services are included in the cost of sales, and other employees such as administration and sales are included in SG&A expenses. The ratio is approximately 7:3.

Please explain the details of the content and background regarding the delay in shipment of some equipment. Are you saying that the main reason for the delay in shipment was the impact of component shortages on TEL’s side, and not the customers’ request for an extension of the delivery date? Also, what is the financial impact of the delay?

This is due to our company, not due to a change in the customers’ investment plan. Due to the conflicts between Russia and Ukraine from February and the lockdown in China from the end of March, there was a delay in parts procurement and some logistical confusion. As a result, there was a delay of between 2 weeks and 1 month for some shipments, and the delays spanned from Q1 to Q2. Although the majority of the customers affected are overseas, it is not an event that is biased toward a specific region or customer. Although it is necessary to closely monitor the macroeconomy going forward, we have not changed the estimates for the first half of FY2023 because we have confirmed that the sales for these orders will be recorded in Q2. Regarding the amount of money involved, net sales have tended to increase every quarter over the past year, but decreased QoQ due to a temporary adjustment in Q1 of this year. Q2 net sales are planned to rise accordingly, and the difference between Q1 and Q2 corresponds to the amount of money involved.

I would like to know the sales ratio between leading-edge node and mature node for Logic in China.

The mature node has a larger sales ratio.

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

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