July 10, 2015 Medium-term Management Plan Briefing Q&A

Within the Medium-term Management Plan, is there the option of aiming to become the top player in the world by forming an alliance with a domestic semiconductor production equipment manufacturer? Do you think M&A can be effective in raising profitability in this industry?

I think that forming an alliance with major domestic suppliers would be very tough in terms of antitrust regulations. As we have reached a technological inflection point, we intend to always consider the potential for technology investment and M&A.

Under what conditions will you conduct share buybacks?

In the sense of implementing share buybacks with reasonable timing and scale, we stated that we would consider conducting them flexibly. We are currently in the process of implementing the ¥120 billion share buyback that we previously announced.

What triggered the decision to adopt a more attractive shareholder return policy? If the share price level is low even though earnings decline, is there a possibility that the company will buy back shares? Also, what level of cash on hand do you intend to maintain?

As we will increase profitability under the Medium-term Management Plan, we believe it is important to synchronize the level of shareholder returns with the level of profit to some degree. We are very confident that we can obtain sufficient funds for growth investment even if we make more attractive returns. What we give the greatest priority to in terms of the way we use cash is growth investment. As regards cash on hand, we intend to maintain a level of roughly ¥250 billion.

What is the reason for limiting R&D funding to ¥80-90 billion? What kind of research themes will you choose in order to capture market share for all products?

We will allocate more R&D funding than before to the semiconductor production equipment business. Previously, we invested about ¥15 billion in development common to the entire company, excluding business units, but we will inject this into such areas as etching systems, cleaning systems, and ALD (atomic layer deposition) systems.

Where do you see growth in the field solutions business?

Going forward, technology needs for existing equipment will increase further and improving equipment operating time will become important. By developing service contracts, that include service and parts, we will grow this business. In the IoT era, we expect business to increase not only due to investment in leading-edge technology but also due to demand for used equipment, modifications and services.

In the Medium-term Management Plan, what area has been influenced by Applied Materials? What will be different from before in the area related to operations?

Previously, we had a strong stance on responding steadily to customers’ needs based on a market-in approach, but from here on we will also incorporate product-out to propose patterning solutions through the sharing of technology that straddles business units.

Three months have passed since the termination of the business combination agreement with Applied Materials, but how have the company’s views regarding the taxation system, as well as organizational rejuvenation and technologies changed? In terms of taxation, most of your competitors have an effective tax rate of 20% or less, but what is the reason for having your headquarters in Japan? If the tax rate decreased, would you be able to make higher returns to shareholders?

As half of our shareholders are foreign investors, the question of what kind of relation to adopt between the tax rate and returns is an important matter to consider, but we believe it is also important to increase returns in Japan, where we generate a great deal of added value. We intend to respond appropriately from the two perspectives. In addition, we have rejuvenated the organization by appointing Mr. Kawai as COO and Mr. Hori as Senior Vice President at the executive level. As regards technologies, we have learned strong proposal capabilities and the stance of emphasizing profit and added value in an integrated manner from development to field solutions. Furthermore, we have also been inspired by the speed of global expansion and by high efficiency. The fact that we have established goals at the global level represents a great harvest.

Did sales of etching systems double in 2014 mainly because of growth in sales of dielectric etching systems for 3D NAND? Do you feel that sales of conductor etching systems will grow from here on?

Both products contributed. As both the RLSA microwave system and the parallel plate system are being increasingly adopted by major customers, I believe our market share will continue to grow. Our market share for conductor etching systems was 7% in 2014, but we are projecting a level of around 20% in 2018. We expect to achieve roughly a 10% increase in sales of both etching systems combined in five years.

Your market share for cleaning systems has also grown to a similar degree. Can these products be sold in conjunction with etching systems?

We have focused on single wafer wet cleaning and dry cleaning. Technologies to prevent fine pattern collapse and prevent copper corrosion have become a standardized need in applications other than 3D NAND as well, which has led to the expansion of market share. In the case of dry cleaning as well, demand has broadened from oxide film to metal.

I think that the operating margin in the semiconductor production equipment business was roughly 19% in 1995 and 2001. In the current Medium-term Management Plan, it seems that an unchanged operating margin of 20% is being targeted based on the scenario of the wafer fab equipment (WFE) market being worth $30 billion. What is your view on this?

In the past, I think the WFE market was worth $30 billion in the fiscal year ended March 2012 but our companywide operating margin at the time was only about 10%. Currently, Tokyo Electron Device Ltd. is outside the scope of consolidation, but I feel that even so, an operating margin of 20% is a challenging target.

I think you have also factored in growth in market share based on the scenario of a WFE market of $37 billion, but will the operating margin reach 20-25% even if market share does not grow? In addition, as the profitability of FPD production equipment is low, I think that downsizing the business would lead to an improvement in overall profitability. What do you think about this?

We are assuming market share of around 15%. We aim to expand market share for cleaning systems, etching systems and ALD systems, and I believe we will be able to achieve at least a 10% increase in sales in five years. The market is fluid but we will aim for earning power at the global level by managing changes in market share for each business unit. In the case of the FPD production equipment business, there are three potential areas for development--larger displays, high definition, and OLED--and I believe these will lead to growth. In the long term, we will consider this business while looking at the way in which OLED penetrates the market.