Jun 8, 2022 Medium-term Management Plan Briefing Q&A

Under the new Medium-term Management Plan, you have set a target of achieving net sales of more than 3 trillion yen by FY2027. This represents an average annual growth rate of just around 6% given that your FY2023 earnings forecast shows net sales of 2.35 trillion yen. Considering the actual growth rate of the WFE*1 market in the past, isn’t this net sales target somewhat conservative? Also, can you share your outlook for TEL's WFE market share?

We do not link the financial targets of the new Medium-term Management Plan with the size of the WFE market. The size of the semiconductor market in CY2021 was approximately $500 billion, but this value is expected to reach around $1.35 trillion by CY2030, and the WFE market will also continue to grow as it supports the semiconductor market. FY2027, the final year of the new Medium-term Management Plan, is merely a passing point along that path.
To achieve our financial targets, we will create next-generation products with high added value in our current focus areas in order to increase our market share and profits. In addition, by releasing new products, such as the Ulucus™ L we introduced today, we will further expand our SAM*2 and thereby grow our sales. Through these initiatives, we will try to achieve our financial targets before the final year of the new Medium-term Management Plan.

Tell us about your forecast for your gross profit margin. The term of the Medium-term Management Plan could be a phase in which advance investments for business expansions would increase. Is there any possibility that your gross profit margin will remain flat even as your net sales increase during this period due to the advance investments? Furthermore, the new Medium-term Management Plan sets a target operating profit margin of 35%. This would require you to increase your operating profit margin by around 5pts; can you share with us how TEL intends to achieve this target? For example, do you intend to achieve this target through improvements to gross profit margin or by controlling your SG&A expense ratio?

The first driver to increase our margin is improvements to our marginal profit ratio. By continuously creating next-generation products with high added value, we will strive to increase our gross profit margin and operating margin. Another driver is the expansion of our SAM. Although this will cause advance costs to increase during the phase that spans across everything from evaluations, POR*3 acquisition to the initial stage of equipment adoption, thus having a temporary negative impact on profitability, it will eventually contribute to higher profit margins in the future.

Under the new Medium-term Management Plan, you have increased your target operating profit margin to 35% or higher, while leaving your ROE target unchanged at 30% or higher. In terms of capital efficiency, you seem to have lowered your goal. What brought this about? Do you intend to maintain ROE of at least 30% through balance sheet management, including share buybacks, when your operating profit margin decreases due to the cyclicality of the WFE market?

We do not anticipate that our net sales or operating profit margin will decrease. Even where net sales and profits increase, that does not necessarily mean that ROE will increase if retained earnings build up. We do not intend to wait to achieve ROE of 30% until the final fiscal year of the new Medium-term Management Plan, but to maintain a stable ROE of 30% or higher throughout the term of the Medium-term Management Plan.

Based on your financial targets of the new Medium-term Management Plan, assuming no additional cash outflows through share buybacks or other means, I estimate that your cash on hand will amount to around 1 trillion yen at the final year of the Plan. What is the appropriate level of cash on hand for you?

As we will require more working capital as the size of our business expands, the appropriate level of cash on hand will also change. Our basic policy is that we need cash on hand equivalent to around 2.5 to 3 months of net sales as working capital. In addition, we also consider the medium- to long-term financial plan for growth investments and capital expenditures to determine the appropriate level of cash on hand.

I believe you have explained that total capital expenditures during the 5 year term of the new Medium-term Management Plan will be 400 billion yen. Is this correct?

That's correct. We expect around 400 billion yen in capital expenditures over the 5 year term. This includes capital expenditures for production capacity expansion and R&D facilities.

Tell us about the financial benefits of “shortening equipment start-up time” and how it is positioned in your business activities.

We have considered ways to improve the efficiency of equipment start-up, after experiencing difficulties in dispatching start-up personnel overseas due to travel restrictions imposed by COVID-19. We anticipate that we will be able to drastically decrease equipment start-up time through a variety of means, such as the automated inspection of equipment at start-up and utilizing digital transformation technologies. We aim to reduce equipment start-up time by 50% to 75% compared to the current start-up time, and to achieve One-touch start-up of equipment in the future.
The first benefit of these activities is that we can optimize resources by reducing man-hours required for equipment start-up. Furthermore, by increasing the reliability of equipment start-up and reducing the risk of accidents, we expect to reduce costs for equipment follow-up and maintenance. Additionally, the work-life balance of engineers involved in equipment start-up will be improved, and new career opportunities will be provided to them in different areas outside of equipment start-up.

You explained that TEL intends to double its production capacity in the future by improving MRP*4 processing capabilities. Do you believe that you will be able to double your production capacity only by production efficiency initiatives using your existing production facilities?

Rather than simply increasing production spaces and manufacturing personnel, we are working to optimize various manufacturing operations such as inventory management, as well as procurement and supply of parts and components. Through these efforts, we plan to increase production capacity to about twice its current level.

Is the “demand forecast for the next 24+ months” an original initiative by TEL? Also, given the fact that customers may change their investment plans, how accurate is this forecast?

Previously, the demand forecast could only look up to 1 year ahead. Taking into account recent parts and components shortages, we explained to our customers how necessary it would be to make more long-term demand forecast. As a result, we received significant support from our customers, leading most of them to share with us their investment plans for the next 24 months, or longer in some cases, making it possible for us to forecast demand for 24 months. Although we believe this was originally our own initiative, we assume that our customers are now sharing their long-term investment plans with other equipment manufacturers as well in order to ensure stable procurement of all different types of equipment.
Through this 24+ month demand forecast, it becomes possible for us to procure parts and components further in advance. On the other hand, for the sake of our plans to expand our workforce, make investments for production facilities, and construct production buildings, it would be desirable to forecast demand over an even longer period of time, and we are now engaging in efforts to make this a reality as well.

Can you explain your business opportunities in wafer bonding equipment, the size of the bonding equipment market, and TEL’s competitive advantage over your competition?

The evolution of semiconductor devices requires more than just performance improvement of individual chips, but also of the systems as a whole. The wafer bonding equipment that makes this possible is getting significant attention from customers. As for our business opportunities, one such example is the wafer bonding for 3D DRAM, and we project that this will create a huge market once mass-production begins. However, I would like to refrain from speaking about the market size.
We have various technologies such as super-clean, high-accuracy alignment, and cleaning that we have cultivated in the front-end wafer processes. Our ability to integrate and co-optimize these technologies and platforms is a strength that our competition does not have.

It seems likely that the decrease in multi-patterning processes caused by the expanded adoption of EUV will have a negative impact on the etch system market. This seems like a potential business risk for TEL. How do you view future growth potential for your etch business?

Although EUV is being adopted in logic/foundry, the processes to which it is being applied are limited. Also, even EUV requires multi-patterning, and EUV will not be applied to 3D NAND. As for DRAM, we anticipate that EUV will not be used when it transitions to 3D DRAM. Therefore, EUV will not serve to constrain the growth of the etch system market. Rather, EUV has a positive impact for the overall WFE market, as it enables further scaling.

My understanding is that in the etch system market, TEL has a low market share for memory, and a high market share for logic/foundry. Some studies have indicated that if high-NA EUV is applied to logic/foundry, the total number of etch processes will be reduced by half. Do you have any concerns?

In the etch system market, our market share for NAND has been increasing, and our market share for DRAM remains high. When high-NA EUV is utilized, resist thickness will become even thinner. This will require technology that enables etch with high selectivity, and it will be an opportunity for us to provide added value to this market.

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.

SAM: Served available market

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

MRP: Material Resource Planning