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Executives

Yoshiteru Harada – Corporate Director and Executive Officer

Hiroshi Takenaka – President and CEO

Tokyo Electron Ltd. (OTCPK:TOELF) F2Q13 Earnings Call October 31, 2012 4:30 AM ET

Yoshiteru Harada

[Interpreted]

Now I would like to explain about the consolidated financial summary of the first half of fiscal year 2013. My explanation will be brief summary. So please refer to the consolidated financial review for the details and reasons behind increase and decrease.

First, this is the first half financial results. Net sales was 266.6 billion yen; operating income was 12.2 billion yen; operating margin was 4.6%; and net income was 6 billion yen. Differences from the second half and the first half of the previous fiscal year are shown on the right.

This page shows profit and loss. Net sales of the first half under review is framed by a red line. SPE was 214.6 yen; FPD/PVE was 9.2 billion yen; and EC/CN was 42.4 billion yen; and the total was 266.6 billion yen. Gross profit was posted as 85.6 billion yen and gross profit margin was 32.1%. SG&A was 73.4 billion yen; operating income was 12.2 billion; and net income was 6 billion yen.

You can compare these numbers against the forecast announced in the end of July shown on the far right. Before I receive questions raised later, let me clarify some things in advance. Tax expenses in the first half looks a little too high compared to the income before income taxes, but this is because of the following reasons. As I explained in July, there was a payment for correction in transfer pricing taxation and that was 2.2 billion yen. And also, as we revised the financial forecast which will be announced later, there is a tax effect from elimination of so call unrealized profits on intercompany sales of inventories. In our case, sales of the products made in subsidiary plants is recognized at the time of shipment since those products are not installed yet and considered as unrealized profits on inventories in the consolidated financial statement.

For instance, if there is unrealized profits of 1 billion yen, we post minus 1 billion yen for profit before tax and minus 400 million yen is recorded as tax effect accordingly. However, as we revise full year financial forecast, the total tax effect allowed to be included by the accounting rule was decreased and as a result, we posted additional, more than 1 billion yen tax expenses in the second quarter.

This is the trend of quarterly net sales, operating income, gross profit margin and operating margin. At the far right, you see the results of the second quarter ended in September and its gross profit margin was 31.4%.

This page shows net sales by division for the three consecutive halves from the first half of the previous fiscal year for SPE, FPD/PVE and EC/CN division respectively, and the composition of these divisions are shown on the right. In this first half of FY ‘13, SPE sales accounted for 81%. This is the SPE sales by region. In this first half under review, the US and Taiwan recorded high numbers. This segment information shows half year based sales, segment profit margin and segment income of each division. In this orders and order backlog slide, the result of second quarter from July to September is shown in the far right column. SPE was 66.9 billion yen; FPD/PVE was 8 billion yen; and order backlog was 118.7 billion yen and 15.8 billion yen respectively.

Next slide describes orders by region. So please check this out on your own later.

This is the balance sheet. I would like you to refer to the consolidated financial review for details. Total assets decrease started from the end of March and this is mainly due to the decrease of trade notes, account receivables and inventories. Other current assets also declined and because of decreased consumption tax receivable and decreased receivables with corporate tax refund etc. As for liabilities, current liabilities declined with a slight decrease in accounts payable and customer advances. Please check the consolidated financial review for more details.

This is a slide about inventory turnover and account receivable turnover which we regularly share with you. In the second quarter under review, inventory turnover was 86 days and accounts receivable turnover was 60 days. This is about our cash flow. Cash flow from operating activities was 73.9 billion yen. This 73.9 billion yen was recorded from the profit and also decreases in inventories and account receivable etc. As far cash flow from investing activities, minus 12.6 billion was posted as payment was purchase of property, plant, equipment and others as indicated in the middle. Above that line, minus 15.8 billion yen was posted as expenditure and this was used for NEXX Systems acquisition in this first half. Term deposits over three months shall be included in cash flow from investing activities and this is recorded as net minus 55.7 billion yen. Cash flow from financing activities was negative 6.4 billion yen. The balance of cash and cash equivalents posted on the cash flow statement is 141.6 yen. However, the cash balance including term deposits over three months NCD etc. was 286.2 billion yen.

From this page onwards, they are supplement data such as quarterly information. Please take your time to check this out later. That is all for my part. Thank you for your attention.

Hiroshi Takenaka

[Interpreted]

Good afternoon, ladies and gentlemen. Thank you very much for visiting us in spite of your busy schedule. I would like to explain about the latest status of our business in the past three months. Let me start with business environment and I suppose you know about this well. Last year the total market for wafer fab equipment was about $35 billion. In the beginning of this year, we expected that will be about $33 billion. However, the market started to decline just before SEMICON West and currently I think $28 billion is the industry consensus.

Our sales result announced today was about 20% year-on-year decrease and this matches such market situation. That is described in text here on the slide. Comments on FPD and PV are almost the same as the last time. Demand for mid and small sized panels exists, but that for large panels has not yet started to come back. Therefore, we expect demand for production equipment for large panels will recover in the second half of next fiscal year or later.

For PV, mainly for crystalline POSITIVE, current CapEx remains sluggish because of the production adjustment due to excess production capacity and shipment of low priced panels in China. With this situation, our orders are also declining and this July-September quarter ended at 75 billion yen. This slide for SPE orders by application is self explanatory and memories fell under 20% now. You can tell that logic, logic foundry, MPU, etc. already exceeded 80%. Under such circumstance we revised our financial estimates for FY 2013.

As Mr. Harada explained earlier, we finished the first half almost on par with the original forecast. However, the net sales of SPE in the second half is not estimated as 178.3 billion yen. If this 178.3 billion yen is added up with the first half result of 214.6 billion, the total will be 393 billion yen and this is 18% decrease from the result of fiscal year 2012 or 477.8 billion yen. I suppose this matches the earlier explained market situation. FPD/PVE remains almost the same. EC/CN was also affected by market situation and slightly declined. In total, we estimate full year net sales as 501 billion yen for FY ’13. This means second half net sales will be 234.4 billion yen.

With this revised net sales forecast for the second half, we already started some initiatives such as cost reduction in the past one to two months. We also revised operating income to 300 million yen, income before income taxes to 2.5 billion and net income to 1 billion yen for the second half estimates. The reason for this revision is significantly lowered SPE sales forecast which is by 20 billion yen decrease from our original estimate as described on this slide.

I need to talk about some key items related to this financial revision. As I already mentioned, we made efforts to reduce fixed costs. This focused on expenses of subcontractors, payroll such as overtime pay and development expenses. We have maintained relatively high development expenses in the past few years. And I suppose the expenses for this term is still at high level. However, we reviewed to eliminate unnecessary items with lower priority for now. As a result, we intend to reduce the fixed cost by 16 billion yen in total from the previous fiscal year. Previous announcement of our dividend forecast was on July 30 and annual dividend is 51 yen. This means 25 yen for the first half and 26 yen for the second half. If commemorative dividend is excluded from this 26 yen, regular dividend is 16 yen for the second half. We decided to keep this 16 yen dividend and we will maintain the dividend forecast without revision.

We completed two acquisitions and goodwill will be recognized for each case.

We revised forecast for R&D expenses and CapEx in some areas. We reached as high as 81.5 billion yen last year for R&D expenses and this will be 74 billion this year. This 74 billion yen is the second largest R&D expense in our history and we believe this R&D expense is large enough according to the sales level. As for CapEx, we built four new facilities in FY 2011 and 2012 and that required installation of new equipment there and this resulted in high numbers in these two fiscal years. However, this fiscal year, CapEx is estimated to be lower to regular level of 2.2 billion yen. As a result, depreciation is expected to be reduced by about 3 billion from the original forecast.

Facing this situation, for the short-term, we are used to brace for the rough weather in winter. Having said, we want to grow in mid and long-term. So now I would like to briefly explain about the progress we have made so far for the future growth.

Our etching systems are keeping high share of 50% to 60% in the dielectric etch market, especially in important Back End of Line and HARC process, we maintain our position in the market. We are relatively new to poly etch field but we could secure six new POR for RLSA etcher in the US and Europe. It takes about one to two years for volume production after securing a POR but still we believe we are establishing a secure position in this area for R&D. As I always say, current market share is about 30% and there is no change in determination to push this up to 40%.

Currently, our market share of cleaning system is very low for less than 20%, so acquired FSI International with following reasons. In the future, it is expected that photoresist stripping technology will be used in about 30% of single wafer cleaning process, and FSI had more advanced technology than we did in this area and also had good customer bases. Also, we wanted to have our Kyushu Plant focus on other single wafer cleaning process than this technology. Cleaning system covers wide range of technologies including scrubbers and other methods. What we are going to do is focus on wet single wafer cleaning in Kyushu. Dry cleaning market is still small with only the size of 20 billion yen but we anticipate the market is shifting from wet to dry cleaning gradually. We are currently maintaining more than 70% market share and our Yamanashi plant will strongly support this area. We will utilize FSI technologies for promising SPM market in the future. These are the three important pillars to improve our market position.

This slide shows how we position the acquisition of FSI. The products are complementary to ours.

Let me briefly touch upon other highlights. In thermal processing system, our market share is about 65% in batch process area. Now we launched new equipment and this is not for batch but for semi-batch processing. Customer evaluation for this ALD equipment is progressing and we secured POR for our major customer. We highly expect that we will be able to enter into a new area of thermal processing system with this equipment. 3DI, this is an item we already announced. Although the volume production of TSV etcher is being pushed out, the volume production of wafer bonder/debonder has already started, and some equipment was already delivered. We have not reached 10 billion yen but we feel that we can achieve double level soon.

Another topic is our collaboration with Tohoku University, which was reported by newspaper. Construction of the building will be finished in April next year. We intend to succeed in volume production of small sized vertically structured STT-MRAM owned by Tohoku University and work on this project with a focus to disseminate this Japan original technology to the world. As for FPD, as I showed you some figures in the beginning, we expect very fierce situation in cost competition even if the market makes recovery. Therefore, we are accelerating startup operation in Kunshan plant in China. We also did drastic redeployment of our personnel to shift more people to OLED and 3DI business. Having said that, we need to maintain services and this generated a deficit but that is kept in a small amount.

We have been providing CCP etcher and Korea makers started to supply similar equipment. So we developed ICP etchers using high density plasma and started sales for recently popular oxide semiconductor and OLED back planes. We expect this will be additional differentiator in the market. For OLED, production of large panels will be postponed. We already started customer evaluation in both evaporation system and inkjet system. I do not say here which one is better but we are receiving favorable reaction from customers. I think I can report the results separately.

I know there are various comments about PV production equipment but we assure that we can make use of our accumulated technologies in semiconductor production equipment for thin film silicon and we are in the middle of negotiation for final closing of acquisition.

In summary, I have three points. Wafer fab equipment market is expected to go down by about 20% year-on-year and our forecast was revised accordingly. Facing this situation, we will implement fixed cost reduction of 16 billion yen from the previous fiscal year in order to make business profitable. On the other hand, we will continue to make R&D investment and necessary acquisitions and there is no change in this policy.

That is all. Thank you for your attention.

Question-and-Answer Session

[No Q&A session for this event]

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