Tokyo Electron Limited (TOELF) CEO Toshiki Kawai on Full Year 2021 Results - Earnings Call Transcript

Tokyo Electron Limited (OTCPK:TOELF) Full Year 2021 Earnings Conference Call April 30, 2021 2:30 AM ET

Company Participants

Koichi Yatsuda – Investor Relations

Tetsuo Tsuneishi – Corporate Director, Chairman of the Board

Toshiki Kawai – Representative Director President and Chief Executive Officer

Yoshikazu Nunokawa – Corporate Director, Executive Vice President and General Manager, Global Business Platform Division Finance Unit

Conference Call Participants

Masahiro Shibano – Citigroup Security

Yu Yoshida – CLSA Securities Japan

Tetsuya Wadaki – Nomura Securities

Shuhei Nakamura – Goldman Sachs

Shimamoto Takashi – Okasan Securities

Damian Thong – Macquarie Capital Securities

Mikio Hirakawa – BOA

Masahiko Ishino – Tokai Tokyo Research Center

Yukihiro Aiba – Nomura Asset Management

Koichi Yatsuda

Now it’s time for us to start Tokyo Electron financial announcement for fiscal year ending in March 2021. Thank you very much for joining us today despite your busy schedule. I am Yatsuda of IR department acting as a moderator in today’s session. Now let me introduce the attendees on our side. Mr. Tetsuo Tsuneishi, Corporate Director, Chairman of the Board.

Tetsuo Tsuneishi

I’m Tsuneishi.

Koichi Yatsuda

Next Mr. Toshiki Kawai, Representative Director President & CEO.

Toshiki Kawai

I am Kawai.

Koichi Yatsuda

Next Mr. Yoshikazu Nunokawa, our Corporate Director, Executive Vice President and General Manager, Global Business Platform Division Finance Unit.

Yoshikazu Nunokawa

I am Nunokawa.

Koichi Yatsuda

Before starting the presentations, let me explain the flow of today’s meeting. First of all, Mr. Nunokawa and Mr. Kawai will make presentations. After that, up to until 6:00 Japan time, we will have the question-and-answer session containing questions from the audience. The financial announcement uses two channels on Webex providing simultaneous interpretation between Japanese and English. As we explained in our e-mail, you are kindly requested to use UPS on PCs and mobile terminals if you plan to ask questions.

But if you are not going to ask questions, you can use telephones. Since this is the meeting for institutional investors and analysts, we would appreciate your understanding that we’ll receive questions only from institutional investors and analysts, as usual. We will upload the original contents of this meeting, both in Japanese and English later. We would be happy if you also refer to them. Now Mr. Nunokawa, Corporate Director, Executive Vice President and General Manager, will present the consolidated financial summary. Mr. Nunokawa, please?

Yoshikazu Nunokawa

I am Nunokawa of Finance Unit. I would like to present the consolidated financial summary of the fiscal year ending in March 2021. This slide shows the financial highlights for fiscal year ending in March 2021. Driven by the growing demand for SPE and FPD, net sales increased by 24% on a year-on-year basis. Gross profit was ¥564.9 billion, and operating income was ¥320.6 billion, both of which, together with net sales, set new records. ROE was 26.5%, showing considerable rise from the previous fiscal year.

This shows financial summary. As I said before, driven by SPE and FPD market growth and also smooth progress of equipment start-up operations despite cross-border travel restrictions due to the COVID-19 spread, our net sales was ¥1,399.1 billion, 24.1% increase on a year-on-year basis, which was setting ¥9.1 billion more than the financial estimates that we announced on January 28, 2021.

By segment, SPE net sales was ¥1,315.2 billion, 24.0% increase on a year-on-year basis. And FPD net sales was ¥83.7 billion, 26.8% increase. In both segments, net sales exceeded our forecast. Gross profit margin was 40.4%. Operating margin was 22.9%, increased by 1.9 percentage points on a year-on-year basis because of the drop of SG&A sales ratio. Earning per share was ¥1,562.2, hitting record high due to the share repurchase we conducted in fiscal year ending in March 2020. This slide shows quarterly-based financial summary. Net sales in the fourth quarter was ¥439.2 billion, 50.6% increase from the third quarter, setting a record as quarterly-based net sales. For SPE segment, net sales was ¥415.4 billion, 57.2% increase from the third quarter, setting a new record as quarterly net sales. For FPD segment, net sales was ¥23.7 billion, declining by 13.3% from the third quarter.

Gross profit margin was 40.6%, declining from the third quarter due to the inventory reduction. Operating margin was 25.1%, rising by 3.5 percentage point from the third quarter because of drop of SG&A sales ratio along with significant increase of our net sales. Next, this slide shows the segment information. For SPE, sales was ¥1,315.2 billion, segment income was ¥362.5 billion, and segment profit margin was 27.6%. For FPD, sales was ¥83.7 billion, segment income was ¥8.8 billion, and segment profit margin was 10.5%. While FPD sales increased, profit margin declined on the year-on-year basis. This is attributed to increase of fixed cost-to-sales ratio due to adjustment of our plant utilization to adapt to the market slowdown. Composition of net sales remained unchanged from the previous fiscal year, 94% for SPE and 6% for FPD.

This shows SPE division new equipment sales by application. In calendar year 2020, for memory segments, our sales to DRAM and non-volatile memory customers grew significantly from 2019, thanks to their proactive investment to enhance their capacity for leading-edge technology nodes, which are our focus areas. For logic/foundry as well, we maintained high level of sales last year as our customers kept investing, not only in leading-edge device nodes but also in a wide range nodes from 14 nanometer to matured technology nodes.

This slide shows new equipment sales, just like the previous page, by product in this case. As I said in the previous slide, since our sales to memory, particularly to non-volatile memory device manufacturers grew significantly in fiscal 2021, proportion of etching and film deposition systems increased as they are used a lot for 3D NAND multi-layer stacking.

Next, this slide shows field solutions sales. In fiscal 2021, the field solutions sales was ¥362.3 billion, 19% year-on-year increase. Driven by growing installed base and high utilization rate of customers’ fabs, parts and service sales showed a significant growth. Next, this shows balance sheet. For asset, total asset were ¥1,425.3 billion, cash and cash equivalents were ¥311.5 billion, accounts receivables were ¥191.7 billion and inventories were ¥415.3 billion. Compared with the third quarter, inventories declined, but all the others showed an increase.

Liabilities were ¥400.8 billion, net assets were ¥1,024.5 billion, equity ratio was 71.1%. This slide shows inventory turnover and accounts receivable turnover. The inventory turnover was 108 days. The accounts receivable turnover was 50 days as accounts receivables increased from the third quarter. Finally, this shows cash flow. In the fourth quarter, cash flow from operating activities was ¥58.6 billion. Free cash flow was ¥39.4 billion. This concludes my presentation about the consolidated financial summary.

Koichi Yatsuda

Now Mr. Kawai will present business environment and financial estimates. Mr. Kawai, please?

Toshiki Kawai

Good afternoon, everybody. I am Kawai. Now I’d like to talk about business environment and financial estimates. Let me start with fiscal 2021 business highlights, full year business highlights. The financial results exceeded our forecasts. Both net sales and operating income hit record highs. Despite cross-border travel restriction due to COVID-19 pandemic, through effective collaboration between our overseas subsidiaries and our plant, we were able to properly address the demand growth and accomplish equipment start-up operations, which constitute the basis for our record-high sales. For SPE, we released CELLESTA SCD cleaning system with supercritical dry technology mounted; and Episode UL, a new platform for etching system. Also for FPD, we launched an etching system equipment, PICP Pro, a new chamber for high-resolution processes.

For both SPE and FPD, these high value-added new products have started to contribute to our sales. For field solutions, due to high utilization rate of customers’ fabs, demand for parts and services was strong, which drove our net sales increase on the year-on-year basis. Next, I will talk about business progress toward a longer-term growth.

Our R&D investment hit record high in fiscal 2021 to promote creation of high value-added next-generation product, which our customers will need in the future. In Tohoku plant and Yamanashi plant, the new production building started their operations, which ensures our production capacity ready for the further demand growth. In addition, we moved the existing Sapporo office to a new place to reopen it as TEL Digital Design Square to promote digital transformation, which enables us to provide high value-added products and service and enhance our productivity.

For our environmental initiatives, we revised midterm environmental goals for 2030 to make them more challenging. Next, I’d like to present our business environment. For WFE market in calendar year 2021, at the time of the third financial announcement, we expected about 20% year-on-year growth. However, due to the strong logic/foundry investment as well as now accelerating memory investment, we currently expect that WFE market will grow by about 30% on the year-on-year basis. For the FPD fabrication equipment, TFT array process market, there have been no changes in the outlook over the past three months. This slide shows the WFE market outlook by application. For logic/foundry, the investment is expected to increase by about 30% on year-on-year basis due to further proactive investment driven by expansion of applications triggered by ICT spread and promotion.

For DRAM, along with growing demand for 5G mobiles, PCs and data centers, DRAM is in short supply. To address this situation, high level of investment is expected in calendar year 2021, which is about 45% increase on the year-on-year basis. For non-volatile memory, investment is expected to increase by about 15% on the year-on-year basis since the customers will continue steady investment to prepare for midterm and long-term bit demand growth. Next, I will present the financial estimates for fiscal year ending in March 2022. In fiscal 2022, net sales will be ¥1,700 billion, gross profit will be ¥739 billion, operating income will be ¥442 billion, and net income will be ¥330 billion, all of them are expected to set new records.

The full year profit margins are also expected to hit record high, specifically 43.5% for gross profit margin and 26.0% for operating margin. As new sales recognition standards will be applied from fiscal 2022, this slide does not state comparison with fiscal year ending in March 2021. This slide shows the SPE new equipment sales forecast in fiscal 2022.

As you can see here, sales will be ¥625 billion in the first half and ¥635 billion in the second half of the year. Both of them are expected to be, by far, more than the sales of first half of fiscal 2019, ¥504.3 billion, which set the record at that time as half year sales. Therefore, full year SPE new equipment sales is expected to be ¥1,260 billion, 31% year-on-year growth. Meanwhile, new equipment sales on a calendar year basis will increase by more than 40% on a year-on-year basis, outperforming the WFE market growth rate.

Next, both R&D expenses and CapEx are expected to hit record high in fiscal 2022. We plan to spend ¥160 billion for R&D and ¥64 billion for capital investment, and depreciation expenses of ¥43 billion are expected, where we’ll accelerate proactive R&D and capital investment to cope with growing market and diversifying needs for leading-edge technologies. As we already announced in the press release, we plan to build a new development building in Nirasaki City in Yamanashi Prefecture. We are determined to further enhance our technology development capability to support next-generation semiconductor manufacturing processes. This slide shows the dividend forecast. Based on the fiscal 2022 financial estimates and payout ratio of 50%, we plan to pay a dividend per share of ¥1,061 on a full year basis, which will cross the ¥1,000 mark for the first time, setting a new record.

Finally, I will present the midterm management plan. As you can see here, both fiscal 2021 results and fiscal 2022 estimates are well in line with our financial model in the midterm management plan. We will keep working hard to achieve those financial models. We will hold off on the midterm management plan announcement meeting this year as there is no change in the financial model and we presented our technological strategy in IR Day. Thank you very much for your kind attention. This concludes my presentation.

Question-and-Answer Session

A - Koichi Yatsuda

We will have question-and- answer session until 6:00 Japan time. We will receive questions both in Japanese and in English, but our attendees are on the Japanese channel. Please allow us to restrict verbally asked questions only in Japanese. [Operator Instructions] We will refrain from answering a question if no name or affiliation is given. On the Japanese channel, I will read out the question translated into Japanese, and our attendees will give an answer in Japanese. While on the English channel, it will be simultaneously translated into English on a real-time basis. [Operator Instructions] So first question, please. The first question is from Mr. Shibano of Citigroup Security.

Masahiro Shibano

I’m Shibano from Citigroup Global Markets Japan. My first question is about this year’s plan and financial model relationship. So this time, ¥1.7 trillion, that is the plan for this year. And that in 2024, the financial model, just in the middle column of your financial model. So accordingly, gross margin, 43.5%, and financial model, just the same as financial model. However, on the other hand, when you look at the SG&A expense, there is some gap between the estimates and the plan. So now if you think about potential – growth potential, it’s difficult for us to predict the reduction of the SG&A expenses. How do you view this current status?

Koichi Yatsuda

Nunokawa-san, please.

Yoshikazu Nunokawa

I am Nunokawa. Let me answer to your question. Thank you very much for your question. The midterm management plans for 2024, we have the midterm management plan financial model and this fiscal year’s plan. So ¥1.7 trillion is the expected net sales. So compared with the financial model, the gross profit margin is just the same as the model. However, the SG&A expenses are slightly more than the financial model.

That’s what you said in your question. So as you said earlier, so SG&A expenses are not likely to decrease in the future. When you think about the future growth, we need to continue our R&D expenses. So we don’t have any plan to reduce SG&A expenses. In reality, this fiscal year, the SG&A costs more – compared with the plan, are – actually, these SG&A expenses are more than our plan, mainly because of the R&D development, R&D expenses.

R&D expenses are more than our original estimation. That’s one of the reasons. And also IT system enhancement also requires some expenses, and that expenses is a bit higher or faster than our original plan. That is the reason why we have more SG&A expenses for 2024, not only the sales but also the expenses. Of course, we need to control expenses, but the gross profit margin should be increased furthermore, and the SG&A expenses-to-sales ratio should be reduced. That’s how we try to achieve our financial model. This is how we plan to achieve our financial model. This is the answer to your question. Thank you very much.

Masahiro Shibano

I have one follow-up question. As for the net sales target for this fiscal year, new equipment, so you expect a very drastic growth. And when compared with the past few years, now you have the very high level of the sales. But your capacity and supplier capacity as well and the condition of the personnel or facilities for supply chain, are there any uncertainty in the future? But – or do you have the appropriate resources, both in your company and supply chain? So cost up might have – we don’t have – there is no concern of cost up or any problems in the second half of this year?

Toshiki Kawai

I am Kawai. Let me answer to your question. First of all, in principle, as for the preparation, there should be no problem in terms of our readiness. For supply chain, our partner companies, we have the annual production meeting. We have very close relationship and communication with the suppliers. As for our capacity, production capacity, as you know, little by little, we are enhancing and improving logistics. In Miyagi, for example, we have the distribution building, and we added some production lines. So we have been working on the enhancement capacity steadily. And in Tohoku and Yamanashi, now we have the new buildings, and new buildings started their operation. So the capacity is 1.5 times or 2 times more than before. So that’s the situation. So communication with supply chain and our own capacity for production, both – in both aspects, there is no concern about the resource problem at all. So we are planning to achieve the expected level.

As you said, the financial model and our current, let me just give you some additional comments about your previous question. The gross profit margin of 43.5% are likely to achieve. That is one of the great achievement of ours. That’s how I view the current condition. On the other hand, in Tokyo Electron, our growth strategy, our financial model, so we have – we do have the technology road map with customer that includes next-generation products with high value added.

So this is how we try to come up with technology road map, and we need to enhance our penetration so that the products are to be adopted by customers, high-volume production. That’s how we can enhance the top line. So this is how we can reduce the SG&A expenses-to-sales ratio. And recently, semiconductor demand is expanding because semiconductor now constitutes the social infrastructure. So the proactive and active technology innovation should be enhanced or driven by the active CapEx and R&D development investment. I just added some comments to your earlier question.

Koichi Yatsuda

Mr. Shibano, thank you very much for your question. Next question is from CLSA Securities – Mr. Yoshida from CLSA Securities Japan.

Yu Yoshida

I am Yoshida of CLSA Securities. My first question, for this year, WFE market expectation, you said 20% growth was expected, but now you said 30% growth is expected in WFE market for this year. So where – in which segment, by application, by region, which area shows more growth potential than three months ago?

Toshiki Kawai

So 20% to 30%, so about 10% increase in our prospect for the WFE market growth. So the logic/foundry investment is very active. But in addition, memory investment has been accelerated. So in all applications, the investment is getting higher than before. DRAM – as for DRAM, in the past, there are some adjustments, but now – for two years, DRAM CapEx – or capital investment was adjusted over the past two years. But now there is – DRAM is in short supply, so they need to add investment or pulling forward some planned investment. Logic, memories – for memories as well, 3D NAND, the investment is increasing as well. So in all the areas as applications, the capital investment is increased. That’s the reason why we added 10% for our prospect of the WFE market growth to 30%.

Koichi Yatsuda

Mr. Yoshida?

Yu Yoshida

So by region, how do you view the WFE market growth by region?

Toshiki Kawai

By region, in all regions and areas, the WFE market is growing evenly. There is no, can I say – and even less. So the WFE market is growing evenly throughout the regions.

Yu Yoshida

So maybe WFE market will be about 56 – $85 billion, that should be the size of the WFE market this year. So next year and on, when you – how do you see the continuity of the market growth? Could you just let us know your current view for the next year WFE market growth?

Toshiki Kawai

So as one research company announced the other day, the semiconductor device market, about 50% of that is driven by data center service, for example, smartphones, PCs, automobile, tablets. So these are the drivers of about 50% of WFE market, and that also drive the technology innovation. So 2025 Gartner also announced the gradual increase, phase-by-phase increase in that area. And 5G smartphone in year 2021, Gartner said about 560 million units, the 5G mobile accounts for 38% – oh, I’m sorry, smartphone – so 1.4 billion smartphone and 5G mobile is 560 million units, accounting for 38%.

But year 2025, the 560 million 5G mobile will increase to more than 1.5 billion units. So in terms of unit, the 5G mobile increased by 2.5 times, and 5G mobile have more higher semiconductor contents. So that’s the trend toward the future. And digital and green, so those two are the major pillar in the market as a whole, and semiconductor importance will be further enhanced in the future. So because of that, continuously, active investment or big years will continue. That’s how I view the future market.

Koichi Yatsuda

Thank you very much, Mr. Yoshida, for your question. Next question is from Mr. Wadaki of Nomura Securities. Mr. Wadaki, please?

Tetsuya Wadaki

That’s very clear and strong message. My first question is relevant to Mr. Yoshida’s question. So year 2022, how much percent growth is expected by application, for example? You don’t have to be accurate, but could you just let us know your current feeling?

Toshiki Kawai

By application for actually memory – both memory and logic, actually there is a very solid, strong demand both for memory and logic. So according to my understanding, for this year, so I wonder how much of them are pulling forward – being pulled forward. When you think about that potential, it’s a bit difficult for me to let you know something clear and cannot give you some quantitative forecast. But maybe we can expect the same level or more than the same level as 2021 WFE market size.

Tetsuya Wadaki

One follow-up question. So by application, the flash memory, on Page 21 of your presentation, and non-volatile world, so 15% is the market increase. But as for your sales, actually, your sales to the non-volatile memory is more than – by far, more than 15%. So do you increase the share increase? Or are there some hidden reasons of the great increase of your sales to the non-volatile memory customers?

Toshiki Kawai

So as I said earlier, for example, CY 2021 new equipment sales, so calendar year basis, 40% increase. So WFE market is expected to grow by 30%, but our sales outperforms that. But for this year, as well as I know this very well, memory investment – after the adjustments, the memory investment is now increasing. But in the case of memory, as you know, the new equipment investment accounts for the higher proportion. So in that sense, so that’s the leading-edge area. That growth is rather significant for this year.

In the case of logic, needless to say, the new capital investment, investment to the new equipment, of course, there is such kind of investment. But in the case of logic, commodity area also increased for logic application. So in that case, field solution business is expected to grow because of that commodity business. But memory investment, the leading-edge tools are high demand, and that proportion is rather high. So as I said, 3D NAND, the film deposition and etching are expected to grow in sales. And this is how I can answer to your question, Wadaki-san’s question, and this is how we analyze the situation. Thank you very much.

Koichi Yatsuda

Mr. Wadaki, thank you very much for your question. Next question is from Goldman Sachs, Mr. Nakamura of Goldman Sachs Japan.

Shuhei Nakamura

I am Nakamura of Goldman Sachs. For new year, the – about the group’s profit margin, I want you to give us some background compared with last year about increase by 300 basis points. So SPE new equipment sales increases drastically. I think that is the major reason why that over the past few years, it’s about 40%, around 40%, that is the gross profit margin. But could you just let me know the reason why there is some difference?

Yoshikazu Nunokawa

Thank you very much for your question. So for this year’s gross profit margin, for this fiscal year, 43.5%. In the past, compared with the previous years, the level of gross profit margin has increased, as you pointed out. The major reason, actually, is the size increase. As you pointed out in your question, SPE sales increased drastically. Because of that, the marginal profit ratio and gross profit margin increases, and we have been promoting productivity enhancements so far. That is very down-to-earth activity, and we can see some results of the productivity enhancement from this fiscal year and onward. So that’s the reason why we can see some improvement in the gross profit margin for this fiscal year’s plan. Thank you very much.

Shuhei Nakamura

That’s very clear. One follow-up question. For this fiscal year, so the sales recognition standards will be changed from this fiscal year. Because of that, sales or profits are impacted by the different – by the change. So if possible, could you just give us some figures based on figures of last year’s results by using the new standard?

Yoshikazu Nunokawa

Thank you very much for your question about the change of our sales recognition standard. For last – so the sales recognition standard is now changed, and that change, in principle, will not have any impact on the sales or profit. There are some positive and negative impacts, but basic understanding. So because of the change of the standard, we don’t see any increase or decrease of the profits or net sales. That’s our understanding. And when you look at the results, the comparison with previous fiscal year, so after the end of this quarter, by using the previous standards, sales recognition standards, we have some expected level of the sales. In the past, we had the CST, the completion of setup and test. That was the previous standard for sales recognition, and we can show the results based on CST at the end of this quarter.

Koichi Yatsuda

Mr. Nakamura, thank you very much for your question. Next question is from Mr. Shimamoto of Okasan Securities. Mr. Shimamoto, I’m afraid your microphone is muted. Could you unmute your microphone, please? Mr. Shimamoto, I’m afraid we cannot hear your voice. Could you repeat your question once again, please?

Shimamoto Takashi

I’m sorry. I have one question for next – this fiscal year. So you are earning a lot of money this year, according to your plan. And the payout ratio is 50%. So once again, how you plan to use the cash? Maybe you are maintaining the policy for flexible share repurchase. But do you have any plan or policy for M&A? You know the Kokusai Electric might be on the market for sale. So do you have any idea for the M&A? And how do you think about the use of your cash?

Toshiki Kawai

Let me answer to your question. First of all, about the cash, how – mainly, in principle, we are going to invest for our further growth. That’s how we try to use our cash. For – I’m sorry, M&A policy, so when it comes to M&A, we do not deny the possibility of M&A. So when we see the solid market growth and when good profitability is confirmed and shareholder profit and positive impact for customers are also confirmed, then we will see the M&A as one of the options. However, not only M&A, joint evaluation – but also a joint evaluation might be another option to take. So this is how we try to provide high value-added products that customer will need in the future.

So this is how we try to encourage the people surrounding our company happy. If people become happy, then M&A might be one of the options to take. As I said earlier – as you mentioned earlier, we are flexible in considering the possibility of the share buyback or share repurchase.

Shimamoto Takashi

I have one follow-up question. From looking at your company externally – from external viewpoint, you are very good. And you also outperformed WFE market, and I don’t think there are any missing portion in your strategy. But from your viewpoint, Mr. Kawai, when you look at your technology line or product line, are there anything that you think you need to improve in the future? If any, could you just let me know what it is?

Toshiki Kawai

There are so many things we need to challenge and all of them, so challenges actually are opportunities for us. That’s how I view the challenges. Therefore, financial model should be achieved. We need to make solid effort to achieve financial model. And next to the financial model 2024, that is one of our target year, 2024. Needless to say, however, in my mind, or I should say, in the mind of Board members, we are always thinking ahead beyond year 2024. So we need to identify the challenges. There are so many potential opportunities for growth, opportunities for potential growth.

Koichi Yatsuda

Mr. Shimamoto, thank you very much for your question. Next question is from Mr. Damian Thong of Macquarie Capital Securities.

Damian Thong

We received question in text, let me just read it out. So SPE field solution growth is 19% compared with previous year. But this year, 9%. It remains at 9%. So I wonder, this prospect is rather conservative. But perhaps sales, how do you view the growth – potential growth of the parts sales?

Yoshikazu Nunokawa

I am Nunokawa. Let me answer to your question. Thank you very much for your question, Mr. Thong. So field solution business, so fiscal last year, 19% growth was achieved. And this year, we plan to achieve 9% growth for this fiscal year. You said that prospect is rather conservative. So field solution business, so mainly composed of the parts and service and used equipment and modifications. Last fiscal year, the – because of the high utilization rate of customers’ fabs, parts service sales grew significantly. For this fiscal year as well, this growth of parts and service sales expected to grow furthermore.

But there was no – there would be so much jump just like previous year. So for used equipment and modifications, we expect the further growth of the sales for modifications and used equipment. In particular, for used equipment, as you know, used equipment themselves is now running short in the market. So we are not able to expect so much drastic increase in the sales of the used equipment. So that is the reasons why we just see 1% growth for field solution sales for this fiscal year.

Toshiki Kawai

So from the viewpoint of the market, let me just add some comments. So now semiconductors are running short. And that is the new investment. In the case of memory, in particular, the leading-edge tools are high demand in the memory. So the new equipment sales increases drastically. So that’s the major proportion in this year’s prospected forecast sales. Field solution, however, show – will show the steady growth. But more than that, the new equipment sales grow furthermore. As Nunokawa-san said earlier, the used equipment is in short supply. So there is not so much used equipment in the market.

On the other hand, upgrade or relocation or modifications are another potential. But compared with the proportion of the new equipment sales, those – field solution area is not so much. So that’s the reason why we came up with 1% for parts and service. Because of the higher utilization rate and growing installed base, the parts and services sales are increasing steadily.

Koichi Yatsuda

Mr.Thong, thank you very much for your question. Next question is from Mr. Hirakawa from the BOA.

Mikio Hirakawa

Let me just read it out. Year 2022 – the March 2022, SG&A is expected to increase ¥53 billion per year. R&D is expected to grow by ¥23 billion. But other than that, for example, IT investment, could you let us know the IT investment, for example? Thank you very much for your question. Nunokawa will answer to your question.

Yoshikazu Nunokawa

SG&A, so as for the breakdown of SG&A, I am sorry, but I cannot share that with you now. But in your question, you mentioned the IT investment. Last year, we invested certain amount of money for IT. But this year as well, we are planning to enhance IT investment. So that is one of the reasons of increase of the SG&A expenses for this fiscal year. And as I said earlier in my answer, R&D expenses, compared with the midterm plan, R&D expenses are more than our financial model. And we are determined to continue the investment of R&D, so that’s the increase in portion, again, compared with the last year, fiscal year.

Koichi Yatsuda

Mr. Hirakawa, thank you very much for your question. Next question is from Mr. Ishino of Tokai Tokyo Research Center. Again, we received the question in text.

Masahiko Ishino

Let me just read it out. WFE market, EUV lithography proportion in 2021 and 2025, how do you view the proportion of EUV lithography in the WFE market? Your market is – how much increase of your share expected from year 2021 to 2025? So WFE – first question is about EUV lithography proportion in the WFE market. How do you view the sales relative to the EUV lithography?

Toshiki Kawai

As – about the share, our share, let me just talk about that. About the competition of EUV lithography, maybe IR will present that. Is it possible?

Koichi Yatsuda

Yes. So IR department will answer to the first part of your question. So we expected the main scenario in the midterm management plan is WFE’s market of ¥56 billion to ¥70 billion. But this year, our focus is about 30% increase. According to the calculation, about $85 billion is the size of the market. One of the drivers is EUV relevant portion. So our market is growing, but now EUV lithography is introducing rapidly. That EUV proportion increases. But from 2021 to 2025, EUV lithography is now being penetrated into the market considerably. So I think our market growth, almost the same level of EUV lithography growth, especially the leading-edge logic/foundry EUV proportion is rather high. But in the case of memory segment, EUV proportion is not so much high. And for this fiscal year, the major driver is memory customers. So we think we can outperform the WFE market, as Kawai-san said earlier.

So 40% or more sales is expected for this fiscal year. For year 2025, year-by-year, the customer investment trend will be changing from year to year. So it’s so difficult for me to give you some specific answer for year 2025.

Yoshikazu Nunokawa

As for the – our share, let me – WFE market, the financial model linkage, so let me just explain those things now. So when you look back one year, past one year, so strong and resilient society construction. So ICT technology has been implementing in every industry, and digital transformation is going on in every industry. And semiconductor industry becomes more and more important because the semiconductor constitute infrastructure of the society, digital and green. And every country has a very positive policies, and there are many changes in business, and WFE market is growing more than expected.

Accordingly, as we presented today, for this fiscal year, our sales is expected to be ¥1.3 trillion. So the area we haven’t penetrated, so there is a mature technology nodes or commodity demands are rapidly increased right now. Our financial model is based on patterning or other leading-edge, high value-added next-generation products. At the same time, we try to provide these products and services. So WFE market scenario should be reviewed and revised, if necessary. So now we have the semiconductor device shortage in the global market and WFE market and financial model.

We are now in the middle of the reviewing our financial model right now. So actually, the area that we haven’t penetrated is also growing very rapidly. And share plan, the plan to increase share, maybe we should revise the share plan as well at the same time as the revision of our WFE market forecast. And once again, I want to share the idea with you when some solid understanding has been produced. But as I said before, the patterning system being evaluated and also adopted by our customers and the progress is in line with our plan.

Koichi Yatsuda

Mr. Ishino, thank you very much for your question. So one more question, although it’s time. It’s 6:00, so I’d like to share one more question. So we have Mr. Aiba, Nomura Asset Management. Mr. Aiba, please?

Yukihiro Aiba

Thank you very much. So one question. For the gross profit margin, for the fourth quarter, the gross profit margin didn’t improve so much. But this year, so 43.5% has been achieved in the first half of this year, so I feel very happy to hear that. But this improvement is because of the high-volume production or the improvement activities. But when it comes to the financial model, compared with financial model, 43.5%, so that is two years ahead.

You achieved already 43.5% three years earlier than your prospected timing. But are there any reasons for that? Actually, this is a driver to improve the gross profit margin or this portion was not enough compared with the plan, if any. So now you said you are now reviewing the financial model. But let’s say, two years from now, when the sales is, again, ¥7.0 trillion, how much improvement can you see for the gross profit margin in two years to come?

Yoshikazu Nunokawa

So I am Nunokawa. Let me answer to your question. So two years ago, we prepared this model, and current gross profit margin, so 43.5% against ¥1.7 trillion. So our current figures are just the same as the financial model. But difference from the – our scenario we produced two years ago, so I shouldn’t say anything so specific, but major things. So profit – gross profit margin and marginal profit were proportion of the raw materials. And also the fixed cost, the balance among those things, and current balance is a bit different from the balance we expected two years ago. As for the figures, I’m sorry, we cannot share the specific figures with you.

Yukihiro Aiba

Another point, ¥1.7 trillion, if we can achieve that level in the two years from now, what happens to the gross profit margin?

Yoshikazu Nunokawa

I’m sorry, I cannot give you any specific value. But according to our current plan, the figure is expected to increase, needless to say. I’m so sorry, I cannot give you any details, but proportion of the raw materials and processing costs, in other words, the fixed costs are to be revised once again. And in the future, we are going to further improve the gross profit margin. So that’s the difference from our scenario that we produced two years ago. I’m sorry, my explanation was not so sufficient, but this is best I can answer to your question.

Toshiki Kawai

My follow-up comment. So the financial model – essentially, financial model focuses on the top line, the operating margin and ROE. So these are the area we focus on in financial model. So those figures, so there are some product mix, macro economy and customer mix. Because of those factors, things might be different. So it’s so difficult to have the 100% matching with the plans, so we should provide this product and the service. By doing that, we try to enhance the operating margin and ROE.

We want to increase ROE and operating margin. So 43.5% gross profit margin, we are likely to achieve gross profit margin. That was the very good news and good progress so far. On top of that, so now we can provide high value-added product to the customer. We are planning to increase the top line, highly likely that we can increase the top line. And accordingly, we can increase gross profit margin as well. As a result, the fixed cost ratio to the sales should meet our financial model in the future. But two years to come, so there are so many positive factors. But in order for us to achieve the financial model, of course, we need to closely look at the management – market trend, and we should manage our operation properly.

Yukihiro Aiba

I expect a lot for your new financial model.

Koichi Yatsuda

Thank you very much for your question. So this concludes the financial announcement meeting. Finally, from this meeting onward, we have set up a questionnaire survey on Webex so that you can easily send your feedback, not by e-mail but by – through Webex. We would very much appreciate your kind cooperation as we’d like to learn from your precious inputs and continuously improve our IR activities. Thank you very much for joining us today despite your very tight schedule.

Toshiki Kawai

Thank you very much.