Kokusai Electric Corporation (6525) Earnings Call Transcript & Summary

I am Kawakami, Managing Executive Officer and CFO. Thank you for joining us today at Kokusai Electric's earnings presentation. I would like to begin by explaining our first quarter financial results and full year earnings forecast. These are disclaimers, which I will skip. First, here is a summary of the first quarter results. Page 4 are highlights. The first quarter was a quarter that showed strong recovery as anticipated as well as progress suggesting growth going forward. Details will be discussed in the following pages. Page 5 is a summary on the profit and losses for the first quarter. Since we consider adjusted profits to be an important management indicator, we will explain them in adjusted profit terms. Since most of the export sales of our products are in Japanese yen terms, foreign exchange impact on profit is minimal. In the first quarter, in addition to Equipment sales recovery, concentrated shipments of equipment resulted in year-on-year higher sales and profits. As for profitability, the gross profit margin was 1.4 percentage points higher year-on-year due to a higher proportion of highly profitable Equipment mainly for China. Furthermore, due to the recovery in sales revenue, adjusted operating income margin and adjusted quarterly profit margin improved by more than 10 percentage points from the same period last year. R&D, capital expenditures and depreciation costs were generally in line with initial expectations. Page 6 shows the factors behind the year-on-year changes in revenue and adjusted operating income for the first quarter. In the first quarter, Equipment sales increased across all applications, namely NAND, DRAM and Logic/Foundry. In addition, equipment shipments to China, including those accelerated from the second quarter as well as shipments of legacy equipment included in the services business saw concentration. And as a result, sales revenue in the first quarter increased significantly year-on-year. This increase in gross profit margin owing to higher sales and higher gross profit margin resulted in a significant increase in adjusted operating profit as well year-on-year. Page 7 shows the quarterly sales composition by business. The sales composition of Equipment business sales expanded compared to the same period last year due to an increase in Equipment sales in the first quarter. On the other hand, compared to the fourth quarter of the previous year, the ratio of sales from the Service business increased due to increased impact from the concentration of legacy equipment shipments and increased sales from the Services business. As observed, the mix may be different from the norm by quarter due to sales trend of the Equipment business and legacy equipment under the Service business. However, across the medium term, the Equipment business will be ahead and recurring Services business such as parts, sales and maintenance will follow suit as a trend. Page 8 shows a breakdown of equipment sales by application on a quarterly basis, including 300-millimeter equipment, which constitutes the Equipment business and legacy equipment of 200 millimeters or less, which is included in the Service business. The active investment in mature nodes in China since the second quarter of the previous year and recovery trend in equipment for advanced node, DRAM and Logic/Foundry worldwide since the third quarter of the previous year is continuing into the current quarter. In addition to this, shipments of equipment for DRAM to China, including those brought forward from the second quarter were concentrated in the first quarter, resulting in an expansion of the DRAM composition ratio. Further, shipments of equipment for SiC, Si and gallium nitrate, our devices included in the Service business were also concentrated in the first quarter. In the second quarter, this concentration of shipments of equipment for DRAM and power devices is expected to settle down. And from the third quarter, we expect Equipment sales for advanced nodes to recover in the order of China DRAM, Logic/Foundry and NAND. Page 9 shows a breakdown of combined Equipment and Services revenue by destination on a quarterly basis. In the first quarter, Equipment and Services combined accounted for 53% of total sales in China. As explained earlier, this is due to the impact of the concentration of DRAM equipment shipments to China in the first quarter, including the advance from second quarter. Since shipments are expected to settle down from the second quarter onward, the sales ratio in China for the full year is expected to be in the mid-40% range as forecasted at the beginning of the fiscal year. In the medium term, we expect the ratio of sales in China to return to previous levels of around 30% as investment in advanced nodes around the world recovers in earnest. Page 10 shows quarterly R&D expenses, capital expenditures and depreciation and amortization costs. The ratio of R&D expenses to sales revenue in the first quarter was 5.1%, normalized by the recovery in sales revenue. We will continue to invest in development of next-generation products and plan to raise the R&D ratio to 6% or more over the medium term. Capital expenditures increased year-on-year as well as versus the fourth quarter of the previous year since 40% of the amount of capital expenditure related to the Tonami business site, which will be completed in October, was recorded in the first quarter. Since the main capital investment related to the Tonami business site will be completed in the fiscal year ending March 2025, it is expected to stabilize the JPY 4 billion to JPY 6 billion per year from the fiscal year ending March 2026 onwards. Page 11 is the balance sheet. Total assets increased JPY 10 billion versus fiscal year ending March 2024 due to an increase in trade and other receivables and increase in tangible fixed assets due to large-scale CapEx spending, while cash and cash equivalents and inventories decreased. Total shareholders' equity increased by JPY 11.7 billion versus March end of 2024, mainly due to an increase in retained earnings. Page 12 shows the quarterly cash flow. Free cash flow decreased in the first quarter due to increase in investment cash flow stemming from large CapEx spending related to the Tonami business site. Investment cash flow spending related to large-scale CapEx investments in the first quarter will continue into the third quarter. However, since operating cash flow will see improvements from the second quarter and beyond, free cash flow is expected to improve heading towards the fiscal year-end. Further, as for financial cash flow, we are expecting expenditure owing to buyback in the second quarter. The balance of cash and cash equivalents will maintain sufficient working capital levels even when accounting for the buyback mentioned. Page 13 shows major management KPIs related to the balance sheet. Capital adequacy ratio continues to trend upwards and was at 51.6% at the end of the first quarter, in terms of the first quarter end relationship between cash and debt, due to impact from cash out regarding large CapEx spending, net cash will be at a minus continuing from the fourth quarter end of the previous fiscal year. As explained earlier, although free cash flow is expected to improve towards the end of the fiscal year, since we expect cash outflow in the second quarter due to buyback, we expect net cash negative for fiscal year ending March 2025 and for net cash to turn positive in fiscal year ending March of 2026. Next, I will explain our full year forecast for the fiscal year ending March 2025. Page 15 is a highlight. Specific details are provided on the following pages and beyond. Please look at Page 16. The full year forecast disclosed at the time of the fiscal year March '24 full year results announcement on May 10 remain unchanged. In the fiscal year March '25, revenues are expected to increase by 20% Y-o-Y, while adjusted operating profit and adjusted net profits are expected to increase by more than 30% Y-o-Y. Page 17 shows the breakdown of sales revenue in the forecast for fiscal year March '25 by first and second half of the year. The graph shows half year sales revenue broken down into Equipment sales to the world, excluding China, Equipment sales to China and Service sales. Both the level and breakdown of sales revenue in the first and second half of the year remain unchanged from the initial forecast. In the first quarter, there was an advance in shipments from the second quarter, but there is no change in the total level for the first half of the year. In the second quarter, shipments of equipment for China and legacy equipment are expected to settle down and sales are expected to be lower than in the first quarter. In the second half of the year, at the beginning of the period, we had estimated the cost of demand for equipment for China and assumed a recovery in demand for equipment for advanced products worldwide. There are no changes at the present, but both Chinese demand for DRAM and demand from around the world is stronger than we assumed at the beginning of the period. As we further examine the outlook for the second half of the year, we plan to announce more probable outlook for the year when we announce our second quarter results. Page 18 shows the order backlog and orders received on a half year basis. The level of order backlog was high in fiscal year March '23 due to an increase in projects with longer delivery times followed by the supply chain problems in fiscal year March '22. But as initially expected, longer lead time projects are being converted into sales, which is expected to normalize by the end of fiscal year March '25. On the other hand, the order backlog is expected to start increasing in the second half of fiscal year March '25 as the order backlog is clearly recovering after bottoming out in the first half of fiscal year March '24. The disclosure of orders received has been restrained because there is a mix of long lead time projects into that crossover period and short lead time projects that are recorded as sales within the same quarter and the composition of these projects fluctuate from quarter-to-quarter, but the semiannual trends are relatively stable and the risk of misleading is low. We intend to disclose this data going forward. That wraps up my presentation.

My name is Tsukada, Director and Senior Managing Executive Officer. I would like to explain our future outlook. At the time of our listing last October, we announced our medium- to long-term management policy, management strategy and medium-term targets, and we updated them at the IR Day held on June 18. As our first quarter results and full year forecast are already explained by Kawakami, in terms of business operations, we have made steady progress in our growth initiatives as explained at the time of our listing in IR Day, and it is evident in our business results. I will now explain the specifics of these efforts. Page 20 is the outlook for the business environment. The semiconductor device market has bottomed out in early 2023 and continue to recover. Investment in the development of advanced devices is continuing worldwide, and we expect demand for advanced node Logic/Foundry to begin recovering in the third quarter and beyond following an increase in demand for advanced node DRAM equipment against the backdrop of spread of generation AI and other factors. In addition, sales of NAND have begun to recover in the period under review, and we expect the demand for equipment for mass production advanced nodes to begin a full-fledged recovery in the fourth quarter. Active capital investment in China for mature node is also expected to continue for the next few years. In the medium to long term, the outlook remains the same that the semiconductor-related market is expected to grow significantly due to expanding demand for electronic devices such as smartphones and PCs, the expansion of data centers and investment in reducing environmental impact, the so-called GX. Page 21 summarizes our outlook by application. In DRAM applications, new PORs have been won for the highly challenging deposition process for advanced DRAM and the new POR for treatment have also been won. And we expect demand for treatment equipment in addition to batch ALD equipment to increase as device evolve in the future. And we aim to win further new PORs. For Logic, shipments of the GAA generation for which development POR has been awarded have started. And GAA generation sales in fiscal year March '25 are expected to exceed JPY 10 billion and expand in fiscal year March '26 and beyond. Our outlook remains unchanged. Furthermore, new business opportunities in interposers are also emerging, and we expect to expand our business in new business areas in the medium to long term. For NAND, we have a high market share in the 3D NAND deposition process with our lineup of large batch ALD compatible equipment, mini batch ALD compatible equipment for more advanced deposition and single wafer treatment equipment. At present, sales of Equipment for pilot production and expansion of mass production capacity are on the rise in advance of the resumption of full-scale mass production. And we expect the demand will recover in earnest as market conditions recover, and that sales will further expand as devices become more multilayered in the future. For SiC power devices, which are included in the Service business, sales are expected to grow by about 20% Y-o-Y due to the introduction of new high-temperature activated annealing products while expanding sales of existing products. From fiscal year March '26, sales are expected to increase with new high-temperature activated annealing products aiming to grow into one of the pillars of our business. On Page 22, we show the drivers for future growth along with the development road map. We believe that as semiconductor devices become increasingly multilayered and 3-dimensional, there will be increasing opportunities for batch ALD and treatment equipment in which we excel. In the short term, increased demand for DRAM and Logic/Foundry in mature and advanced nodes, respectively, followed by recovery in demand for NAND. In the medium term, sales growth for Logic GAA generation, increased demand for advanced node DRAM, sales growth for mature node Logic/Foundry and new products for SiC power devices. In the long term, there are inflection points such as a transition to 3D DRAM and Logic [indiscernible], and we aim to achieve a balanced portfolio and medium to long-term growth by providing products and services that meet the needs in each of these areas. Finally, I will give an overview of our share offering and share buyback resolved on July 10. KKR, which holds 43% of our shares offered 20% of the shares and [ Coke ], which holds 6% of the shares, offered all the shares with about 60 million shares for sale, of which about 8 million shares were over-allotted. As a result of the offering, KKR shareholding will decline from 43% to 23%, and our liquid share ratio will be about 60%. Along with the secondary offering, taking into account the impact of the supply and demand for shares, we also resolved to repurchase up to 6 million shares for JPY 18 billion between July 30 and September 20. In fiscal year March '25, as we are in the process of improving cash flow and are unable to secure sufficient free cash flow, we initially planned to return profits to shareholders only through dividends and not through share repurchases. Since we plan to conduct share buyback and pay dividends based on free cash flow of each year from fiscal year March '26 onwards, the share -- the buyback this time is separate from the share -- the buyback in the shareholder return policy set forth in our medium-term management plan. That wraps up my presentation. Thank you very much for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]