Kokusai Electric Corporation (6525) Earnings Call Transcript & Summary

We will now begin the financial results briefing of Kokusai Electric for the first quarter of the year ending March 2027. Thank you very much for joining today out of your busy schedules. I will be serving as the moderator, . Matsumoto from Corporate Communications. It is a pleasure. Firstly, I will introduce today's speakers. Mr. Kazunori Tsukada, Representative Director, President and CEO.

Hello.

Mr. Yoshitaka Kawakami, CFO and Senior Vice President.

Hello.

The proceeding is, at the beginning, Mr. Kawakami will present the first quarter consolidated results and the full year forecast. Next, Mr. Tsukada will present the outlook going forward. After which, we will have questions and answers and plan to finish at around 4:00 p.m. Today's briefing is broadcast live online via Zoom. If the stream disconnects or the video freezes during your viewing, please wait a moment and try reconnecting. The presentation and answers during -- questions and answers will be delivered in Japanese. Simultaneous English interpretation service is available to the participants. As today's briefing is intended for institutional investors and analysts, please be advised that questions will be limited to institutional investors and analysts. Thank you for your understanding in advance. Please also refrain from recording or taking photos. We will now begin the presentation. Mr. Kawakami, please go ahead.

I am Kawakami, Senior Vice President and CFO. Thank you for joining us today at Kokusai Electric's Earnings Call. I will first go over our first quarter financial results as well as full year earnings forecast. These are disclaimers that I will omit explaining. First, here is an overview of our first quarter financial results. Page 4 are the highlights, where I will explain the specifics from the next page and onwards. Page 5 presents a summary of our consolidated financial results for the first quarter. Both revenue and profit increased quarter-on-quarter as well as previous quarter. This was owing to uptick in service revenue, mainly from component sales and others, resulting in both revenue and profit exceeding our initial forecast. Revenue of JPY 75.4 billion set a new record high for a single quarter. The gross profit margin of 40.7% saw a 2.2 point decline year-on-year, where the proportion of NAND-related equipment sales was high. However, compared to the previous quarter, it rose by 1.3 points, owing to production utilization increase in others. Furthermore, the increase in revenue led to a decline in the ratio of SG&A expenses and profit margins from adjusted operating income onwards rose both year-on-year as well as the previous quarter. The first quarter orders received totaled approximately JPY 140 billion, exceeding initial forecast by about JPY 67 billion. The increase was particularly significant for DRAM for China as well as for NAND sold to non-China and China. The strong demand is expected to continue into the second quarter. Page 6 details the factors contributing to the year-over-year changes in revenue and adjusted operating income for the first quarter. Revenue increased by 46% year-over-year to JPY 75.4 billion owing to growth in non-China equipment sales. Adjusted operating income increased by 59% year-over-year to JPY 17.4 billion as gross profit rose owing to a significant growth in sales despite the total gross profit margin declined due to product mix change. Page 7 shows early equipment and service sales by application. In the first quarter, although sales for NAND decreased by 34% year-over-year, sales for DRAM increased by 158% and sales for Logic/Foundry increased by 82%. Although sales for DRAM decreased by 2%, in the most previous quarter, sales for NAND increased by 84% and sales for Logic/Foundry increased by 38%. Page 8 shows equipment and service sales by application, broken down into sales to non-China manufacturers and sales to China manufacturers. In the first quarter, sales to non-China manufacturers saw increases in equipment and service revenue for major applications, both year-on-year and compared to the previous year -- previous quarter, resulting in a 75% year-over-year increase and a 23% increase versus the previous quarter. Sales to local Chinese manufacturers in the first quarter saw an increase in equipment and service sales for Logic/Foundry applications, both year-over-year and the previous quarter. Yet year-over-year NAND segment equipment sales going through a transitional period resulted in a slight 3% decrease year-over-year. Compared to the previous quarter, sales rose 18%, marking a recovery trend following the low point in the fourth quarter of the previous fiscal year. Furthermore, while sales to non-China increased year-on-year, sales to China declined, resulting in a fall to 25% for share of sales to China. Page 9 shows revenue by destination. First quarter sales to China decreased year-over-year, but increased quarter-over-quarter. Outside of China, sales increased in all regions, both year-over-year as well as the previous quarter. The percentage of sales to China remained at 28%, the same level as the previous quarter. Page 10 shows the quarterly trends of the balance sheet. Total assets increased by JPY 11.2 billion compared end of fiscal year ending March 2026, owing to increase in inventory from production growth as well as increase in trade and other receivables. Total liabilities increased by JPY 5.6 billion compared to the end of the fiscal year ending March 2026 due to increased trade and other payables from increased production. Total equity increased by JPY 5.6 billion compared to the end of the fiscal year ending March 2026, primarily owing to an increase in retained earnings. Page 11 shows the key financial indicators from the quarterly balance sheets. The equity ratio decreased by 0.4 percentage points from the end of the previous fiscal year to 60.6%. In addition, we maintained our net cash position from the end of the previous fiscal period with net cash standing at JPY 6.6 billion. Page 12 shows quarterly cash flows. Operating cash flow -- cash flow inflows exceeded investment cash flow outflows resulting in free cash flow of JPY 6.6 billion. Cash flows from financing activities resulting in an outflow of JPY 6.4 billion due to dividend payments and buyback. Page 13 shows quarterly R&D expenses, capital expenditures and depreciation expenses. Research and development expenses for the first quarter totaled JPY 4.5 billion. The ratio of R&D expenses to revenue fell to 5.9% owing to increase in revenue. R&D expenses for the fiscal year ending March 2027 are expected to increase by about 10% year-on-year projected to total approximately JPY 20 billion. Capital expenditures for the first quarter totaled JPY 4.8 billion. We are currently investing a total of JPY 20 billion to construct a demonstration center in Oregon, USA, aiming for operational start in January of 2027. Consequently, capital expenditures for the fiscal year ending March 2027 is expected to increase by about 70% year-on-year to approximately JPY 29 billion. Depreciation expenses for the first quarter totaled JPY 3.9 billion. This figure is expected to remain at a similar level going forward and is expected to increase by about 10% year-on-year, reaching approximately JPY 16 billion. Next, I will explain the full year earnings forecast for the fiscal year ending March 2027. Page 15 shows the highlights. Details will be shared starting on the next page. Please turn to Page 16. We are revising the earnings forecast and dividend forecast for the fiscal year ending March 2027 that was announced on May 13 at our full year earnings call for fiscal year ending March 2026. Revenue was expected to significantly exceed the previous forecast, owing to a substantial increase in sales in the equipment business. Consequently, we have revised the first half forecast upwards by 6% to JPY 161.0 billion, a 37% increase year-over-year and a full year forecast upwards by 21% to JPY 340 billion, a 45% increase year-on-year. We have also revised our profit forecast upwards in line with the revenue increase. Adjusted operating income has been increased by 10% to JPY 39.2 billion, a 55% increase year-on-year and our full year forecast has been raised by 42% to JPY 86 billion, an 81% increase year-on-year. Adjusted net income for the first half was revised upwards by 11% to JPY 27.8 billion, a 60% increase year-over-year and a full year forecast has been raised by 40% to JPY 60 billion, a 76% increase year-on-year. The dividend forecast has also been raised in line with the upward revisions to adjusted net income. With the interim dividend forecast increased by JPY 9 from JPY 23 to JPY 32 and have revised our year-end dividend forecast upwards by JPY 9 from JPY 24 to JPY 33. As a result, the projected annual dividend is expected to be JPY 65 per share, and the consolidated dividend payout ratio based on adjusted net income is projected to be 25.2%. Page 17 summarizes the factors contributing to changes in the earnings forecast for the fiscal year ending March 2027, comparing it to the previous forecast announced at the earnings call for fiscal year ending March 2026. Revenue is expected to exceed previous forecasts for both equipment sales to non-China and China as well as for service revenue. Therefore, we have raised the forecast by 21% from the previous forecast to JPY 340 billion. In addition, profitability is expected to improve due to product mix changes. And as such, the gross profit margin has been raised by 1 percentage point from the previous forecast of 42% to 43%. Regarding adjusted operating profit, owing to a significant increase in sales and a rise in gross profit margin, we have raised the forecast by 42% from the previous forecast to JPY 86 billion. Page 18 summarizes the factors contributing to changes in earnings forecast for the fiscal year ending March 2027 compared to the previous fiscal year's results. Revenue was expected to increase owing to higher sales of equipment to non-China customers, higher sales of equipment to China and higher service revenue and is projected to increase by 45% compared to the previous fiscal year. Adjusted operating profit is projected to increase by 81% year-over-year, owing to higher sales as well as rise in total sales gross profit margin from improvement in production capacity utilization resulting from increased production volume and the total gross margin improvement from product mix changes where the increase in SG&A was absorbed. Page 19 shows chronologically revenue in non-China and revenue in China from March '23 to March '27 forecast. Revenue in non-China bottomed in March '24, since then, the revenue increase trend has been continuing with greater acceleration in March '27. Non-China revenue forecast is revised 14% upward compared to the last forecast, driven by stronger-than-expected demand for NAND and Logic/Foundry equipments including advanced packaging. NAND sales are expected to grow 95%, DRAM sales 39% and Logic and Foundry sales 89% year-on-year. Each application is expected to grow significantly totaling non-China revenue growth of 49% year-on-year. Now revenue in China is revised upward by 39% compared to the last forecast, a 37% increase year-on-year with greater-than-expected increase in DRAM equipment demand. For China NAND sales, in the last forecast, we expected a sharp fall due to major device manufacturers, investment transition period, but are now projected to drop only slightly as demand has been increasing recently. March '28 onwards, we expect China NAND equipment sales also to shift to a growth trend. With faster-than-expected pace of revenue growth in China, China revenue share rose 4 points compared to the previous forecast to 33%. We expect the share to trend around 30% going forward. Page 20 shows revenue forecast by application of equipments and service. In March '27, driven by generative AI demand, we expect semiconductor device makers to accelerate CapEx for generational shifts and capacity expansion, mainly in high-performance devices. Therefore, equipment sales are projected to grow strongly across all applications, NAND, up 49%; DRAM, up 61%; and Logic/Foundry up 65% year-on-year. Page 21 shows revenue forecast by destination. Revenues are projected to grow across all regions year-on-year. China's share is expected to reach 38% partly due to active CapEx by non-China manufacturers for their plants in China, while export controls and tariffs have no direct impact currently, we will monitor closely together with potential indirect impacts. Page 22 shows revenue forecast by equipment. High value-added equipments are expected to account for about 70% of equipment sales in March '27. We will accelerate the adoption of high value-added products as generational shift investments progress in each application. This concludes my presentation.

I am Kazunori Tsukada, President and CEO. I will explain future outlook. Page 24 outlines our business environment. Our view is that in the semiconductor device market, AI-related demand will continue to strongly drive CapEx, especially in high-performance devices among device manufacturers. On the other hand, non AI-related industrial equipment users are in a recovery phase, awaiting full recovery. For the mid- to long-term, our view remains unchanged that the overall semiconductor device market will grow at a pace faster than expected so far. Regarding the calendar year 2026 WFE market size, during our March '26 earnings announcement, we projected a 15% year-over-year growth to around $120 billion to $125 billion, but with AI-related investments accelerating further centered on DRAM and NAND, we have raised our outlook by about 10 percentage points, now expecting year-over-year growth of over 25%, reaching around $140 billion. Page 25 provides an update of our mid-term management plan. When we announced the March '26 results, following changes in the market environment, we reviewed the timing of achieving the midterm plan. We now expect to achieve our revenue target of JPY 330 billion in March '27, 2 years ahead of schedule. Sales mix by application is also approaching target levels as a result. For the midterm adjusted operating margin target of 30% or higher, we aim to achieve in March '28 through operating leverage coming from larger scale of revenue. We will build higher profitability by raising the mix of high value-added products with device generational shifts, reducing production costs via higher utilization rate and controlling fixed costs and SG&A. Page 26 covers production capacity and sites. Capacity utilization is expected at an average of 70% to 80% in the first half. Over 80% in the second half of March '27 and higher next fiscal year. Production lead time is currently around 8 months. While current capacity secures our JPY 340 billion revenue forecast for March '27, we are expanding capacity to meet increasing demand, March '28 and beyond. We are evaluating rapid capacity expansion on newly acquired land next to the Tonami plant, while ramping up production engineer recruitment, and putting in various measures. Through these efforts to increase production, monthly unit production capacity is targeted to reach 2.5x of the March '25 level in 10 years. Page 27 outlines shareholder returns. It is our management priority to deliver stable, continuous and proactive returns to our shareholders. And the basic policy is a consolidated payout ratio of around 20% to 30% of retained earnings. Following this policy, with the revision to the guidance, we raised our annual dividend forecast by JPY 18 for March '27. Further, following the shareholder return policy, we announced share buybacks at the time of financial results announcement for the year ended March '26 and have subsequently announced the cancellation of these treasury shares. We completed up to JPY 5.3 billion share buyback, resulting in purchases of about 570,000 shares on July '27. All acquired shares will be canceled on August 31. Finally, Page 28 summarizes the semiconductor device development roadmap, business environment and our catalysts. Semiconductor device makers are rapidly accelerating CapEx for high-performance devices for generational shifts and production capacity, and they are also expected to increase CapEx for generation -- general purpose devices. For NAND, we are optimistic that capacity expansion investments will finally resume. While for DRAM, Capex is likely to become more active for generational shift and capacity expansion driven by AI. In Logic and Foundry, we can expect more device manufacturers to implement Capex for GAA. And in advanced packaging, our film deposition technology is our competitive advantage, and we can expect to win new PORs. For the evolution of semiconductor devices, we are actively collaborating with customers on the development of next-generation devices and will further promote proposals aimed at securing new PORs. In particular, we will create opportunities for our batch ALD compatible equipment and single wafer plasma treatment equipments, our strengths and aim for sustainable sales growth faster than the WFE market alongside a highly profitable business structure. Thank you very much for your attention.

That concludes our presentation. We would now like to open the floor for Q&A.

[Operator Instructions] Now we would like to open the floor for questions. Yu Yoshida-san.

This is from CLSA Securities, Yoshida. So congratulations on a great earnings call. So in terms of your by application equipment sales outlook, so in the first half as well as by application, when you look at the full year, when you look at the first half, do you have an outlook if that is available, please share. And in the slide, I think it was JPY 234 billion for equipment sales previously, but then it's JPY 255 million -- JPY 225 billion now. But is there some kind of an upgrade from the previous version of your equipment included? If so, what is the percentage?

First surrounding the sales outlook of JPY 340 billion in terms of equipment by application. When we look at the first half for NAND, it is 17%; DRAM is 43%. Logic/Foundry will be 36% and others will be 4%. So this will be the percentage by equipment and by application. So upgrade portion has been included. Please give us a moment. Thank you. As for upgrade modifications, in the first quarter, sales was JPY 14 billion. And from the second quarter and beyond, it was JPY 11 billion for the second quarter. And overall, for March 2027, when we look at the full year, the upgrade modification will be JPY 39 billion that we are forecasting, and that has been priced in.

Just for clarification. For the first half when it comes to the value for just equipment, I think you gave us a breakdown for equipment only. So what is the value for just the equipment portion. And then the previous outlook for equipment, if the numbers have changed, so can you please give us a backdrop to why the numbers have changed for your outlook?

For the first half, the equipment sales was JPY 130.4 billion and service was JPY 30.6 billion. And that is our outlook of now. As for the upgrade modification, it is a new standard that we are going by and maybe that's why there is a change in the numbers.

Understood. So if there's anything that you can maybe elaborate separately, that would be very much appreciated. And secondly, and as for the WFE outlook, I think you have tried to see an upward revision. And going into next year, do you have an outlook at this point in time? And then from your earnings base, how are you observing how the next fiscal year will look? So is there a further uptick that you can expect? And when will that be more visible? And going into next fiscal year and going into next year, if you have an outlook and your thinking, that would be very much appreciated.

For WFE calendar '26 to '27, it should be maybe about a 20% increase that we are anticipating at this very moment. However, going into '27, if WFE -- there are some hints that maybe WFE will rise even further. But at this moment, we are expecting about 20% growth. And as for our sales, that was addressed in your question, needless to say, we want to grow above the WFE growth, and that's how we intend to expand our top line. For March 2027, we want to go for more than a 20% increase. And that is something that we are currently hoping for.

If you have by application, exactly where it could be growing and contributing, can you comment? That would be appreciated.

We expect that DRAM will be more hopeful continually. And NAND investments should be increasing to a certain extent as well. And that is what we anticipate. So NAND sales is very close to record highs, could be getting very close to record highs, and that's something that we are picking up as a hunch. And as for advanced packaging, there should be sustainable investment that should be happening. And therefore, advanced packaging's growth should be continuing. That's what we anticipate as an outlook as well. Thank you.

Thank you very much. Next is Suzune Tamura-san, please.

Morgan Stanley Securities, Tamura speaking. We are seeing WFE. And on this page, I have a question. Outlook of China. Chinese WFE market, if we look at the WFE market, just in China, what is the outlook? And then within that, what is the number by application, please?

China and non-China, we have divided. But within China, what is the breakdown by device and applications. Sorry, we don't have the information prepared. Excuse us for that. But China local, the WFE year-on-year is 5% plus. This is the current outlook.

That is year 2026 -- in year 2026?

Yes.

And then how about for 2027? Do we have the 2027 information?

For year '27 -- sorry, the overall field that I expressed earlier is about 20%, as I said earlier. But by region, we don't know. We don't have the information available yet. Many apologies.

All right. I see. And then my second question, in the presentation, you also touched upon somewhat, that is sales JPY 330 billion, once going more than that, you need to increase your production capacity, as you have said from the past. And this year, you are able to support the increase in production and in the production field and for supply chain, how pressed are you? going towards next fiscal year, how much can you support production-wise to cater for the demand? Production capacity wise, do we need to increase something big like an entire building?

No, even without doing that, we can increase production, for instance, the existing 3 production sites we have today already, how can we increase efficiency and effectiveness of production there will allow us to increase production. Therefore, first of all, we will increase the number of people working. We will increase the number of shifts. That is the preparation we are undergoing right now. And one more important point as raised in your question is the supply chain. Raising production capacity to the level we aim for, there are partners who can follow and keep up with us. And there are also suppliers who cannot catch up so that they will not be the bottleneck so that we can work lock in step. We will provide all the support necessary from our side. We want to prevent any bottlenecks in the supply chain. We are preparing.

Lately, do we see any bottlenecks to prevent our production increasing?

No, we are not seeing that happening.

Lately, you said, but how about for next year? WFE will be growing 30% next year, we hear. In this backdrop, will the suppliers not become a bottleneck next fiscal year onwards? Don't you have this concern?

On this, it is not just limited to us, but SPE companies to the key suppliers have provided their production outlook, which means suppliers are also preparing and taking action to build production capacity and to increase production. At the beginning of the year, compared to the WFE, what we expected, then we are seeing about 2 years advancement in schedule, which means we need to increase production 2 years quicker. There has to be CapEx and capacity increases for 2 years necessary ahead of schedule.

I see. And as for the plan for this fiscal year, I want to hear the upside to this year's forecast. And you said lead time is 8 months, which means no different compared to the last time, which means for the second half of the year, you are fixed, which means sales revenue-wise, there can't be much upside any further. Is this the right understanding? And profit-wise, year-on-year, if you have as much profit increase this much. And my impression is that other companies are increasing profits a bit more. How much profit upside can you expect in your case? There can be fixed costs. This will have to be increasing. Are you taking a conservative view, especially in certain aspects? In that case, please highlight.

For sales revenue, JPY 340 billion is the revised forecast now. This is the base that we can for surely clear. And profits since revenue is going up, some outsourcing will take place because of the increased production and payroll will go up which we have factored a increase, including bonus, which means profit wise, we can for sure defend this number.

But how much higher in profit compared to this number, we need to see further? In a sense, is this the minimum you're going to achieve as profit?

I think we can clear this number.

Next moving on to [ Wadaki-san ].

This is [ Wadaki ] from SBI Securities. First, this is the market earnings, I think theme, which is China exploding. So China is probably seeing an explosive situation. So how much have you priced that in? And how sustainable is this going forward? And what is the backdrop to this explosion that's happening in China. What is your read?

When it comes to demand from China, it is increasingly becoming very strong. So it is a major Logic/Foundry, DRAM, NAND across all areas, a very bullish situation is happening most recently. And then it's looking like it will continue from next fiscal year and onwards as well. And together with this, the medium to small cap emerging chip manufacturers demand is also proving to be stronger. We don't think this is one-off. But having said that, at a minimum, this fiscal year, next fiscal year, a very strong situation should be continuing. There are some companies that have announced that they will be building new factories as well. And therefore, a very strong demand should be continuing for a while, and that is our read.

Hearing what you shared. So it seems like your sales revenue is really growing in China.

When it comes to Chinese customers, they try to match our production lead time when they place orders. And therefore, our sales outlook can be priced into a certain level.