Kokusai Electric Corporation (69B.MU) Earnings Call Transcript & Summary

Kokusai Electric Corporation will begin the presentation of the financial results for the first quarter of fiscal year ending March 2026. Thank you very much for participating today. My name is [indiscernible] from Corporate Strategy Division and the Public Relations and IR. Let me introduce the participants today. Representative Director, President and CEO; Kazunori Tsukada. Senior, Vice President and Executive Officer, Financial Accounting, Yoshitaka Kawakami. Today's proceedings will begin with the presentation of the financial results for the first quarter and the forecast for the full year and by Kawakami and it will be followed by the outlook explained by Tsukada. Today's session will be using the Zoom webinar, and the Q&A session will be conducted in Japanese. Participants that can listen to simultaneous English as well. This presentation is intended for its investors and analysts only. So we will limit the questions only from the analysts and the institutional investors. Please refrain from recording the presentation. Without further ado, let us now bring Mr. Kawakami, please start.

I'm Kawakami, Executive Officer and CFO. Thank you for joining us today for the Kokusai Electric financial results briefing. First, I will provide an overview of our first quarter financial results and full year performance forecast. Following our disclaimers, which I will skip. First, an overview of the first quarter financial results. Page 4 highlights. Detailed explanations will follow using the subsequent pages. Page 5 is a summary of the consolidated earnings for the first quarter. Compared to the same period last year, when there was a concentration of equipment shipments to Chinese locals, the first quarter saw a decrease in both revenue and profit decreased also compared to the most recent quarter for the fiscal year ending March 2026, we plan for both sales and profit to be skewed towards the second half, and as such, the first quarter results were generally in line with the plan. The gross profit margin was 42.9%, which was lower by 2.1 points compared to -- since last year saw higher profit margin from the concentrated equipment shipments to the Chinese locals. However, compared to the full year results of the first previous fiscal year, there was a 0.3 percentage points increase. That is generally in line with the plan. This was owing to the increase in higher ratio of high value-added products and equipment sales despite the more than 10-point decrease in sales ratio to Chinese locals. Additionally, the first quarter was approximately JPY 53 billion, largely in line with the plan. Page 6 details the year-on-year changes in sales revenue and adjusted operating profit for the first quarter. In the first quarter, overall revenue decreased by 21% compared to the same period last year. The decrease in equipment sales to Chinese locals was due to a concentration of shipments of legacy equipment included in the service business for DRAM during the first quarter of the previous fiscal year while equipment shipments returned to normal levels in the current quarter. Adjusted operating profit decreased by 44% year-on-year primarily due to the significant decline. Page 7 shows quarterly revenues by business segment. In the first quarter, equipment sales decreased by 28% compared to the same period last year, while service sales decreased by 6%. Compared to the most recent quarter, the ratio of service revenue increased significantly owing to service sales increase, while equipment sales decreased. Page 8 shows the sales of legacy equipment for the 300-millimeter device business and the 200-millimeter or smaller equipment included in the service business broken down by application. In the first quarter, NAND sales increased by 116% compared to the same period last year, while sales for DRAM decreased by 73% and Logic/Foundry decreased by 8%. Page 9 shows sales revenue by application divided into global and China domestic markets. I will first explain the comparison between the first quarter results and the most recent regarding sales to global markets on the left side. Investments into the next-generation NAND transition progressed in the first quarter, leading to growth in NAND-related equipment sales. On the other hand, DRAM and logic foundry equipment sales -- however, our plan is second half focused, and the recovery trend for advanced devices continued. Service sales increased owing to the recovery of sales of legacy equipment and increased component sales. Next, moving on to sales to Chinese domestic customers on the right side. I will explain the first quarter results in comparison to the most recent quarter here as well. NAND-related equipment sales increased significantly in the first quarter, owing to the recovery of investments by major manufacturers. On the other hand, DRAM equipment sales decreased significantly due to the impact of major manufacturers entering an investment low. Logic/Foundry equipment sales decreased due to weak investments by emerging manufacturers despite steady investments by major manufacturers. Service sales increased owing to growth in component sales and the recovery of legacy equipment sales. The sales ratio for China domestic markets decreased by 3 percentage points from 41% in the previous quarter to 38%. Page 10 shows sales revenue by shipment destination. Sales by destination increased year-on-year for Japan and Taiwan and increase for Japan quarter-on-quarter. Sales to the U.S. decreased both year-on-year and quarter-on-quarter with sales ratio at 3%. Page 11 shows the quarterly balance sheet trends. Total assets resulted in the same total amount as the previous quarter end with increased inventory with production increase while there was a decrease in cash and cash equivalents, trade receivables and other receivables. Total capital increased by JPY 2.7 billion from the previous quarter end, primarily owing to increase in retained earnings. Page 12 shows the main financial indicators from the quarterly balance sheet. The equity ratio increased by 0.8 percentage points from the end of the previous quarter to 58.2%. Net debt remained largely in line with the plan at JPY 17.5 billion. Page 13 shows the quarterly cash flow. Operating cash flow exceeded investment cash flow, resulting in free cash flow of JPY 2 billion. Cash flows from financing activities resulted in an expenditure of JPY 4.4 billion due to dividend payments and other items. Page 14 shows quarterly R&D expenses, capital expenditures and depreciation and amortization expenses. R&D spend for the first quarter was JPY 3.9 billion. The ratio of R&D spend to sales revenue increased to 7.4% due to sales revenue decline. R&D expenses for the fiscal year ending March 2026 are expected to increase by approximately 20% compared to the previous fiscal year. Capital expenditures for the first quarter totaled JPY 2.3 billion. Going forward, we plan to invest a total of JPY 20 billion over the 2 fiscal years ending March 2026 and 2027 to newly build a demonstration center in the United States. As a result, capital expenditures for the fiscal year ending March 2026 are expected to increase by approximately 10% compared to the previous fiscal year. Depreciation expenses for the first quarter amounted to JPY 3.4 billion. Due to the impact of large-scale capital expenditures in the previous fiscal year, depreciation expenses are expected to increase by approximately 10% compared to the previous fiscal year. Next, we will explain the full year performance forecast for the fiscal year ending March 2026. Page 16 contains the highlights. Detailed information will be provided using the following pages. Please see Page 17. There are no changes to the earnings forecast as well as the dividend forecast for the fiscal year ending March 2026. That was announced at the time of the full year earnings call for the fiscal year ended March 2025. The guidance for the fiscal year ending March 2026 projects a 2% increase in revenue compared to the previous fiscal year, a 4% decrease in adjusted operating profit and a 5% decrease in adjusted net income compared to the previous fiscal year. The gross profit margin is expected to increase by 0.2 percentage points from the previous fiscal year. The initial plan that had already factored in a decrease of JPY 12 billion in sales for general purpose DRAM due to the indirect impact of tariff policies has been capped as is. The sales mix compared to the initial plan includes adjustments and the timing of new equipment sales and modifications as well as adjustments in the timing of equipment shipments and shifts between applications. However, there are no changes to the overall full year earnings forecast. Considering the lead time from production to shipment at our company, the accuracy of the shipment forecast for the second half will improve by the end of the first half. Therefore, we will provide a more detailed explanation of the second half forecast, including the and direct impact of tariff policies at the time of the second quarter earnings call. Page 18 shows the breakdown of sales divided between global markets the local Chinese market. The graph was presented at the full year financial results announcement on May 13, and I will now provide an oral update on the current outlook compared to that. First, in the memory segment for NAND and DRAM, as we expected, technology investments driven by device generation shifts are progressing and equipment demand is projected to increase. Compared to the initial assumptions, there are some fluctuations and differences in strength amongst the 4 units, NAND and DRAM for global market and NAND and DRAM for the local Chinese market. But overall, memory demand is expected to proceed roughly in line with the initial plan. However, for DRAM in global markets, compared to the initial assumption, there seems to be more demand for modifications included in the service business than for new equipment demand. Additionally, for DRAM in the local Chinese market, shipment timing is becoming uncertain and it is necessary to closely monitor order timing. Next, for Logic/Foundry and other non-memory segments. There are differences in strength between advanced node for global market mature node for global markets and the mature node for the local Chinese market. Nevertheless, we will aim to achieve the initial plan overall for the non-memory segment. That concludes my presentation.

I am Tsukada, Representative Director and President and CEO. I will now provide an outlook for the future. Page 20 shows our outlook on the business environment. In the semiconductor device market, active investment related to generative AI continues and the investment in NAND has started to recover. On the other hand, the recovery in general purpose DRAM remains slow and the mature node Logic/Foundry market continues to be sluggish. Based on this situation, we forecast that WFE market in 2025 will remain at the same level as in 2024 in line with our previous outlook. Compared to our earlier forecast, NAND is slightly negative. DRAM is slightly positive and Logic/Foundry is slightly negative. These are the trends we are seeing. For 2026, there are still many uncertainties but if factors such as tariff policies and export regulations do not worsen from the current situation, we expect mid-single-digit growth. Beyond that, heading into 2029, we believe that the demand for equipment for advanced devices, especially those related to AI will continue to rise. On Page 21, we have summarized the business environment and our company situation by application. Since the announcement of the full year financial results for FY March '25, the updates are as follows. First, regarding NAND demand in global market are as not as strong as expected, while demand in China is stronger than expected. Second, for DRAM, demand in global market is stronger than initially expected particularly with an increase in modification related demand. Meanwhile, shipment timing for the local Chinese market remains uncertain. Third, for Logic/Foundry, demand for mature nodes is in global market is weak. In the NAND segment, technology investments aimed at the device generation changes are driving increased equipment demand, both globally and locally in China. We expect that this technology investment to continue not only through the fiscal year March '26, but also into fiscal year March '27. Additionally, for the local Chinese market, we anticipate further investment aimed at expanding production capacity. For DRAM, with the advancement of [ HBM ], we expect the continued equipment demand for generational upgrades and capacity expansions in advanced devices. Although modification demand is higher than initially expected, we still anticipate the demand growth to continue in FY March '27. General purpose DRAM recovery remains slow and we continue to take a cautious view factoring in indirectly the effects of tariff policies. While investment in China has entered a post period, we expect a recovery in FY March '27. For Logic/Foundry, demand for equipment for advanced nodes, especially GAA is expected to continue growing. Investment in mature nodes has been weaker than expected. However, in China, major manufacturers continue to invest and we expect a further investment to continue in line with the Chinese government policy to buy made in China devices. For power devices, investment in the Chinese market continues, and we expect the demand for our products to keep growing. In global market, investment remains stagnant, but we have secured initial PORs for new products, and we expect these to continue to the revenue has contributed to revenue as the market recovers. Looking at the competitive landscape, Chinese equipment manufacturers are gaining the presence in batch division and CVD equipment, However, in the field of high difficulty film deposition, where we excel, Chinese players currently have no significant presence. Our market share in batch ALD equipment is expanding. Going forward, while continuing to monitor trends among local Chinese equipment makers, we will remain focused on expanding both TAM and our market share in the advanced device segment. Page 22 shows the transition in our product mix. There are no changes to the product mix outlook from our initial forecast. In FY March '26, demand for NAND equipment is recovering and the sales of mini-batch ALD, the systems are expected to grow significantly. As a result, the combined share of batch ALD systems and the single wafer treatment that is expected to reach 70%. Although the ratio of sales to local Chinese customers will typically offer relatively high profitability is expected to decline in FY March '26. The gross profit margin is still projected to surpass that of the previous year. On Page 26, we show the semiconductor device development road map, along with our catalyst growth potential. There are no changes to the strategies in the medium-term targets we have explained so far. Our target timing for achieving the medium-term goals remains tied to the year when the WFE market reached USD 120 billion. As semiconductor devices become increasingly multilayered, miniaturized, complex in the 3 dimensional, we believe there will be growing opportunities to leverage our strength in batch ALD and single wafer treatment systems. We expect to achieve revenue growth that exceeds our overall WFE market growth. In addition, with a higher mix of high value-added products, and lower SG&A expenses ratio due to increased revenue, we expect adjusted operating profit to grow at a faster pace than revenue. Finally, please refer to Page 24. On July 10, KKR sold a portion of shares of our company, resulting in a change of their ownership ratio. We were informed that KKR transferred approximately 30 million shares, just over half of the approximately 55 million shares held as of the end of March '25 to institutional investors through a securities firm. As a result, KKR's ownership ratio dropped from 23% to 11%. KKR is no longer our largest shareholder and is also no longer classified as a related party of our company. That concludes our presentation. Thank you very much for your attention.

That will be it from briefing from the Kokusai Electric side. We would now like to open the floor for questions. [Operator Instructions] Now we would like to appoint the first individual, Yu Yoshida.

This is Yoshida from CLSA. The first question is for WFE market of fiscal year 2026, it seems like you are expecting a 2-digit growth. If possible, my application can use share with [ vision ]. And then for this fiscal year, even though there may be some shifts, you would be aiming for a higher goal. Specifically for this year, there are some shifts. However, going into next year compared to about 3 months ago, has there been changes to your observation or how you foresee things?

For WFE market for 2026. When it comes to the breakdown by application, when we look at fiscal year 2025 most recently, there has been some changes compared to what we initially anticipated. So therefore, overall, it will be in the mid-1 digit. The mid-single digits would be about USD 110 billion. So right now, we are not really in a position yet to share the breakdown because we are currently trying to study the contents.

Understood. But for example, is there maybe an application that could be the driver? Can you have maybe more of a qualitative comment then?

When it comes to AI-related areas, investments into that arena should continue to be strong. And that is the outlook that we currently have. It will be the advanced logic foundry area as well as HBM related DRAM which most likely will continue to remain strong. And specifically for NAND, there is a generation shift. That type of investment should continue. However, when it comes to the strength of that is something that we would need to continue to monitor. And when it comes to the mature node logic foundry, we would like to expect some recovery. However, we don't know how strong the recovery will show. That is something that we do need to be observing and discerning.

As a follow-up. When you look at the full year guidance, at the time of the second quarter, you said that you will be able to maybe share some details once you understand how the second half will look like. But having said that, the business environment is changing. And there are some risks that are starting to emerge, and there are some upsides that you could be expecting. And when we look at the prerequisite of the guidance, it seems like the advanced package area as well as the DRAM, I think tariff impact, which was looking very conservative. So for the second half, is there maybe like an upside and downside that you can share with us in terms of which is the bigger risk?

When it comes to the multipurpose DRAM. At the beginning of the year, we were thinking about a JPY 12 billion worth of risk that we took off. Is the situation going to improve? Well, the multipurpose DRAM demand start to increase and rise and would there be more investments coming in? We don't really feel that. Therefore, as we mentioned before, when it comes to the risk portion, we do believe that we will continue to keep this as risk. And when it comes to course, there could be some production increase. But we're not really expecting to make an upward revision to the production level. Therefore, we do need to be monitoring the situation a little more closely and continue dialogue with the customers. And what is different from our assumption would be that for the NAND generation change investments. It is not as strong as we had imagined. We are seeing significant recovery. However, when it comes to increasing the volume of the new generation investment, it was not as strong as we had initially expected. That is what we are feeling.

So we would like to take a question from Tetsuya Wadaki-san, please.

I am Wadaki from Morgan Stanley. So I would like to ask about the business environment. So in China, there is a substantial investment for NAND, and that is reflected in your first quarter results, but because of some other restrictions, the evaluation for your business is quite a mix from the market. So now you do have more visibility with the business. And I'm not really sure what kind of risk you are expecting for that business in China. So do I -- and how should I interpret your situation in China?

So if I can update you on the impact of the latest export restrictions. So for our business with the major Chinese and NAND customers, our business is not subject to the restriction. So for the orders we have already received or the incurs we have received. So far, we should be able to book that as our revenue in the future. That is what we ar3 expecting to see. So compared to your initial expectation, do you see the risk level of the risk to decline? Or you have already expected all the risks. So we were expecting the risk. So there is no upside to what you have expected. I understand that. And Tokyo Electron -- for etcher, they are not able to the sell that. And it seems like they are going to be more active in selling other areas, and that includes the batch ALD because they cannot sell etcher -- drive the sales from etcher, they may focus on other businesses.

That means would that have any impact to your -- the competition in China? Are you still able to keep your competitive advantage?

So for vertical, the batch ALD, the equipment -- so we and other Japanese company, we had have equal market share, that situation continues unchanged. Based on -- it depends on the data of 2024, but on the revenue base, we -- our market share is more than 70%. So it seems like we are able to maintain our competitive advantage, and we are able to expand our PORs. Especially in NAND area, [ Suruge ], our mini batch system, demand is very strong. And there is the increasing number of adoption of our systems, then we are able to differentiate ourselves from other competitors. And that situation will remain unchanged.

Now moving on to Takashi Shimamoto.

This is Shimamoto from Okasan Securities. I would like to also understand how to observe the WFE market. Now as already made an earnings call and based on what they said, for the first half of 2026 calendar year, there could be maybe like a transition period that could be happening and from your eyes. Is there signs of such? Looking at just WFE, it appears like that may not be necessarily the case. And that is my observation. So what would be your observation? If you can comment, that would be wonderful.

When we look at the WFE market of 2026, as we mentioned before, it would be the mid-single digits. And that will be the scale that we are considering from a full year perspective. But if we do this from a quarterly or maybe like a first half or second half consideration, how would that look? We have not been able to have a full observation yet. When it comes to our sales expectation, we can understand that. But when it comes to WFE as a whole, we don't really know how that is going to develop. To accurately have an observation is quite difficult at this moment. Therefore, when we look at the full year of 2026, we are thinking that this will be the scale that we should be expecting. And so that's the outlook that we have at the moment. One thing that we could consider as a possibility will be that in 2026 at the beginning, there were expected investments that could be front forwarded to 2025. And therefore, there could be a drop in the first half of 2026. And that is a possibility that still exists. So for 2025 to 2026, we don't know how that will present itself. That's something that we're trying to discern.

There's one follow-up. When it comes to your earnings, I think you do have some visibility into the future. For January to March period 2026, so that would be the fourth quarter numbers. Is there a big decline in sales? I think it was going to be quite a bit of a skew in the second half, which was your initial observation, and I do believe that remains unchanged. But is there some kind of a change that you're starting to pick up?

As we mentioned in the presentation briefly, when it comes to the expectation of our sales for the second half, which will be the [ mixed ] players investments. It seems like the delivery period as well as the investment timing could be adjusted attention. How these things will play out is that really going to be as we had expected in terms of sales as well as shipment and that is something that we are currently trying to discern. And it has been covered in the news briefly. When it comes to South Korean manufacturers' investments into the U.S., that may start to heighten which will be March 2026 of our fiscal year. Would that be able to be so -- there are some positives that we do need to understand whether we'd be able to capture or not.

Let us take a question Yoshitsugu Yamamoto-san of Mizuho Securities.

My name is Yamamoto from Mizuho Securities. This main extraordinary situation, but you said you are going to -- we are likely to reach your guidance for the full year, even though the mix of the -- your business may change. I understand there is some other risk because the [ tail ] has lowered their outlook for the second half, and they also talked about the more -- the slowdown to come due to the market environment. If they are going to talk about the market factor, that means you may be affected by that trend as well. So what kind of impact are you expecting?

So for us, we don't really see any major change of the investment plans of our customers, which end that will result in the short fall of our business results in the second half. We do not identify any of those other factors yet. That's why we have not changed our full year forecast. And as we explained, our lead time is 6 months. So for -- even if we receive the new orders, we should be able to book our revenue and finish our shipment by the end of this fiscal year. So at this moment, we are not going to finalize our outlook for the year. So we would like to take some more time to scrutinize the situation. And if necessary, we will make the adjustment.

On Page 27, for your NAND related the document, sorry, on Page 21. And on top right, you are expecting the sales growth in Q4 for the global market. But Tsukada-san also mentioned with the generation change of NAND, the investment could be slightly weaker than you expected? So how should I expect that this -- the positive or negative factors, which will have more impact?

So I talked about if I can give you the breakdown of the situation for the world market and for local market. So for the world market, we are beginning to see the generation changes. So we are seeing increase from last year, but the growth is not as strong as we have expected. That is the situation. This is the market for demand for global market. And at the same time, for the Chinese local market compared to our initial expectation, the demand seems to be slightly stronger offsetting the relative weakness in the global market. That's what I meant.

So of course, you should not follow what the tail has done. But the tail has said that they will see the revenue decline in the second half compared to the first half. But for you, you are not seeing the same trend in your business?

For our business, we don't see any major change of our customers' investment plans. We do not see that happening within our customers. That is not the situation.

Now continuing to Shuhei Nakamura-san.