SCREEN Holdings Co., Ltd. (7735) Earnings Call Transcript & Summary

Good afternoon, everybody. Now we'll hold an earnings presentation for the third quarter fiscal year ending in March 2026 for SCREEN Holdings. And let me introduce you the presenter for today. Masato Goto, SCREEN Holdings Company Limited, President, Member of the Board, Chief Executive Officer; Yoichi Kondo, Executive Vice President, Member of the Board, Chief Financial Officer. And today, in addition to CEO and CFO, we have three executive officers attending this event. Manabu Ishimura, Managing Executive Officer, Head of Financial Strategy Division; and Akihiko Miyagawa, Senior Executive Officer, Head of Corporate Strategy Division; and Chiho Otobe, Executive Officer, Head of Corporate Communications Department, Corporate Strategy Division. Now we'd like to invite Executive Vice President, Kondo, to give us a presentation about the consolidated business results and forecast. Now the microphone is yours.

Now let me give you the presentation about the consolidated business results and forecast. Net sales of JPY 425.3 billion and operating income, JPY 77.4 billion and OP margin 18.2%. And that is the sales and profits both decreased year-on-year, but it is in line with expectation. In SPE, sales and profits both fell year-on-year, but we're now receiving a very strong inquiry. So performance has now bottomed out and entered into recovery phase. And FT, it is performing very strongly, and we could have the strong sales and profit growth over the previous year because of the strong sales of OLED. So the full year outlook remains unchanged, but the large-scale project of sales from China is now shifted to the next year. But with that, we still maintain the full year forecast. And this is the third quarter cumulated consolidated earnings. So it was JPY 425.3 billion, and operating income, JPY 77.4 billion. That is minus JPY 23.1 billion; and ordinary income, JPY 78.8 billion, minus JPY 23.4 billion; net income, JPY 54.9 billion, minus JPY 14.5 billion. And this is the sales by the estimation, Japan, 14%; Taiwan, 19%; China, 39%; Korea, 8%; in other countries, 7%; North America, 8%; and Europe, 5%. And this is the sales by segment. SPE, 79.5%; GA 9.1%, FT 8.2%, PE 2.2% and others, 1.1%. And this is the consolidated earnings by segment. First, SPE, the third quarter cumulative is JPY 338.6 billion. Operating profit, JPY 78.3 billion. That is OP margin of 23.1%. And on the right side, you can find the comment, sales and profits both fell and foundry operation remained solid, while logic sales declined. And order intake is strong. So we are now entering into the recovery phase. In GA, JPY 39.5 billion of sales and operating income, JPY 1.9 billion, and that is sales and grew whilst profits fell. Sales growth was offset by the impact of the U.S. tariff. Next, FT, JPY 35.8 billion of sales, OP income, JPY 7.3 billion and sales and profits both grew. Equipment sales and OP margin grew significantly, mainly driven by OLED. PE JPY 8.9 billion of sales and operating income is minus JPY 0.5 billion and sales and profits both fell with the recovery expected in the fourth quarter because of the strong inquiry we are receiving. So we can maintain profit. The balance sheet and total asset is JPY 677 billion, and net asset is JPY 443.2 billion, and equity ratio achieved 65.4%, and that is the JPY 180 billion level. And this is the cash flow, and we have the interim corporate tax payment -- for the first quarter, operating cash flow was JPY 9.6 billion, used JPY 5.1 billion in investments. The free cash flow is JPY 4.5 billion and the financing cash flow increased, but we had interim dividend payment of JPY 11.6 billion. So JPY 40.5 billion cumulative operating cash flow. And we had a free cash flow of JPY 23 billion. And this is R&D expenses, CapEx and depreciation and amortization. They have been in line with our expectations. There's no change in the figures. So the JPY 38 billion of the R&D and JPY 28 billion of the CapEx, Depreciation and Amortization, JPY 15 billion. So mainly for the SPE, we have been in line with our expectation. And this is analysis of the operating income growth in -- so this is a comparison between the third quarter in FY '25 and FY '26. So in year ending March 2025, it was JPY 100.6 billion minus JPY 14.1 billion due to sales and capacity utilization but it's going to JPY 77.4 billion. And there's minus JPY 11.8 billion impact of fixed cost and increasing the profitability by JPY 2.6 billion. And so for the third quarter, it will be JPY 77.4 billion. And the sales decline mainly by the SPE, but we have the improvement of profitability, mainly was SPE and FT and fixed cost increased mainly about the growth investment attributable SPE and exchange rate has an impact from the GA. And this is the business forecast. So you can find the change from October. There's no big change. So the forecast is JPY 621 billion for the net sales and JPY 117 billion for the operating income and net income is JPY 88 billion; SPE, JPY 502 billion and JPY 121 billion of the operating income and OP margin 24.1%; GA, JPY 53 billion of sales, OP income, JPY 2.5 billion; OP margin, 4.7%; FT, JPY 46 billion and income, JPY 8 billion; and OP margin, 17.4% and JPY 15 billion and JPY 1 billion of income and OP margin, 6.7%. And this is analysis of operating income growth forecast against actual from the ending in March 2025. And we had the plus JPY 2 billion from the sales and capacity utilization and no change with the profitability, but there's a negative impact of the fixed cost at minus JPY 19.5 billion and another JPY 1 billion in exchange rate negative impact. And profitability mainly improved with FT and fixed cost, mainly with SPE, we made a growth investment, which had an impact on the fixed cost and exchange rate it was JPY 152.78 per dollar and JPY 163.05 per euro. But this time, it is JPY 145 per dollar and JPY 170 per euro. And this is about the dividend outlook. There was no change. So paid to the expected year-end dividend is JPY 157, and we carried out the interim dividend payment. So annual dividend would be JPY 280 and the payout ratio is about 30%. And we'd like to make the further effort to make the better return for the investors. That's all from me. Thank you very much. Thank you, President, Vice President. Now Masato Goto is going to explain about the business environment. Mr. Goto, please.

Okay. Goto is going to explain the business environment and the full year outlook. The full year outlook, the summary. SPE, as was explained earlier, the pending sales projects have been shifted to the next fiscal year, taking the cautious attitude. On the other hand, stronger demand centered on foundries and memory makers, particularly for HBM came in. Therefore, that offset the impact, allowing us to maintain the full year forecast. As for FT, the good performance buoyed by the active display OLED investments. And new businesses and advanced packaging, we are on track. And the next fiscal year onward, further growth is expected. The last December, we made an announcement we are going to establish a new R&D site in the U.S. called ATCA. We continue implementing the growth investments. That's the current situation. SPE, the business overview. Market trends and outlook. And WFE, the calendar year 2025, the growth expected to land at mid-single-digit range. It's around USD 115 billion. And as for calendar year 2026, we with the variability by region and application, then the overall, the performance is going to be quite strong and AI-related business is expected to grow low double-digit growth is expected. Investment trends by application. As for foundry, leading-edge nodes, the 2-nano or 3-nano are going to be strengthened and the investment is going to drive the WFE growth. And as for logic, it's a gradual recovery trend. And the memory as market -- it is set in the market, DRAM center, the memory shortage is going on and the memory suppliers is trying to strengthen. And so the steady investment recovery is expected. As for NAND, for server demand is getting robust and then so it's also expected to recover. Image devices, memories for server investment, it's a bit biased. And so the memory for devices is not recovered. So because of that investment is rather delayed. And the power devices and others, gradually, the market is recovering. Advanced packaging originally, the centering on Asia investment was quite active, but not only Asia, but the investment in North America is emerging. And as for Chinese market, the emerging -- not only the emerging customers, existing foundries are continuing the investment. And so the market situation is turning around. SPE, the composition of equipment sales by application and post-sales. The Q3 cumulative this fiscal year, the Q3 cumulative JPY 338.6 billion and driven by the foundry, foundry sales accounts for 51%, logic 5%, flash 3%; and DRAM 13%; Imaging device, 1% and power device and 2% and others 5%, and the post sales is 21%. The quarter-on-quarter, the sales to foundries increased and year-on-year, sales to foundries and DRAM remains solid. Post sales remains stable, 21%, as you can see. SPE composition of sales by destination. As for this, the trend hasn't changed very much in the Q3 cumulative China -- for China, they declined a little bit. And for Taiwan, the increased. For Japan, the 12%. So the comparison with the same time -- same quarter last year, the composition is a bit different. However, the China and Taiwan, the mainstream no change. SPE composition of sales by application forecast, JPY 502 billion and the foundry is driving and mainly nearly 50%, 48% for foundry and followed by DRAM and logic and flash. This is the composition. And as for post sales, full year estimate, 19%, a little less than 20%, maintaining that level is the current prospect. SPE composition by sales by destination forecast, again, at the moment, the China accounts for 39%, nearly 40%. For Taiwan, 26%; for Japan, 11% and others, as you can see here, this is our estimate. And year-on-year, the Taiwan is going to increase significantly in our expectation. GA sales trends and forecast. The device and recurring business remains stable. As for profit, were affected by U.S. tariff policies. So efforts are underway to enhance the profitability through operational efficiency and the price pass-through. Recurring business accounts for half of our business -- half of our sales. This is the current trend of GA. And FT, as I mentioned earlier, the centering of OLED display equipment investment is quite robust. So sales increased. Half of the sales is new investment for OLED and then the 25% of the existing LCD and the remaining is the post sales. And for the time being, display, the equipment investment are expected to continue. And so display is on the trend of recovery as well. That's the current situation. And next PE, the market recovery is trade and struggling, but centering on the Korea and China, the gradual recovery is seen in the third quarter, it was very severe situation. But in the Q4, the equipment sales are on the recovery trend. And the post sales accounts for the half of our sales and the postpaid sales is getting the base and also the product market is recovering. So it's getting the turning around to the positive side. And next about the stock split notice. As for this Tokyo Stock Exchange and policy guideline and instructs us to lower the minimum investment and for more liquidity, and we may split into 2. But in order to improve the situation more or better, we decided to split in the ratio of 1 share into 2 shares. And the March 16 is the date of public notice and the record date and March 31 is the record date and the split into 2 shares. And the method of split is written here. 95.3 million shares will be doubled. And along with that, we are going to amend the articles of incorporation and the total number of authorized shares before stock split is 360 million shares. This will be a 720 million shares. So we are going to amend the articles of incorporation. As for the schedule, the date of a public notice of record date is March 16, 2026. Record date is -- effective date is April 1, 2026. Activities related to ESG. Along with our policies, we have been taking these ESG initiatives as planned and topics for today is we were chosen as the Clarivate Top 100 Global Innovator for 2026. And each ESG-related initiatives are announced in our homepage. So please refer to our home page for the details about our ESG initiatives. And this is a group news. And we make publication about these news on our website. So please find the details in the website especially about our development site in the United States, we have the group about all these, you can find the details. And if you have any further questions, please come back to us. That's all for me. Thank you very much.

Thank you very much. Mr. Goto. Now I'd like to go into the Q&A session.

First, Mr. Yoshida from CLSA Securities.

This is Yoshida. And so about the focus of WFE market for '26, so logic, foundry, DRAM, about major application, I will have your kind comment. And also, if you have any information about China, please let us know.

So, in 2026 forecast, AI-related inquiry has been increasing. So this will continue to lead the market growth. So AI-related foundry will enhance their capital investment and also the enhancement of the capacity for the DRAM, which is in shortage, these two will lead the market. And also in China, our customers in China, mainly in foundry are now planning the active investment. So we can expect a growth equivalent to the average of the WFE market.

So when you see your competition, do you think that the growth of the WFE will be more accelerated in 2027 than in 2026? So do you have any comment about the expectation in 2027?

So we just started 2026. It's hard to make the comment about the next year. But as you mentioned, the trend is that following the 2026, we also continue to see the growth into 2027. So '26 and '27, these two years will see the increase of the capital investment. So at this moment, we cannot talk of the specific figures about '27, but this is the kind of overall trend we expect in the market.

And my next question, maybe it's a bit too early to ask this. But as for the next year's performance, I have a question. So this time, the DRAM to China sales will be shifted to next year. But excluding this point, WFE growth of your business in next year can achieve the expected growth? Or do you expect any kind of movement, which is different from the overall trend in the industry or market? Please let us know.

So our focus about the next fiscal year, as you mentioned, we will make the -- we expect the CapEx in the area where we have the strength. So we have the confidence that we can achieve the growth aligned with the market growth. And about the strength we have, which is unique to us, we have various ideas, but please let me refrain from mentioning these specifics. So when the right time comes, let me make announcement about these. That's all for me. Thank you very much.

Thank you, Mr. Yoshida. Mr. Nakamura from Goldman Sachs, please.

Thank you for appointment. First point, SPE OP margin. In the Q3 OP margin, 24% level. In Q4, you plan the SPE sales is quite high and the OP margin is around 26%. How you consider the OP margin, the size of sales and also the product mix?

SPE OP margin as you guessed that we are expecting very close to the figure that you mentioned, top line goes up along with that, the factory operation ratio utilization will also go up. Therefore, the same -- if the bigger volume as we have shown before, we're going to have a similar OP margin. So, basically, as you mentioned, we would expect the similar number that you mentioned.

In different questions, the Q3 to Q4, the nearly JPY 40 billion increase, but the operating income is an increase of about JPY 13 billion. If we consider the marginal, the cost ratio, then seems to be a bit lower. How do you think? Is it good or not?

I think there are several way of considering the current business situation is considered, we set in that level. The second question, SPE, the current inquiries and order situation at the end of last year, there might be some changes in my understanding. The quarterly order intake, if you have -- if you can give me a hint of that level. And together with that, the slipped the specific project. Now shifting to the next fiscal year, the recording of the sales, what is the probability of the -- I would like to explain that. As for the order intake details are not disclosed, and I cannot give you the specific number, but the market itself is turning to the positive side. And therefore, it's in the recovery trend. And Mr. Kondo mentioned earlier, it's the V-shaped recovery. So significant recovery is expected. And the project, which was shifted to the next fiscal year, that we set the sales in the next fiscal year, taking the cautious attitude. So we expect to record in the sales in the next fiscal year.

Thank you, Mr. Nakamura. Next, Mr. Shimamoto from Okasan Securities.

I am Shimamoto from Okasan Securities. My first question is about the sales, which is shifted to the next fiscal year, the project in China. So I heard that the scale of the business is about JPY 20 billion. And all of this will be shifted into the next fiscal year. So, first, let me confirm this scale of the business. And text question, so the foundry or FT, which is vigor to offset this shift to the next fiscal year? So I want to know the business competition in the second half of the fiscal year.

So the one shifted into the next fiscal year, the scale is, as you mentioned, and they are offset by the logic, memory and many other types of businesses because we are receiving very strong inquiries. So we are making effort to increase the sales in each application. So possibility is that this project or sales shifted into the next fiscal year. Is there any possibility this will be realized within this fiscal year about this project in China? So we have the business of the sales of equipment and installation. We are now going to have another contract with a customer separating these two. But actual documentation and also the upfront payment or so we have to decide whether or not to return the upfront payment received with original contract and involving the auditors, we are now taking necessary steps. But the Chinese New Year and also the situation of the customer side. So we decided to take this business to be shifted into next fiscal year, but things have been carried out without any delay.

And China's close of WFP in 2026. So the average figure was given to us, so that is the lower double digit, maybe 12% to 30% growth is the image we now have. So the growth in China, could you give us a breakdown of this growth in China from the existing foundry may lead this growth? So the growth of this foundry maybe exceed the average. And how about the growth from that memory? So if you have any breakdown of the growth in China, please let us know.

So market in China in 2026, rather than the emerging customers, we think that the existing foundries will lead the market. And also the memory customers are making investment. So these two will be the main players in leading the growth of China market.

Thank you, Mr. Shimamoto. And Mr. Yasui Next of UBS, please.

I am Yasui of UBS Securities. The first question, at the end of last year, at the IR Day, the back-end process equipment seems to be coming up. The WFE at the lower 10% the back-end process and how much would it increase 26% and 27%, probably '27. Would you give us just an image? This is the first question.

The back-end process market, according to the trend, '27 is going to -- we are going to have an increase instead of '26 as a trend. And instead of this fiscal year, next fiscal year, the back-end process product group are expected to increase. The equipment for the back-end process, this fiscal year is the higher, the single digit and next fiscal year, double digit. And so '26 to '27, the market is expected to grow. So we are preparing ourselves and we are also addressing this demand increase.

As a follow-up question, according to our company's search, but the back-end process, advanced packaging seems to be in shortage. I think that's bigger demand. As you explained earlier, the back-end process investment comes out and then the front-end process investment would come later. So what is the bottleneck of back-end process that affects the front-end process market? The back-end process, the impact, how much will be given to the front-end process?

There might be some impact, but the back-end process would give a big impact on the front-end process. I don't think that not much. I don't think it's much. And then the -- how it is the increase volume-wise, it's still in the transition period. So from this fiscal year to the next fiscal year, we don't have any concern. After the FY '27 onwards, the market may change significantly. We keep monitoring the market situation.

Thank you very much, Mr. Yasui. Next, Mr. Yoshioka from Nomura Securities.