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

Time has come. So let us start with the briefing on SCREEN Holdings Consolidated Business Results for Fiscal Year Ending in March 2026. Thank you very much for your participation despite your busy schedule. I am the [indiscernible] of ceremony for today. [ Miura ] from the Investor Relations, Communications Strategy Division of SCREEN Holdings. And recorded data of this event and the Q&A session will be available on our website on May 14. So please find it and for use. And today, in addition to this conference room in Japanese, we hold one in English with simultaneous interpretation into English to entertain participants from abroad. And before the opening of the event, let me give you 2 notes. One is that on Teams, your cameras and microphones are disabled and microphones will be enabled during the Q&A session. And second, while make a remote, please refrain from mentioning the specific name of the customer or competitors, we cannot answer the question regarding the specific situation of the specific players. I have your kind understanding. And we'll give you the instruction about the Q&A session after the presentation [Operator Instructions]. And as was notified today, we will not entertain the questions from the media. I appreciate your kind understanding. And let me introduce you today's participants, Goto, Representative Director, President and Chief Executive Officer of SCREEN Holdings.

I am Goto, Nice to see you.

Manabu Ishimura, Managing Executive Officer, Chief Financial Officer.

I am Manabu Ishimura.

And Chiho Otobe, Senior Executive Officer, Head of Communication Strategy.

I'm Otobe. Nice to see you.

And Director, Vice Chairman of the Board, Kondo will give you remarks now.

And as of March 31, I spent my first day as the CFO. And as I was the Vice Chairman of the Board from now on, thank you very much for your very kind support to me. And from now on, there is no change in our financial policy and direction of the company. And I am sure that Ishimura-san will succeed me as CFO, and I would like to have your continued support with us. And thank you very much for your support and cooperation with me for the past 12 years and as the CFO.

And now Kondo will be. Now CFO, Ishimura will give you the summary of the earnings and forecast. So Ishimura-san, microphone is yours.

Now I want to explain about summary of FY 2026 earnings. First, this is the summary of consolidated earnings of 2026. Net sales was JPY 605.7 billion, which is minus 3.1% year-on-year, minus JPY 19.5 billion reduction and OP income was JPY 122.5 billion, which is minus 9.7% year-on-year. For OP margin, we were able to have the 20.2%. It was forecasted 18.8% in January, but we are able to maintain 20% of OP margin. So in SPE, the sales declined and profit increased compared with the January forecast. In the fourth quarter, we have had record high order in SPE. For FT, Equipment sales for OLED increased and sales and profits rose year-on-year. For GA, sales grew while profit fell year-on-year. While profits were affected by U.S. tariff policies slightly. However, sales of new models are gaining momentum. Due to this net income increase, fiscal year-end dividend raised to JPY 170. And again, this is quarterly number and full year numbers. For full year, the sales was JPY 605.75 billion and OP income is JPY 122.5 billion. OP margin represent ordinary income was JPY 124.3 billion and net income was JPY 92 billion. So we decreased both sales and OP, but we were able to maintain the 20% level for OP margin. And this is the group sales by destination compared to last year, at the end of March, the China percent decreased from 42% to 38%. However, instead, we have seen the increase in Taiwan. So combined sales in Taiwan and China both 60%. So still, we focus on Taiwan and China market. This is of group sales by segment. So same from previous. SPE is 80.2%. So in 2025, SPE sales portion has dropped slightly. However, GA, FT sales increased. This is due to this increase in GA and FT. So still our focus is SPE. Here is the consolidated earnings by segment. So starting from SPE, the full year sales was JPY 486 billion. So it was minus 6.5% year-on-year. The OP was JPY 122 billion. So this is a drop of 10.4%. However, for OP margin was 25.2%. So we were able to maintain 25%, although sales declined. For GA, JPY 57.4 billion. So it's 8.5% increase year-on-year and OP margin is 3.6%, which is minus 16.1% year-on-year. The recent sales are so strong. However, we have the tariff by U.S. impact. And for FT, JPY 44.7 billion net sales, and it's increased by 24.9% year-on-year. And OP was JPY 8.6 billion, which increased by 181.8%. OP margin is 10.7 points. So it has improved by more than 10% compared to last year. And profit ratio has -- we had a record high profit ratio for the net sales was 14.5%, which increased by 2.6% year-on-year. We had a fixed cost increase. So we have seen the reduction in OP. However, starting from 4Q, we have started to see the recovery in OP income. And this is our financial standing. Net asset reached JPY 486 billion. So we have seen the increase in fixed assets and so on. However, the equity ratio, we have 67.4% we have seen the increase in this number year-on-year. Next one is the financial standing of cash flow. The full year operating cash flow was JPY 92 billion, so remained solid in 4Q, driven by profit accumulation and control of working capital. So we have JPY 71.2 billion 1 year ago, increased to JPY 92.7 billion in the fiscal year under review. This is R&D expenses and CapEx and depreciation. For R&D expenses, we had JPY 37.7 billion increased by JPY 6 billion. And the CapEx slightly declined and depreciation is now JPY 14.5 billion, which increased slightly from JPY 12.8 billion. The CapEx for R&D, manufacturing, IT, we had CapEx for them, and we landed within expected range. And R&D mainly attributable to SPE and landed within the expected range. For the analysis of operating income growth year-on-year, the decline in sales had a JPY 12.4 billion negative impact, while profitability improve mainly in SPE and FT at a JPY 11.5 billion positive impact. The fixed cost mainly decreased in SPE for growth investment, including depreciation, R&D and personnel expenses had a JPY 13.4 billion negative impact, while the exchange rate had JPY 1.2 billion positive impact, mainly affecting SPE and GA. And now this is the business forecast for 2027. Annual sales is JPY 725 million and the OP income will be JPY 150 million and ordinary income will be JPY 150 million and net income will be JPY 110 million. So if we divide into first half and second half, we will see more, but that number is higher in second half. In segments, SPE is JPY 600 million and OP income is JPY 153 million, which is 25.5% in margin [indiscernible] is JPY 59 billion and the OP income is JPY 4.5 billion. And FT, the net sales is JPY 47 and OP income is JPY 2.5. So FT we had a very profitable customer last year and due to drop of those customers, it's going to reduce. And we have some advanced packaging in FT. From this fiscal year, fee is JPY 15.5 billion and OP margin will be 9.7%. So incidentally, in SPE, the China memory customer, we are going to account in first half. That's our assumption for now. And next is R&D expenses, CapEx and depreciation for 5-year trend. R&D expenses, CapEx for this fiscal year, we are expecting JPY 43 billion for both. The midterm from the investment for growth, this is the phase. So we are expecting the highest number. And depreciation is JPY 18 billion. This is our forecast. As for the analysis of operating income growth this fiscal year, an expected increase in sales will have JPY 71.5 billion positive impact, while decreased profitability will have JPY 8.5 billion negative impact. SPE will be the major sales driver, but its profitability will decline somewhat at the same time due to increase in fixed cost for growth investment. The minus JPY 3.5 billion exchange rate impact will come mainly from SPE and GA and for the SPE increase in the positive overseas rate [indiscernible] exchange rate fluctuation. Next is the dividend outlook. At the end of this fiscal year, JPY 170 is [indiscernible]. And from the announcement in January, that is increase of JPY 13. So the total is JPY 293. And for the year ended March 2027, the interim dividend will be JPY 60, year-end dividend will be JPY 115. Total annual dividend will be JPY 175. And this is after the split. So the pre-split basis, JPY 120, JPY 230 and JPY 350 will be the figures. So from the previous fiscal year, we have the increase of the dividend at the record high level. That's all from me. Thank you very much, Ishimura-san. Next, let me invite President Goto to talk about the business environment and outlook.

So this is Goto. Let me give you the presentation on the business environment and outlook. In the year ending 2027, this is the summary of the full year outlook. So in overview, all segments are expected to achieve steady growth. For the whole company that we have been talking to you, we have the first phase of the portfolio transformation in which the advanced packaging and the Holdings is now consolidated into the FT. And about SPE, particularly for the generative AI, we will capture the robust WFE investment so that we can enter into the further growth phase. And we will outperform WFE market growth. That's how we operate this business. And in our midterm management plan, we are focusing the investment for the further growth and we will carry out the investment into the future growth steadily. And as was announced already in the United States, we have opened a new R&D site in Albany in New York and have held the opening ceremony. So from this fiscal year, we'll start the full use of this facility so that we can strengthen our R&D capabilities and accelerate R&D efforts. And along with the market growth, we will prepare the production capacity increase of SPE business. Next, please. And this is the market trends and outlook. And as about WFE in calendar year 2025, we expected to run at $117 billion. And calendar 2026, approximately 15% to 20% growth or around USD 134 billion to USD 140 billion is expected. However, as you know, recently, there are many geopolitical events taking place. So there may be some impact of them. So we have to closely monitor the situation in the market and also the geopolitical situation. And investment trends by application, Foundry, Logic, they will lead the movement. So Foundry and Logic will lead the growth of the market. In Memory, the shortage of Memory has been the issue and AI-driven DRM and HBM investment will gain momentum with the signs of NAND recovery. So we responded to the investment into them. And there is some delays, but about the image devices, we see or expect a gradual recovery so that we can be prepared for the future growth. And power device and others with silicon carbide, there's a recovery investment. And advanced packaging -- for the full-fledged introduction, investment in WLP and PLP continue at a high level. So for us, this is a focus area. So we will take measures to capture the demand. And China market, many things are talking about China market, but investment in Foundry and Memory for more advanced nodes remain solid. So we will capture the demand in China market, too. And next is the composition of equipment sales by application and post sales. And here, year-to-year, Logic and DRAM we expect to increase. And about the post sales, as was explained by Ishimura-san a moment ago, the record high sales was achieved. So cost of sales will be the basis of our business. So in order to stabilize this business, we will make the further effort. So this is an area we want to grow. Next, please. And this is the composition of sales by destination. And as you can see here, last year, year-to-year in the fourth quarter, there was a slight increase in China. But in general, mainly in Asian countries, China and Taiwan, these markets are growing now. And this is the sales up by application of the sales forecast. And mainly by DRAM, we see the big growth. And as I mentioned a moment ago, post-sales has been stable as of now [indiscernible] sales, memories and DRAM on HDM will continue to drive the market. And next, the SPE composition of sales by destination forecast, and this is the forecast for the first half. And as for the second half, situation is uncertain. So let me talk about the first half only. So for the first half, we expect a big increase in North America. And also China, South Korea and Europe are expected to grow, and this is the current situation. And about the second half, when we have the certain visibility, we'd like to make another announcement. And this is the sales trends and forecast about GA. And about GA, there was an impact of U.S. tariff, which had a negative impact on the profit, but newly released models will be the main player in the business. And recurrent business, including [ ink ] has been performing very solidly. So we'll have the 2 axis of the new products and recurring business so that we can sustain secure the profitability in this business. Next is the sales trend and forecast of FT. In this fiscal year, business will have a slowdown compared to the previous year. But still, we see the strong inquiries. So we will capture these demand and make them into business. And as I mentioned earlier, advanced packaging was now shifted to an integrated into FT business. The production capacity of FT will have to be allocated to the advanced package business so that we can support the growth of the sales of advanced package, which we expect to grow from now. And next is the sales trend o PE. And last fiscal year, we struggled with this business, but now the market is on a recovery track. And we have to capture this trend and new products were released last year. So based on these new products, we will capture the needs of the market so that we can see recovering of our sales and profit in this business. So now I want to talk about our midterm management plan, the progress of Value Up Further 2026. So -- the midterm management plan that we are working on, the second year has finished, and we are in the third year. So this is the last year of our midterm plan. The result until second year, you can find in the middle column. And the forecast for the third year, as I have already explained, the 3-year total target is JPY 1.956 trillion and average OP margin is 20.9%. So for the target of these 3 years, we are confident that we are going to achieve all aspects. Our main focus in midterm plan is we will just achieve the annual plan. And in what kind of image we will have is our next target. So this planning for new midterm management plan, we have to already make progress. So for -- to our new phase, we want to discuss how we want to advance our company. So here is our cash allocation. So originally, we were going to spend JPY 360 billion as the investment fund and for R&D, CapEx and strategic investment and dividends, these are 4 major segments, and we made plan for each of 4. The accumulated figure total for R&D is JPY 112.4 billion. CapEx is JPY 100.4 billion and strategic investment, JPY 80 billion. So those are all within our expectation. For dividend is JPY 89 billion, actually exceeding our expectations. So for next midterm plan, we have to -- we will consider how we will spend our investment fund based on this kind of result. Next, please. Here is our ESG initiatives. So just briefly, starting from environment. So SCREEN win the highest 3-year rating from Shiga Biodiversity Initiative Certification for 2025. So this is the highest ranking. And for society, for social, SCREEN is selected as a health productivity stock for the third consecutive year. And for governance, the evaluation of the effectiveness of the Board of Directors, the third-party committee has made evaluations, and we want to improve further by the effectiveness of our Board of Directors. So we are going to disclose these facts in our website. These are recent good news. So we have already made announcements, and I think you're already familiar. So we are going to skip detailed explanation. But in holding, we have made this kind of news. And please refer to our website for detailed information. This is topics. As I have already explained, SCREEN selected as the health productivity stock for the third consecutive year. So we want to improve further to become a healthy and good corporation. So again, this is our next step, the quantum communication. We are starting new initiatives, and we have acquired the shares in LQUOM. So we will keep this kind of investment going forward. And other financial topics, the IP and intangible asset governance award, we have received for the first time, the special award we have received. So again, we are going to enhance these areas as well. And next, this is business related we received the 72nd Okochi Memorial Production Prize. So our manufacturing effort was accredited and received award. So we are going to improve our productivity further going forward. And this is, again, we have -- I have already explained and we have already announced our first [indiscernible] and we have conducted opening ceremony. So we have welcomed the guests from overseas and domestic to have this opening ceremony, and we are going to speed -- increase the speed of the process development going forward, utilizing this new facility. And again, this is new release about the launch of SpairD series. So PE, we want to catch this good momentum in PE market with this kind of product. So Next, Otobe is going to explain about these topics.

So every time we have result briefing, we announced that we are going to have 2 follow-up meeting. First one in Japanese in June 11 and the second one is English in June 16. So IR team will be the speakers. And we have welcomed Mr. Nakamura. So we are going to welcome you by 3 of us. So this is it for our presentation. But earlier, President Goto explained about WFC, the breakdown. We get questions quite often. So we want to talk about breakdown per application first before going on to Q&A session. So Page 18, please. So investment trend by application in CY '26. So it's 15% to 20% increase year-on-year. And if we look at application, 15% to 20%. So in case of 15%, I want to explain in the case of 15%, Foundry, Logic, they are going to grow 20%, about 20% and Memory, DRAM, 20% or slightly low and NAND is 15% or slightly less. And the others are maybe 10% or less. So if we can grow by 20% in '26, the Foundry, Logic will be -- number will be changed. Probably 25% growth can be expected for Foundry and Logic. And for Memory, DRAM will grow by 25%. And NAND, maybe not so much change from the 15% scenario, 15% or slightly less and Power and others, maybe 10% or slightly less. So the gap between 20% scenario and 15% is the Foundry and Logic and DRAM, they are going to grow faster compared to the scenario of 15% growth. So now we want to address questions.

So first, Mr. Yoshida from CLSA Securities.

So thank you very much for giving us the breakdown of the WFE growth. If possible, -- would you explain the WFE business to China? And you are going to outperform the growth of WFE. So you specify where are you going to -- how are you going to outperform the WFE as a whole?

Goto will answer your question.

So the market in China, I think relatively a flattish situation is expected rather than the big growth. And sales ratio has been flat. So relatively, we can expect a slight decline of the portion of China. But even with that decline, we do not expect the stretch of the China market from now. And how we outperformed WFE. As you know, the advanced Logic, Foundry are the areas we have the strength. These are the strongest business segment for us. So as was mentioned by Otobe-san a moment ago, in case of the 20% growth scenario, this is the area we expect to be growth. So by capturing this market, surely we'd like to outperform the industry growth.

Understood. And my second question is about Page 12 of the slide. So you have the annual figures and also the figures for the first and second half of the year. And SPE is going to grow into the second half of the year. So by application, by the region, qualitative, could you give us the qualitative explanation about where you expect the further momentum into the second half of the year?

So inquiries from the market, as you know, from the late of November of last year, it's been increasing. And as for the order intake, we had the record high level. And now the order received turn into the sales from the latter of the first half or into the second half. That's why we expect the greater sales or higher sales in the second half of the year. And as for the special contents, as I have been saying, -- as mentioned in the market, there's a shortage of the Memory. So investment by the memory manufacturers is expected in the second half of the next fiscal year. And also for the AI, the advanced logic expect the increase of the capacity by many players. And I think this will lead the growth. That's why we expect higher figures in the second half of the year.

And from Shimamoto-san from Okasan Securities, please.

I am Shimamoto from Okasan. First of all, SPE, how you look at SPE, it's going to grow towards second half. And you had -- sorry, JPY 600 billion forecast is maybe close to the capacity now. So if I'm wrong, please correct me. If that's the case, however, next year and onward, you're going to make new midterm plan and you have to maybe -- you want to accelerate the CapEx for new plant. So if you have any forecast already for next year or how you look at the capacity at this moment, would you please share?

Thank you for question. Our capacity, so the capacity -- sorry, to cover for this year, we think we are confident. And looking at the trend for next year, maybe we need additional capacity, as you said. So this fiscal year, in order to prepare for market expansion, we are going to arrange in terms of our facility. So next year and onward, when market is seeing the growth, we have -- we want to make preparation in accommodating that.

By the way, depending on preparation this year, how far can you increase the revenue for next year? So how -- and how much demand do you forecast for next fiscal year?

Our basic idea is SEMI or [ SCJ ], they have the long-term vision. So based on that guidance, we want to understand how much we have to grow increase. And as I said earlier, SCREEN is targeting to outperform. So we are going to have some addition on top of the guidance by those organizations.

Understood. My second question will be well, you are seeing very strong result. However, the market share you explained in single wafer compared to 2024 is dropping. So the exchange rate is also included. So if you have any explanation of this share reduction? And if you can recover the share, how much you want to recover this fiscal year with what kind of strategy?

For market share, the number tells the fact. So last year, market share was like shown here. However, as you know, the market share is against the sales. So our PoR is not taken by our competitors. Rather, the PoR by competitor is growing. That's why market share declined. So last year, as our initiative, we are going to take the PoR by competitor. That's what we have explained. And we have received already customer certification. So we are going to secure market share. And sorry, by taking PoR, we are going to increase market share. And our strength area is now growing in terms of number. So we don't know -- we cannot say exactly how much percent, how many percent. But we are confident to recover and we have the plan to recover. So please look at carefully how much -- what kind of trend we have for our market share.

Next, Mr. Nakamura from Goldman Sachs.

My first question is about SPE segment profitability. So in the fourth quarter, OP margin was over 30%. I think it was very high level. And you explained the background of this high profitability. But in the new year, you expect the growth of the sales, but OP margin is about over 25%, not so different from that of the previous year. So what is the background of this?

And Ishimura will answer your question.

So in the fourth quarter, sales was large and the cost of sales increased with high profitability and also the forecasted sales in the fourth quarter we achieved over 30% -- and for this fiscal year, the OP margin will be 25%, which is not so different from the previous year. It's because we have the increase of the fixed cost for the investment for the future growth and the ratio of the cost of sales may decrease slightly. So at this moment, these are the expectations we have for this fiscal year.

And my second question -- so the SPE achieved a record high performance in the fourth quarter. And when do you see the further increase of demand SPE, the JPY 340 billion is the expectation for the second half? JPY 700 billion annualized. So when do you expect -- when you see the greater increase of demand, given the current production capacity, can you increase the sales further? And also at present, there are a shortage of the materials components due to the Middle East situation. And what impact do you expect?

Goto will answer your question.

So in the second half, the JPY 340 billion of sales expected. And if there are any possibility this will be increased further, maybe we do not expect a doubling of the figure, but we have the capacity to cover the expected increase from this level. So roughly to say, even if the demand will be larger by 10% or 20%, we can handle them. And as for the procurement of the materials and components related to the Middle East situation, at this moment, we have secured or we can -- we have the visibility that we can cover the demand for the materials and components. But if this situation in the Middle East takes longer to be settled, is honest to say we have to review our situations and come up with the measures. And it's hard to see -- have the clear visibility -- so on an everyday basis, we have the simulation of the situation and closely monitoring how the things will develop.