Sumco Corporation (3436) Earnings Call Transcript & Summary

I am Hiroshi Shibaya of Sumco Corporation. Thank you for your participation today and for your continued support. This is the results briefing for fourth quarter fiscal 2020. Before starting the presentation, allow me to confirm today's materials, which consist of 2 items: the brief statement on consolidated financial results for fiscal year 2020 and the presentation deck entitled, Results for Fiscal 2020. The materials are available for download on our website at sumcosi.com. We will have presentations today from Representative Director, Chairman and CEO, Mayuki Hashimoto; and Representative Director and Vice Chairman, Michiharu Takii. Hiroshi Ito, General Manager of Accounting, is also on hand. We have set aside 60 minutes for the briefing. The briefing will end at 5 p.m. Finally, a disclaimer. The estimates, expectations, forecasts and other future information discussed here today were prepared based on the information available to the company as of today and on certain assumptions and qualifications, including our subjective judgment. Actual financial performance or results may differ substantially from the future information contained in this material due to risk factors, including domestic and global economic conditions, trends in the semiconductor market and foreign exchange rates. Chairman and CEO, Hashimoto, will discuss our forecast and operating environment to be followed by an explanation of the earnings results by Vice Chairman, Takii. We have set aside time for a Q&A session as well. I will now hand over to Chairman, Hashimoto.

Let us begin. I will start with our results. Please turn to Slide 5. This is the overview of our fourth quarter results. We were able to slightly exceed our forecast. Sales were JPY 72.6 billion, JPY 0.1 billion better than planned. Operating income, JPY 8.1 billion, JPY 0.6 billion ahead of plan. Ordinary income, JPY 7.1 billion, ahead by JPY 0.1 billion. And net income attributable to owners of the parent was JPY 5.3 billion, JPY 0.3 billion better than the forecast. In fourth quarter, the yen appreciated slightly, but we were able to finish the quarter with results slightly higher than plan. Moving on to the forecast for first quarter 2021. We are guiding for sales of JPY 76 billion, operating income of JPY 8.5 billion, ordinary income of JPY 8 billion and profit attributable to the owners of the parent of JPY 5.5 billion. Our ForEx assumption is JPY 104 to the dollar. Compared to the magnitude of the sequential improvement in sales, you may have noted that we are forecasting a slightly smaller improvement in OP. This reflects the impact of periodic maintenance for our largest 300-millimeter plant at Imari slated to start in February, which will be followed by periodic maintenance at our third largest plant, Nagasaki, in March. This will limit our production capacity. We will not be producing at full capacity, so some sales will be from inventory. This is why we expect to generate revenue but are taking a slightly conservative view of profits. Hence, the JPY 8.5 billion OP forecast. Next, on to Slide 6 and shareholder returns. The fiscal year-end dividend has been set at JPY 9 for a full year total of JPY 27. Dividend payments will total JPY 7.8 billion for a dividend payout ratio of 30.9%. In addition, in line with our policy of rewarding shareholders with a share buyback equivalent to a payout ratio of around 10%, which we adopted last year, we will conduct a share buyback of JPY 2.5 billion or 9.8%, bringing the total shareholder return ratio to 40.7%. Please turn to Slide 7 for a discussion of the market environment for silicon wafers. Starting with the fourth quarter results, demand for 300-millimeter from logic was very strong. Market conditions for memory were not bad. In 200-millimeter wafers, although demand had been weak in second and third quarter, second quarter was particularly bad. Demand recovered sharply towards the end of the year, in November and December. Currently, production is not keeping up with orders. On prices, we were able to maintain price levels for LTAs, although there have been some pushouts in terms of delivery timing. For spot prices, while it was true that the market was softer in second quarter last year on the back of a slight excess in supply, in fourth quarter, prices were flat. Near term, we would expect spot pricing going forward to firm up, particularly in 200-millimeter and 300-millimeter for logic. When we look at the first quarter outlook for 300-millimeter based not only on our view but commentary from our peers, it appears everyone, including us, is running at full capacity utilization, and no one has room to increase output. Supply is not keeping pace with demand. For memory, we are seeing a modest recovery mainly in DRAM. Currently, there are significant differences between logic and memory in terms of supply-demand conditions. I believe this situation is likely to persist for some time. For 200-millimeter, we have seen a rapid rebound in consumer electronics and automotive demand. Demand here continues to outstrip supply. Going forward, I believe it will be challenging for us to catch up with demand. We are trying to address the situation through measures such as rehiring staff. But even if we were able to fully mobilize, it probably is not enough to meet demand. We expect to maintain LTA price levels, although there are some customers that have requested pushouts to the timing of deliveries. In terms of the outlook for spot prices, although prices are likely to move around given the nature of the spot market, we expect prices for memory to remain weak as supply is running slightly ahead of demand. 300-millimeter logic is extremely tight. 200-millimeter is also tight. That said, last year, in the market, there were a relatively high number of customers that signed 1-year contracts. We were unable to accommodate such requests as we were full, but there were some players that had excess capacity for logic and chose to commit to lower price points. As a result, despite the relative tightness of the market this year, it is likely to be generally challenging in terms of raising prices. However, given the fierce competition in the spot market, at least in spot we would expect to see a significant improvement, particularly toward the end of the year, in both 200-millimeter and 300-millimeter wafers. Although I have already commented on the outlook, assuming that global economies recover, 300-millimeter demand should be supported by a number of trends such as 5G and smartphone handsets as well as data centers. There are concerns that logic in particular will continue to see wafer shortages. This is because even if there is a lot of polished wafer capacity, logic-use wafers require epitaxial furnaces. Lead times for epi furnace deliveries are currently 12 months. If you include the time required to ramp up new furnaces to operational levels, it is 18 months. Given this, I believe a quick resolution to the tight supply situation is not possible. The situation for 200-millimeter is similar. Demand here is also recovering rapidly. However, in the case of 200-millimeter, it is no longer possible to secure equipment as equipment makers have terminated production. Therefore, generally speaking, it is not possible to add production capacity in 200 millimeters. The key in 200 millimeters will be how much more capacity can be created through productivity improvements. That said, the current supply imbalance is at a level that cannot be fully addressed by productivity gains in my view. It appears that when automotive production was weak, 200-millimeter capacity was reallocated to other areas of demand like 5G. This has led to the situation now being widely reported in the press where although automotive demand has come back, wafers are now in extremely limited supply. Our sense is that the shortages will persist for some time. Please turn to Slide 8. This is the wafer trend for 200-millimeter by quarter. Already, as of the end of fourth quarter, 200-millimeter wafers were at 5.3 million to 5.4 million wafers per month. This is the level that the market was at as of the beginning of 2018. If current trends continue, demand could be similar to 2018 levels, but it actually feels like the market could exceed the 2018 levels. Ultimately, it will hinge on the supply-demand balance. Suppliers are doing their best to increase output, but I think it will be challenging. 300-millimeter also saw a strong increase with fourth quarter at 6.7 million to 6.8 million wafers per month. The increases were largely driven by logic. I expect this trend to persist. This is because the shift to remote working is continuing to support a recovery in tablets and PCs, which is driving demand for MPUs. 5G smartphone handset volumes should also rise. For smartphone handsets, set makers have flexibility in choosing how much memory beyond a certain minimum to incorporate in their handsets. However, unlike memory, logic requirements are not optional. As such, as 5G takes off and handset penetration rates rise, we should see firm growth in logic. This leads into a discussion of customer inventory in 300-millimeter, as shown on Slide 10. As you can see, we believe inventory levels have remained virtually flat. However, as a special bonus this time, we have provided breakouts of this chart into logic and memory, as shown on Slide 11. If you look at logic, in early 2019, inventory was close to 1.6 months but is now down to 1.3 months. If you factor in the increase in wafer input levels, you can see the situation for the customers has tightened substantially. In contrast, memory inventory months remain high and continue to creep up. There do not appear to be wafer supply issues on the memory side. I would also like to comment on some timely topics, starting with the forecast of wafers for automotive use. This slide looks at trends related to the acceleration of efforts to achieve a low-carbon society. The U.S. has indicated its intent to rejoin the Paris accord. The COVID-19 outbreak has also accelerated the shift to EVs. The chart on the left depicts our view as of early 2020. However, our view now is that hybrids and EVs will account for a larger proportion of the market from an earlier stage. For example, by 2040, we expected the split between internal combustion engines and HEVs and EVs would be 50-50. Our view now is that by 2040, all new vehicles to be sold will be either hybrids or EVs. You are probably already familiar with this, but as shown on Slide 14, major countries have already announced their intent to ban sales of ICE cars to 0 around 2035. The migration away from ICE has been clearly set out in our view. The question for us is how this will impact wafer demand. Please turn to Slide 14. You may already know this, but wafer consumption by EVs and HEVs is relatively high. Compared to ICEs, HEVs require 2.2x per vehicle in terms of surface area, while EVs require 2x. In addition to this, ADAS, effectively autonomous driving technology, also has relatively high requirements for wafers. Taking this, it suggests that the wafer demand for these applications based on a 200-millimeter equivalent will rise by around 1 million wafers over the next 4 years. This figure is based on a 200-millimeter equivalent. We do not expect to see much of a shift from 200-millimeter wafers to 300-millimeter wafers in this area because of the heavy-duty requirements. Many would consider it too risky to use 300-millimeter wafers. What this means is that, in our view, demand for 200-millimeter wafers is likely to increase by 200,000 per year. Turning to Slide 18, I would like to briefly share my thoughts on smartphone-related demand for 300-millimeter wafers. We believe the migration to 5G will be relatively rapid and faster than we had previously expected. The transition to 5G handsets will also drive up wafer consumption with requirements roughly doubling on a per-handset basis. This will increase overall wafer consumption volume. With 2020 as the bottom, we expect to see an increase in demand of between 200,000 to 300,000 wafers over the next 2 to 3 years from 5G handset demand. However, as shown in the graph on the right hand, we believe that for smartphone handset, NAND, which is the green portion of the bars, is unlikely to grow much. The expected growth will come from logic, the yellow portion of the bar, and DRAM in blue. This reflects the increased complexity for logic associated with 5G as well as the trend towards further integration. As such, we believe demand for logic should continue to grow strongly. Currently, DRAM is at around 1.4 million wafers, NAND at around 1.6 million wafers, and logic is around 2 million wafers. My impression is that logic has grown quite significantly. Next, please turn to Slide 20. This should be a chart that you are familiar with in which we try to project trends in 300-millimeter demand and production capacity. I will say at the outset that prophecies don't always come true. The chart may look unchanged, but, in fact, we are constantly fine-tuning the forecast. The bottom line here is that most believe there will be wafer shortages in 2023. I don't believe anyone is initiating capacity increases now. I say this because although supply slightly outweighs demand in polished wafers, epitaxial wafers are in short supply. Without the ability to increase epitaxial furnace capacity, it is not possible to increase epi wafer supply. Barriers to entry for epi wafers are relatively high, although some may attempt to enter. So major players are not increasing capacity. This year's capacity utilization is likely to be around 93%. At this level, customers start to get nervous. Once utilization gets to the 96% level, customers are likely to feel that the situation has become critical. My view is that we could get to the 96% level next year. At current prices, greenfield expansion is not an option. The economics simply do not justify investment at this level. So I wouldn't expect anyone to undertake CapEx at these levels, barring perhaps companies with autocratic managements prepared to defy economics. Given this, I don't expect production volumes to increase much. On that basis, I believe shortages will be unavoidable in 2023. Sumco's stance is that greenfield capacity expansion is subject to wafer price levels. Furthermore, at current price levels, I frankly believe that expanding capacity is not an option. Our peers are likely to feel the same, in my view. What that means is that our customers need to give serious consideration to the situation and that we need to encourage them to do so. This completes my section of the presentation. I will now hand over to Vice Chairman Takii to talk about the earnings results in more detail.

I am Vice Chairman Takii. I will present the fourth quarter results in more detail. Please turn to Slide 22, where we show the fourth quarter results as noted at the beginning by Chairman Hashimoto. On a full year basis, both sales and profits declined year-on-year. Full year sales fell JPY 8.1 billion year-on-year. Operating income dropped approximately JPY 12.8 billion year-on-year to JPY 37.8 billion, with a similar trend for ordinary income. Net profit declined JPY 7.6 billion year-on-year to JPY 25.5 billion. CapEx was JPY 53.3 billion on a validated basis. Depreciation was JPY 45.1 billion, up JPY 4.4 billion. As a result, the EBITDA margin declined slightly on a year-on-year basis. The year-on-year change for the financial metrics at the bottom of the table all show negative figures. On a quarterly basis, we struggled with yields on leading-edge wafers in third quarter, which is reflected in the figures. That covers this page. Please turn to Slide 23. This is the waterfall chart for a sequential comparison of fourth quarter results. Sales rose JPY 1 billion Q-on-Q, while OP rose JPY 1.5 billion. This was largely in line with our forecasts. The contributions from the various elements are as shown below. The decline in costs was JPY 0.3 billion better than expected, the result of improvements in material costs and yields. The main driver of the improvement, however, was the absence of the negative JPY 1.3 billion impact related to the lower-than-expected yields on leading-edge wafers in third quarter. Depreciation increased JPY 1.1 billion. There was a positive contribution of JPY 1.2 billion from sales-related variance and others, with the majority from the increase in 300-millimeter wafers, particularly epitaxial wafers. The ForEx impact reflected a slight appreciation of the yen. Please turn to the next page. This is the waterfall chart for year-on-year changes to full year operating income. On a full year basis, while both sales and OP fell year-on-year, we were able to make progress on reducing costs. Earlier, I touched upon the leading-edge yield issues, which had a negative impact of JPY 1.3 billion on costs. However, apart from this, progress was relatively solid, contributing more than JPY 1 billion on the positive side. Additionally, we reduced some maintenance spending in alignment with production levels, particularly for the smaller diameters, for a positive contribution of JPY 1.3 billion. Other than this, related to the COVID-19 outbreak, travel and entertainment expenses also declined for a contribution of several hundreds of millions of yen. Electric power costs also fell. Depreciation rose JPY 4.4 billion. With regard to the net negative JPY 6.7 billion impact from sales-related variance, I talked about the various component elements last time as well. But price declines, primarily in spot, were a major negative factor of JPY 12 billion. On the positive side, the increase in 300-millimeter volumes had an impact of JPY 5 billion, but this was not enough to fully offset the price declines. Japan accounted for about 50% or JPY 6 billion of the price decline impact, primarily from smaller-diameter wafers. The Taiwanese subsidiary accounted for the remaining JPY 6 billion decline mainly from spot prices on 300-millimeter wafers. The year-on-year exchange rate impact was a relatively large negative JPY 3.8 billion on the back of yen appreciation, JPY 2 billion of which is related to dollar-yen moves. The remaining JPY 1.7 billion to JPY 1.8 billion is related to the appreciation of the new Taiwan dollar versus U.S. dollars. Please turn to the next 2 pages for a discussion of the balance sheet. Turning to Slide 25. Overall, the balance sheet improved. Cash and cash equivalents increased JPY 12.9 billion. Product inventory and work-in-progress increased slightly into the end of the year. Raw materials and supplies fell JPY 7.3 billion. Of this, JPY 9.5 billion comes from declines in polysilicon inventory. Tangible and intangible assets increased, the result of CapEx outweighing depreciation. Interest-bearing debt declined JPY 2.2 billion. The capital surplus fell JPY 3.3 billion, reflecting the buyback and cancellation of treasury stock at the beginning of the year. The increase in retained earnings reflects the contribution of profits, net of dividend payments. All of the financial metrics shown at the bottom of the table improved year-on-year. Slide 26 looks at the cash flow statement. We generated operating cash flow of JPY 84.1 billion. CapEx on a validation basis was JPY 53.3 billion. After taking into account the outflow from investing cash flow, free cash flow was JPY 29 billion. After reflecting the outflows for dividend payment, the cancellation of treasury stock and the repayment of debt, this leaves us with the JPY 12.9 billion which was added to cash and cash equivalents. Next, I will discuss our forecast for first quarter 2021. Please turn to Slide 28. We are projecting sales of JPY 76 billion, up JPY 3.8 billion year-on-year and JPY 3.4 billion Q-on-Q. Our OP forecast is JPY 8.5 billion. Nonoperating income is expected to decline JPY 0.8 billion year-on-year. This is due to a one-off factor in first quarter 2020 related to the receipt of a JPY 0.6 billion subsidy for our Nagasaki plant. The sequential change for nonoperating income reflects a relatively larger impact from ForEx in fourth quarter of JPY 0.6 billion. Net income attributable to owners of the parent is projected to be JPY 5.5 billion. Our ForEx assumption and various metrics are as shown at the bottom of the table. Please turn to Page 29. Slide 29 shows the waterfall chart, which breaks out the major components of change for first quarter operating income on a Q-on-Q basis. As alluded to earlier, some of you may feel that the Q-on-Q increase at the OP level is small given the magnitude of the sales increase. We expect costs to increase slightly Q-on-Q. This reflects the concentration of periodic maintenance during the quarter, which is expected to boost maintenance costs by JPY 0.5 billion. Additionally, given that we expect production to be tight, we have factored in an increase in labor costs such as overtime or the hiring of contract workers for the smaller diameters. We have also factored in an increase in more expensive high-end raw materials for a total negative impact of JPY 1 billion. Depreciation is expected to increase by JPY 1.4 billion on the transition into a new fiscal year. Sales-related variance includes a negative JPY 1 billion impact from prices. Rather than a decline in prices, the negative is a reflection of a mix change driven by a 10% year-on-year decline in the proportion of 300-millimeter LTA sales. In contrast, an increase in volumes will contribute a positive JPY 1.4 billion to JPY 1.5 billion. The vast majority of the JPY 3.4 billion Q-on-Q increase in sales will come from inventory. As you know, margins are lower on this, so this is why the positive impact from higher volumes is only JPY 1.4 billion to JPY 1.5 billion. We are expecting the yen to appreciate slightly for a negative impact of JPY 0.4 billion. Please turn to Page 30. This is the year-on-year waterfall chart for first quarter OP. On a year-on-year basis, we expect costs to rise JPY 1.5 billion. The majority of the increase is the JPY 1 billion increase we expect in first quarter, as discussed on the previous page, labor and maintenance costs. As well, there was a slight increase in cost year-on-year related to the broader adoption of teleworking, owing to higher systems expenses. Depreciation is expected to increase by JPY 2 billion year-on-year. On sales-related variance, as discussed at the outset, 300-millimeter volumes have risen significantly year-on-year. We also expect to see solid increases in 200-millimeter volumes as well. We have factored in a positive impact of more than JPY 4 billion from the year-on-year change in volumes. In terms of prices, as noted on the previous slide, we expect a negative impact of JPY 1 billion from mix combined with a JPY 1 billion negative impact last year for a total of around JPY 2 billion. We expect a negative JPY 2 billion impact from ForEx, of which minus JPY 1.5 billion is from yen appreciation. Based on this, we are guiding for JPY 8.5 billion in OP for first quarter. Slide 32 shows quarterly trends in sales and OP. If you look at the progression, OP was down slightly in third quarter and fourth quarter, but we expect OP to recover going forward. Slide 33 shows quarterly trends for EBITDA. First quarter is slightly lower, but we believe that this is likely to be the bottom. Slide 34 shows the regional breakout for sales. We do not expect to see significant changes here. This completes the analysis of our forecasts.

[Operator Instructions] We will start with Mr. Enomoto of Bank of America Securities.

Please discuss your view of industry consolidation. GlobalWafers is moving to acquire Siltronic. Please share your view of industry supply/demand and the operating environment following the acquisition. Your view of supply/demand this time was quite bullish. Can you comment on the impact of the acquisition in light of the backdrop of rising demand? Also, if possible, given Sumco is also the result of a merger, can you talk about the pros and cons of a combined company based on your experience?

Hashimoto will respond.

First, I do not view the combination of GlobalWafers and Siltronic as a bad thing for the industry. Personally, the acquisition of MEMC came at a good time when the market was weaker, allowing Global to buy at a relatively cheaper price. However, the market is now in an uptrend. The ToB appears to be challenging, and Global must borrow significantly to fund the acquisition. So it may be a bit of a gamble. I hope that it goes well. Sumco is the result of the combination of 3 companies, as you know. On the plus side, we had abundant human resources and diversity. This was a positive in developing leading-edge technology, where everyone came together. I consider this to be a strength. On the minus side, all 3 companies had their own technology processes. Although the integration happened more than 10 years ago, we still have not fully unified our processes. Technology integration is difficult and very expensive. Additionally, Sumco aggressively doubled its capacity earlier than its peers more than 10 years ago. If we had expanded capacity gradually over time, it would have allowed us to unify technology over time. But many of our facilities are specific to particular processes, so we are still challenged in terms of efficiency, which is a weakness. On the human side, we are fully integrated, but harmonizing technology is tough because of the differences in hardware. This creates challenges for efficiency, although we have been able to make significant progress on this front. So one weakness of a merged company is the challenges in integrating technology and the resulting inefficiency. However, I would view diversity as a positive. If you can successfully manage such diverse resources, I think it is a positive in developing technology. But improving production efficiency is difficult until significant progress is made in integrating technology. This is why we created an AI promotion department and are focused on adopting AI technologies in manufacturing. Our strength is in the development of leading-edge technology. Our strategy is to be as early as possible in developing leading-edge technology in order to take market share while prices are high. At the same time, we recognize the importance of having a solid base. So the ability to manufacture commodity product cheaply is also very important. I believe automation is the way to achieve this. I sometimes envy competitors that take a cookie-cutter approach to manufacturing where they use a single process, but there are many different ways to approach the business. That would be my view.

The next question is from Mr. Ikeda of Goldman Sachs.

In the presentation, on Page 20, you talk about supply-demand conditions. You also touched upon your view of greenfield investments. Can you talk about what conditions you would need to see such as prices or customer commitments for a specified time frame? I believe you would need a 30% to 40% price increase from current levels in order to justify greenfield investment based on previous comments. At the moment, I believe your leading-edge epitaxial wafer business is not that profitable at current prices. How are you thinking about customers' willingness to accept price hikes, supply/demand and the rising cost of inspection equipment as you try to avoid a situation where success at the leading edge becomes pain with little gain? I think you would need to see a significant increase in prices before you commit to capacity expansion. Only a limited number of players have leading-edge capabilities, and this is an area of importance for Sumco. How are you thinking about the next round of capacity investments, particularly for epi wafers?

At a high level, based on simple calculations, we would need to see prices rise 50% to 60% to invest in new capacity for epi wafers now in order for the economics to work. I do believe that we have no choice but to communicate this to our customers. For epi and leading epi in particular, inspection equipment is very expensive and yields on leading edge, although they have improved recently, are challenging in the early stage of production. This leads to elevated costs. Obviously, investments are necessary for leading edge, but we still need to recoup our investments. From that perspective, I would like to see price increases of 50% to 60% for leading edge with epi. That would be my view. Therefore, for us to undertake greenfield investments, we would need to see substantial commitments from our customers. This is why our major customers, by and large, have respected the terms of the LTAs. We don't typically have situations where customers resort to unreasonable behavior like threatening to pull their business unless they get a lower price. There are some customers that have asked to delay deliveries given weaker production levels. We don't want to force them to take wafers they don't need, so we have accommodated such requests. One reason why I think our customers do not adopt unreasonable tactics is because there is a sense that the industry is headed for a round of capacity expansion in the near future. That would be my view.

Understood. So probably, the epi market will be very tight in second half of 2022?

Actually, there are already shortages in epi now. We are barely managing to cope with all of the customer demand and customer pressure for more. Our peers are probably also running at full capacity.

Does that mean that you are starting to negotiate for higher prices? You have said epi is already tight for customers, which suggests something must be done soon. How should we think about the time frame?

In terms of the time frame for price hikes, as I mentioned at the beginning, last year there were competitors that had excess epi wafers. We may have had some excess as well. Prices softened at that time. Given many contracts are 1-year contracts, although there are some 3-year contracts, there probably won't be much we can do on prices this year. Of course, we are not 100% locked in for the year. Additionally, there are customers who are asking for additional volume on top of the contract volumes. When we are asked for additional volume, we need to do allocations, which means taking some volume away from other customers. In these situations, we would not be reallocating wafers without being appropriately compensated. The other alternative for customers needing more would be to tap into the slight increases in output generated through incremental improvements in productivity. Given the additional effort required to accommodate such requests, we believe we should be appropriately rewarded. So from this year, we plan to start asking for higher prices. Given the current situation, I really think the industry has reached the stage where we can no longer increase output significantly. What we have been hearing is that there are real shortages. Recently, we are being barraged by many of our customers asking for more wafers because of these shortages.

Understood. It certainly sounds like the market is significantly tighter than it was 3 months ago.

Next is Mr. Okazaki of Nomura Securities.

I would like to confirm 2 points with regard to your forecast for first quarter. You talked about the impact of periodic maintenance at Imari and Nagasaki. I'm sorry, perhaps it's just me, but is this the first time that you have had 2 facilities undergoing periodic maintenance in first quarter? Is it just this year? Also, with regard to the sequential change related to prices, Vice Chairman Takii mentioned that the proportion of LTA business in first quarter will fall 10%. Is the impact that you were talking about the change in the relative weights of LTAs and spot on a sequential basis?

The decline in the proportion of LTA business is mainly in memory. Many of the LTAs put on in 2018 and 2019 rolled off in 2020. However, some memory customers have opted to delay taking delivery of wafers. The total volume and price under LTAs has remained unchanged. But given the low capacity utilization at some of the customers, they have asked to delay some deliveries. As a result, there has been a decline in volume at LTA prices, increasing the relative weight of spot transactions. Epi is very tight, but polished wafers are weak. It is very rare to see this much of a divergence in demand. We haven't seen the gap widen this much before. The divergence in trends is very clear.

Are the LTAs you are talking about now based on calendar year? Is that why there is a sequential impact in first quarter?