Sumco Corporation (3436) Earnings Call Transcript & Summary

[Interpreted] I am Hiroshi Shibaya of Sumco Corporation. Thank you for your participation today. This is the results briefing for Q4 2021. We will have presentations today from Representative Director, Chairman and CEO, Mayuki Hashimoto; and Vice President, CFO, Michiharu Takii. Hiroshi Ito, General Manager of Accounting, is also on hand. This briefing will end at 5:15 p.m. Please accept our apologies for going 15 minutes beyond the originally-scheduled time. Next, a disclaimer. The estimates, expectations, forecasts and other future information discussed here and shown in today's materials, 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 financial results by CFO, Takii. We have set aside time for a Q&A session as well. I will now hand over to Chairman Hashimoto.

[Interpreted] I am Chairman Hashimoto. I will start with an overview of our earnings on Slide 5 of the presentation. We were able to substantially exceed our Q4 forecast with sales, operating profit and ordinary profit coming in ahead of plan. The operating environment was not significantly different from when we formulated our forecast, but production was quite smooth, allowing us to achieve slightly higher production volumes than expected. Effectively, the overshoot was the result of the aggregation of many small gains. With regard to our Q1 forecast, we are guiding for sales of JPY 99 billion, operating income of JPY 21 billion, ordinary profit of JPY 20 billion and profit attributable to owners of the parent of JPY 13 billion. Almost all of the sequential improvements in profits are the result of price hikes. We do expect some increases in cost, but depreciation should decline, and we are implementing many initiatives. The main factor behind the forecast for higher sales and profits, is the price hikes. Next, on to Slide 6 for a discussion of shareholder returns. We had guided for a year-end dividend per share of JPY 19, but reflecting the recent outperformance, we have chosen to raise the year-end dividend to JPY 24, which will bring the total annual dividend per share to JPY 41. This translates into a dividend payout ratio of 30.2%. We have no plans for share buybacks at this time. As you know, we recently undertook a public offering, reflecting our strong need for cash, as we expand our production capacity. We do not expect to conduct share buybacks for the time being. Moving to the next page. Please turn to Slide 7 for a discussion of the market environment for silicon wafers. The market environment remains positive, but perhaps a little too good, given the challenges it is creating. Starting with the Q4 results. As you already know, the strong demand for 300-millimeter wafers from both logic and memory customers, continues to outstrip capacity. The situation is similar for 200-millimeter and smaller diameters. Supply cannot keep up with demand. On prices, obviously, prices on existing LTAs are unchanged but spot prices have shown healthy increases. Given that supply is not keeping up with demand, it is a market environment where it is relatively easy to raise prices. The Q1 2022 outlook for 300-millimeter reflects the continued increase in requests for more volume from customers in both logic and memory. Unfortunately, we are not in a position to respond. For 200-millimeter and smaller diameters, the situation is the same. On prices, new LTAs put into place related to the 300-millimeter Green Field capacity expansion, come into effect from this year. Price points are different by customer, but generally speaking, the LTAs have been structured, so that prices will rise in a step-wise function over the next few years, hitting peak prices in 2024. For 200-millimeter, we have made no new investments. So basically, prices will be rising in line with the market. On the outlook, going forward, in 300-millimeter, demand for both logic and memory is likely to continue expanding. All of the capacity expected to come online at the new plant, is already covered by LTAs out to 2026. With regard to the volume locked in under LTAs, our customers had actually indicated that they needed even more volume, but we were not able to take delivery of production equipment in the required time frame to make this possible. Delivery lead times for production equipment are getting longer. As a result, we are unable to do more at this time. Consequently, even after the completion of the Green Field capacity expansion, we believe that the tight supply/demand situation is likely to persist. In our case, in particular, logic is the mainstay of demand. Given this, unlike polished wafers, which tend to be quite volatile, it won't be easy to resolve the current-type supply situation. With regard to the new 300-millimeter wafer capacity at Imari, the ceremony to purify the site prior to beginning construction, was held on January 17. Under the circumstances, I was unable to travel from Tokyo, but we were able to hold the ceremony. For 200-millimeter, we expect demand to remain strong for the foreseeable future. Next slide, please. This is the wafer trend for 200-millimeter by quarter. As you can see, the trend throughout 2021 was largely consistent at around 6 million wafers per month. It appears that this level is the ceiling for global capacity. As a result, it is likely that customers are experiencing serious shortages and that some are truly struggling. However, there is no economic rationale for investing further in 200-millimeter capacity, no new plants will be built. Therefore, the current tightness is likely to persist for some time. Products that are produced in relatively sizable volumes may migrate to 300-millimeter but applications for 200-millimeter tend to be small-lot production of a wide variety of products, which makes it unlikely that customers would build new facilities enabled for 300-millimeter wafers. So I think that the current-type conditions will continue for the foreseeable future. Next, Slide 9, please. This is the same chart for 300-millimeter wafers. As you can see, the curve is unusual. Normally, under tight conditions like we are seeing now, the sequential progression from Q3 into Q4 would show a much steeper slope. But unfortunately, everyone in the industry has reached the limits, in terms of Brown Field capacity, so there is no room to increase volumes further. This is particularly true for Sumco. So the only choice is to do Green Field expansion, but given the growth in the underlying market, achieving meaningful increases is tough. In the past, a 5% increase in capacity would not have been that big, perhaps 150,000 per month, when the underlying market was 2 million to 3 million wafers per month. But now that the market is close to 8 million wafers per month, 5% means increasing capacity by 400,000 or 500,000 per month. At this kind of scale, it is not easy to increase supply by 5% or 500,000 per month every year. If you are talking about Green Field expansion, then bringing capacity online will take time. So unfortunately, given this, it seems likely that the current conditions will persist for some time. If you look at Q3 and Q4, there was almost no increase. This reflects the fact that everyone in the industry is already at full capacity utilization and cannot increase output further, in my view. Turning to Slide 10. This chart shows estimated customer inventory for 300-millimeter wafers. You can clearly see the sharp decline in customer inventories. This is for 300-millimeter wafers as a whole. We believe that customer inventory has dropped to 1 month. If inventories drop below the 1-month level, it creates a precarious situation for the customers. If we then look at the next slide, Slide 11, which breaks out customer 300-millimeter wafer inventory between logic and memory, you can see that logic is already at 0.7 months, while memory is around 1.2 months. So as you can see, the shortages are particularly acute for logic. For memory, the declines have been linear, which is sparking a sense of crisis amongst the customers. Our customers have been pressing us to increase production, but unfortunately, we do not have room to increase production volumes. I believe, our peers are in the same boat. This is the situation. Turning to Slide 12. So the question is, how did we get here? Why has demand for 300-millimeter wafers increased so much? This is obvious, but smartphones are migrating to 5G, which is leading to a surge in data traffic volumes. This surge is driving demand for new data centers. In addition, the migration to 5G smartphones not only drives higher data traffic but also drives replacement demand for handset, effectively doubling up the incremental demand for wafers related to smartphones. On the PC side, data center demand is also being driven by the rise in teleworking. This is also sparking a significant increase in data traffic. Backed by these trends, we are seeing a wave of new data centers being built. Data centers require both logic and memory, so they are a major consumer of semiconductors. We are also seeing increases in demand from automotive and AI applications, but relative to the total market, the volumes required are not huge, but overall, the market is seeing shortages. Next, please turn to Slide 13. With regard to smartphones, as you can see in the chart on the left, data traffic volumes are expected to increase dramatically on the move to 5G. In conjunction with this, the number of 5G handsets will increase. Wafer consumption by 5G smartphones is also likely to increase, given the higher number of chips per handset. So we estimate the increase in wafer demand related to smartphones, is roughly 1 million wafers per month over the 5-year period shown here. Next is Slide 14, which looks at the expected impact from high-performance computing. This is a market that Sumco is targeting. We expect this market to grow from the current 800,000 per month to 1.5 million wafers per month over the next 5 years. Next slide, please. This slide looks at DRAM. Annual DRAM bit growth is expected to be around 20%, but scaling can only contribute 10%. Therefore, the remaining 10% must rely on an increase in wafer input volumes. So we believe there will be solid demand growth from DRAM. For NAND flash, please turn to Slide 16. For NAND flash, bit growth is generally offset by the impact of scaling. Based on this, our view had been that wafer demand was unlikely to increase significantly. However, recently, we have seen a new trend in technology that is particularly being taken up by YMTC of China, in which they are bonding logic to NAND flash. The previous architecture was side by side. The bonding technology was developed to speed up data transactions, but this architecture requires one more polished wafer for the bonding process. It seems likely that growth for this will be rapid with not only YMTC but other customers also adopting this technology. So this could be a driver for polished wafers, although the technology level for the additional polished wafer is not that high. Moving on to Slide 17. So pulling all of this together, our view is that even in 2026, there will still be shortages. In 2026, we would expect to exceed 10 million wafers per month to be at around 11 million wafers per month. Even if our peers try to rush through the new capacity, as we have experienced, there are equipment vendors that deal with all of the players, but also those that are exclusive. But all of these equipment makers are already fully booked up. So lead times are getting longer, and it is increasingly difficult to source equipment. Sadly, there are many individual processes to fabricating a wafer at Sumco. So regardless of the price of the equipment, the absence of even a single piece of equipment will prevent us from completing the wafer fabrication process. This is why, despite our investments to increase capacity, we will only start to see gradual increases in output starting from the second half of 2023, and it will take until 2025 before we are fully ramped up. We will be receiving the equipment, piece by piece, as it is completed, so we will have to ramp up each piece of equipment, one at a time. If we could take full delivery of the equipment in one fell swoop, we would be able to ramp up the facilities on mass, but that is not going to be possible. In other words, there are significant bottlenecks in the supply chain. As mentioned previously, if we look back to 2008 and 2009, when everyone in the industry was madly ramping up capacity, the market was only 2 million wafers per month. So a 10% increase was only 200,000 wafers per month. Now, the market is getting close to the 10 million wafer per month level, so 10% would be 1 million wafers per month. Effectively, the incremental portion is 4x to 5x larger this time. This, obviously, requires a larger investment amount. In addition, the capacity of the suppliers is not that large. Because of this, it is difficult to increase capacity to the desired level of output. This completes my section of the presentation. I will hand over to CFO, Takii, to talk about details of our earnings.

[Interpreted] I, Takii, will present the earnings in more detail. Please turn to the next slide. This is a summary of the full-year results. As you can see, full-year sales increased JPY 44.3 billion year-on-year. Operating profit also rose year-on-year. For non-operating gains and losses, please note the positive JPY 1 billion in Q4. This is related to the receipt of plant location subsidies of just under JPY 2.1 billion for the 300-millimeter capacity expansion at our facilities in Saga Prefecture in 2019 and 2020. This was offset by JPY 0.8 billion in share issuance costs for a net positive of JPY 1 billion. In addition, corporate taxes declined in Q4. This is related to the decline in loss carryforwards, compared to the expected improvement in profitability in the next fiscal year. The cumulative loss carryforwards had been recognized under deferred tax assets, but we recalculated, resulting in an increase of JPY 1.5 billion in deferred tax assets. This has been reflected in the net figures shown here. As a result, net income increased significantly, up JPY 15.6 billion, to JPY 41.1 billion. CapEx was JPY 69.5 billion, depreciation was JPY 51.3 billion and EBITDA JPY 104.3 billion. There was a slight depreciation of the yen, on a year-on-year basis, for an average of JPY 109.6 to the dollar. OPM, EBITDA margin and ROE were all up on a year-on-year basis. Next slide, please. This is the analysis of sequential change in operating income for Q4. Q4 sales rose JPY 4.1 billion Q-on-Q, and OP was virtually flat Q-on-Q, at JPY 15 billion. Costs rose JPY 1.2 billion. About half of the increase was due to maintenance costs, but labor costs also increased. This is a reflection of the increase in headcount, as we are increasing production. Depreciation also increased. Sales-related variance was a positive JPY 2.3 billion. This was a combination of a JPY 0.8 billion contribution from higher prices, but the vast majority, JPY 1.5 billion, was the result of the increase in volumes. There was a positive contribution from the weaker yen of JPY 0.8 billion. As a result, there was a slight Q-on-Q improvement to Q4 OP, which rose to JPY 15 billion. On Slide 21, we show the analysis of year-on-year change for the full-year OP. OP improved by JPY 13.7 billion year-on-year. Costs increased by slightly more than JPY 6 billion. This consists of a JPY 6 billion increase in labor costs, as discussed previously. We increased headcount on the back of production increases in all diameters. I will go into more detail later, but production volumes for each diameter increased by 10-plus percent. In addition, bonuses also increased slightly. Maintenance expenses also rose by JPY 3 billion. We have increased maintenance expenses to allow us to continue to run at full capacity. However, the quality-related expenses incurred in 2020, related to the slow improvement in yields, dropped out for a positive impact of JPY 3 billion year-on-year, netting all of the above results in the JPY 6 billion negative for costs. Depreciation also increased JPY 6.2 billion year-on-year on the back of the CapEx spending in 2021 to increase capacity. There was a JPY 25 billion plus positive year-on-year contribution from sales-related variance. As discussed previously, there was a negative JPY 5 billion impact from the change in the average price, related to a decline in the proportion of LTAs in early 2021 and the resulting increase in the proportion of spot. This was more than offset by a positive contribution of JPY 30 billion from increased volumes. Volumes increased in all diameters. On a year-on-year basis, the yen depreciated slightly for a positive contribution. Next slide, please. This is the balance sheet. Cash and time deposits on the balance sheet increased JPY 141.7 billion. The increase is chiefly due to the public offering conducted in October. I will go into more detail on this in explaining our cash flow, on the next page. Accounts receivable increased on the back of higher sales. Raw materials and supplies declined, reflecting the reductions in polysilicon inventory. Polysilicon has declined to roughly JPY 100 billion of the outstanding JPY 134.9 billion. The remaining JPY 30-plus billion is other raw materials and supplies. We have slightly increased our inventory in materials required for maintenance than production. Fixed assets also increased. The outstanding balance of interest-bearing debt fell JPY 8.8 billion due to a slight reduction in long-term debt. If we look at the capital account, capital and the capital surplus both increased by roughly JPY 60 billion. This reflects the impact of the public offering, split evenly between capital and capital surplus. The reason for the slightly smaller increase in the capital surplus, is due to the JPY 2.5 billion impact of buying back and retiring treasury shares in 2021. Retained earnings increased by JPY 33.5 billion, reflecting the impact of profits attributable to the owners of the parent, less dividends paid. The shareholders' equity ratio improved to 62.3%. Net asset value per share rose to JPY 1,359, leading to a significant improvement in the DE ratio. Next slide, please. This is the cash flow statement. After profits and depreciation, if we reflect the change in polysilicon and other inventory, operating cash flow was JPY 104.7 billion. After deducting investment cash flow, free cash flow was JPY 37.4 billion. Cash inflows, as a result of share issuance, contributed JPY 119.8 billion, which is the net amount after deducting share issuance expenses of JPY 0.8 billion from the JPY 120.6 billion raised. After factoring in dividend payments and the share buyback as well as paying down of long-term debt, discussed earlier, cash and time deposits increased by JPY 141.7 billion. Moving on to Page 25 and the forecast for Q1 2022. For Q1, we are projecting sales of JPY 99 billion, operating profit of JPY 21 billion and ordinary income of JPY 20 billion. We expect corporate taxes to increase, related to the recalculation of deferred tax assets mentioned earlier. The positive impact of deferred tax assets, recognized in Q4, drops out. In addition, cumulative loss carryforwards will be largely depleted in 2022, so the impact, this fiscal year, will be smaller. This is also a factor in the guidance for higher corporate taxes. This trend of higher corporate taxes on a year-on-year basis, will continue throughout 2022. We are guiding for profit attributable to owners of the parent, of JPY 13 billion. We show the OPM, EBITDA margin and ROE down below. The OPM is expected to improve, and we expect the ROE to remain above the 10% level. Next slide, please. On Slide 26, we show the analysis of sequential change in operating income for Q1. We expect to see a continued sequential increase in costs. We have increased maintenance expenses by JPY 0.5 billion, but the major reason for the increase is the expected rise in electric power unit prices. The fuel adjustment unit price is rising, reflecting higher fuel costs as well as the impact of the weaker yen. Prices of raw materials and supplies are also up slightly. With the start of the new fiscal year, depreciation expenses will decline Q-on-Q. The JPY 5 billion positive in sales-related variance breaks down into a JPY 6 billion positive from higher prices, with prices up for all diameters. However, we are expecting a slight negative impact from volumes of JPY 1 billion. This reflects the lower production volumes as a result of a temporary shutdown of facilities at Nagasaki for periodic maintenance in March. Additionally, the lower number of business days in February is also a factor. The weekend should be a slight positive of JPY 0.8 billion for operating income. The key driver of the Q-on-Q improvement in profits, is the JPY 6 billion impact from higher prices. Next slide, please. On Slide 27, we show the analysis of year-on-year change for the full-year OP. On a year-on-year basis, partly reflecting the lower level of prices prevailing in the previous year, sales are expected to improve by JPY 23.1 billion, OP is expected to improve JPY 11.7 billion. Costs are expected to rise JPY 3.9 billion. In talking about the full-year results, I commented on the increase in labor costs, but of the JPY 3.9 billion increase expected here, JPY 2 billion is from higher labor costs, chiefly due to increased headcount. Given the significant increases in production, we are having to grow headcount. We expect electric power unit prices to also rise roughly JPY 1 billion. The change varies from region to region, but generally, unit prices are up JPY 3 or JPY 4 year-on-year at the high end per kilowatt hour. Maintenance expenses are also expected to increase by JPY 0.5 billion. On a year-on-year basis, depreciation is expected to increase on the back of investments completed in 2021. For sales-related variance, we expect a JPY 14.4 billion positive. We have factored in an increase of JPY 8 billion from higher prices. Prices have risen more than 10% for all diameters. We expect a JPY 6 billion contribution from higher volumes. Reflecting the JPY 10 year-on-year depreciation of the yen, we expect a JPY 3.5 billion positive contribution. Our net outstanding balance in U.S. dollars is about $350 billion, hence the JPY 3.5 billion impact. Turning to the Reference section, please open to Page 29. As you can see here, quarterly sales have rebounded to a high level. Moving on to Page 30, you can see the EBITDA margin is also at relatively high levels, getting close to 2018 levels. This is the regional breakdown of sales. There hasn't been significant change, so I have no additional comments. This completes my remarks, Mr. Shibaya.

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

[Interpreted] I am Enomoto of BofA Securities. I have one question about LTAs. You commented that you are effectively fully sold out with LTAs to 2026. Three months ago, you had indicated that you had yet to fully complete your LTAs. Can we interpret this to mean that you were able to fully complete the LTAs in the last 3 months? What are the terms such as price like? You have said that you expect the prices to hit a peak level in 2024. Will prices rise in 2025 and 2026 as well? Also, I think logic was the main target, but do the LTAs out to 2026 and the volume increases also include memory?

[Interpreted] First of all, with regard to the LTAs out to 2026 and whether we did make progress in the last 3 months, that is correct. In the last 3 months, we were ultimately able to fully lock in LTAs for all of the capacity. As all of the capacity is locked in with LTAs, we don't significantly differentiate between logic and memory. That said, the new plant's capacity will be virtually all focused on the most advanced leading edge for logic. So polished wafers will not increase much.

[Interpreted] What about prices?

[Interpreted] I can't comment on prices. What I can say is that, as noted by CFO, Takii, prices have risen by around 10%. The general pattern would be for prices to continue to rise up to 2024. Peak prices will be achieved in 2024, after which prices will be flat into 2025 and 2026. There may be some instances where prices will rise significantly this year, after which they would remain at the higher level. The reason for the difference in pattern relates to the volume, typically purchased by each customer. As I have said in the past, we have applied the law of one price, i.e., identical goods will be sold at the same price. Say you have one customer who has typically bought in large volume, so buying 100 now but increasing their purchase volume to 150, and we compare this to a customer that only buys 10 now but will increase their purchase volume to 20 or 30. The latter would see a higher percentage increase in price. For customers that had already been buying larger volumes, we have chosen to raise prices in a step-wise fashion. There are differences between customers. In terms of pricing we have asked for from our customers, we have set prices at a level that will allow us to recover our investment in 5 years.

[Interpreted] Next is Mr. Ikeda.

[Interpreted] I am Ikeda of Goldman Sachs. I would like to follow up on prices. How should we think about price movements during the period of 2022 to 2024? Starting with 2022, first of all, Sumco should benefit from the shift of about 30% of your sales from cheaper spot pricing to LTAs. I suspect that this will have a meaningful impact. On top of this, there should be some incremental positive impact from higher prices on existing LTAs for a combined price impact of more than 10%. In 2023, I believe there should be a further incremental increase from price hikes on existing LTAs as well as the impact of new capacity coming online, which is tied to a large price hike. In 2024, new capacity, which is tied to a large price hike, should increase by a further 10%. My impression is that you will see price increases of around 10% every year, with the total price increase for the 3-year period of 35% to 40%. Am I looking at this in the right way? Any hints you might be able to provide, would be very helpful.

[Interpreted] At a high level, you are not dramatically off track. We have many customers that are situated differently. So if we talk about averages, it could potentially lead to customers feeling unfairly treated, if their price increase is higher than the average. So I am reluctant to talk about this in percentage terms. I also feel that any discussion of percentages could have an impact on future price negotiations. Having said this, almost all of the negotiations have been completed out to 2026. With regard to this year's 10% increase, if the question is whether this is a reflection of higher spot prices or higher LTA prices, I would say that for 300-millimeter, we did almost no spot business. So the price increases are reflecting higher prices on existing LTAs. Although there were some customers who had LTAs to 2023, almost all of our customers chose to renew their contracts this year. Some may not have wanted to wait until contract expiry, only to see prices rise sharply. Some may have felt that if they did not renew it now that they might be running the risk of not being able to lock in volume in the future. So almost all of the customers renewed this year. So the price increase is really a function of higher LTA prices. With regard to your suggestion in terms of percentage price rises in subsequent years, generally speaking, the framework is there, although I will not comment on the accuracy of the numbers. So probably, prices will rise in a step-wise function to a peak level in 2024, after which prices will remain flat.

[Interpreted] If that is the case, can I clarify something? Previously, you had suggested that prices might rise substantially in 2022, but price increases after that might be relatively more modest.

[Interpreted] I don't remember saying that prices would jump up at the beginning and then not rise anymore.

[Interpreted] My impression was that subsequent price hikes might be more modest. In any case, am I correct in assuming that the price hikes will be relatively consistent over time?

[Interpreted] That is what I have been saying to date. I don't think that I have ever said that prices would jump up in 2022. That aside, a 10% increase represents quite a significant price increase for this industry. Our customers would normally be very resistant to a hike of this scale.

[Interpreted] That is true.

[Interpreted] Raising prices by 30% to 40% in one fell swoop would be very difficult. If we had attempted this up to now, it would be on the understanding that it could result in a breakdown of our relationship with the customer. We would have to be prepared to walk away from the table. However, the customers need to have waivers, and they want us to increase capacity. So in this instance, they have been very cooperative in supporting us. The customers that have signed LTAs for the new capacity, are all customers with whom we have long-standing and solid relationships. These are customers who have had LTAs up to now and have a good track record, in terms of keeping their word. From that perspective as well, we believe them to be very reliable customers.

[Interpreted] Next is Mr. Okazaki.

[Interpreted] I am Okazaki of Nomura Securities. I would like to ask about the planned capacity increase at your subsidiary Formosa SUMCO Technology. How much will capacity increase? What will contracts look like?

[Interpreted] The capacity increase will be slightly less than half of the scale of planned increases at Sumco. LTAs are being put into place. FST now has LTAs in place for about 50% of its capacity. Previously, 100% of the capacity was sold at spot. But while it was highly profitable, when the market was favorable, when there was excess supply, it rapidly became a buyer's market. It proved to be too volatile, so now about half of the capacity is under LTAs.

[Interpreted] Are you saying that 50% of the new capacity is under LTAs?

[Interpreted] No, 50% of overall capacity is covered by LTAs.

[Interpreted] But the remaining half is spot, even after the completion of the capacity increase?

[Interpreted] Yes.

[Interpreted] And the increase in capacity is about half the scale of the capacity increase planned for Sumco?

[Interpreted] Yes.

We will take questions for three more people. Next is Mr. Nishiyama.

[Interpreted] I am Nishiyama of Citigroup Securities. I have a question about the medium-term outlook for your earnings. When we look at the next 3- or 4-year period, many of your peers appear to have contracts in place, which have a bigger price hike in the back end, while price hike at Sumco appear to be skewed toward the front end, with the magnitude of increases getting gradually smaller over time. Given this, if I had to raise a concern, it would be that on the back of a rising depreciation from second half 2023, Sumco could potentially see its profits or profit margin decline relatively significantly at that time. Should we be prepared for this possibility?

[Interpreted] Due to the contracts that our competitors have put into place, bake in a significantly larger price increase in the back end?

[Interpreted] Relatively speaking, yes, that is my understanding. Some companies have said that they are expecting a large increase in price in 2024.

[Interpreted] Sumco's LTAs will see step-wise price increases from the early years, hitting peak price in 2024. So the magnitude of the price hike is bigger in the later years.

I see. Understood.

The new capacity will be depreciated using the declining-balance method over 5 years. So when the plant begins operations, the increase in depreciation could well outweigh the increase in revenue at the beginning.

[Interpreted] Next is Mr. Yamada.

[Interpreted] I am Yamada of Mizuho Securities. With regard to prices, as you noted earlier, you expect prices to rise in a step-wise function. This was in line with my expectations. However, I feel the increase was a little larger than I expected. I suspect that this is because prices went up not just for 300-millimeter, but for 200-millimeter and 150-millimeter as well. Can we assume that prices went up the same 10% as 300-millimeter? Also, with regard to 200-millimeter, if we include analog [ ICs ], I think epi-wafers are at risk of serious shortages. Is there nothing that can be done? Is there any way at all to increase 200-millimeter epi capacity. I know that epitaxial furnaces are no longer available, but is there anything that can raise the proportion of epi-wafers within 200-millimeter? I apologize for asking two questions, but please talk about how to think about 200-millimeter and smaller diameters.

[Interpreted] First of all, on price, CFO Takii indicated earlier that 300-millimeter prices rose 10%. For 2022, the magnitude of price increases is largely the same for all diameters, including 200-millimeter. However, while 300-millimeter prices will rise under the LTAs in 2023 and 2024, we have not invested to increase capacity for 200-millimeter. The agreements in place for 200-millimeter wafers are generally 1 or possibly 2 years, although there may be some 3-year contracts. In any case, it is not possible to say whether 200-millimeter prices will continue to rise to a similar degree in future. That said, if the operating environment remains unchanged, then probably we will see similar price increases. It is possible that 200-millimeter prices could continue to rise over time. Equally, you could see a pause in the rise in prices. There is no way to increase 200-millimeter volume. The equipment is no longer available and older facilities that have been idled, are obsolete. So increasing volume is not possible. Our peers are in a similar position. 100-millimeter customers will not move up to 200 millimeter. So actually, 150-millimeters is also very tight. We are very interested in how the industry will resolve the issue of how to deal with the need for smaller wafers, when there is an increase in chip makers focused on a wide array of small-lot [ ICEs ]. We are doing our best to make 200-millimeter wafers, but we have reached the limits of what we can do.

[Interpreted] Understood. It can't be done. I will use that as my assumption.

[Interpreted] Our last question is from Mr. Azuma.

[Interpreted] I am Azuma of Jefferies. I apologize for asking yet another question about the capacity expansion. For those of us with no direct experience of the industry, looking in from the outside, it is easy to simplistically assume that all that is needed to increase capacity is to buy more equipment. In fact, it probably is not that simple. And as you have indicated, the magnitude of increases has grown. As a result, I believe that ramping up new facilities is very challenging. How many engineers within Sumco have significant experience and know-how in ramping up facilities? I think, the last round in 2017 and 2018 was very challenging for Sumco, but have you been able to share the expertise and know-how of experienced engineers within the organization? You also touched upon DX, but have you been able to leverage DX or other initiatives to improve productivity? Effectively, this is about the capability of your workforce on the shop floor. How much do you think you have done to strengthen this capability?

[Interpreted] You have asked a very good question. It is certainly true that 2017 and 2018 were very challenging. I personally have had direct experience of ramping up Green Field facilities twice in the U.S. Sumco employees, however, because of the long fallow period, did not have much experience at all. Unfortunately, the lack of experience meant that we really struggled in 2017 and 2018. We have since focused on learning from our mistakes, and mistakes often create the biggest opportunity for learnings. As a result, this time around, our workforce is much more experienced and prepared. And as an organization, because of our previous struggles, we now have a deeper bench of experienced workers. This is why we believe we can undertake this kind of large-scale expansion. That is my view. I would also say that equipment operators require significant accumulated experience. These are not the kind of jobs, where you can pick up the skills very easily over a short period of time. Our labor costs have increased significantly, reflecting our proactive stents in hiring in advance. We have found that it usually takes a year for an operator to fully come up to speed. So we are doing many things to smooth the process. We plan to have experienced workers transferred to the new plant and have newer hires start at our existing plants to work with more experienced staff. We will be hiring 600 people for Imari alone, so we recognize that it will be a challenge to provide training. What we are currently thinking about, is to bring back some of our recently retired staff to create a pool of trainers for the new people, but it is certainly something that we consider to be a challenge.

[Interpreted] You say you will be hiring 600 people for Imari alone, but isn't it challenging to hire people in a location like Saga Prefecture? Is that not a problem for you?

[Interpreted] So far, we have been quite successful in hiring. And in fact, the number of applicants is significantly higher than the number of jobs. There are some who are very keen to work for Sumco. However, we have found that the aptitude testing does thin the pool out. The work is not that easy, so we do have requirements around the quality of human resources that we hire. It is not that difficult to hire in Saga Prefecture. Sumco is Saga Prefecture's largest employer, so we have good brand recognition from the standpoint of hiring. We have been able to secure a superior workforce.

[Interpreted] I see, understood. So the Chibi Maruko-chan TV ads have been effective.

[Interpreted] Yes, almost everyone knows the Chibi Maruko-chan character.

[Interpreted] Thank you, Mr. Azuma. And thank you to everyone. We are grateful for your participation today. We will end the meeting here. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]