8035.T FY2025 Q3 Earnings Call Transcript
Date: 2025-02-06
Source: Financial Modeling Prep

Koichi Yatsuda: It's time for us to start Tokyo Electron financial announcement for the third quarter of fiscal year ending March 2025. Thank you very much for joining us today despite your busy schedule. I am Yatsuda of IR department serving as a moderator for today's session. I'd like to introduce today's attendees. Toshiki Kawai, Representative Director, President and CEO.
Toshiki Kawai: Thank you very much.
Koichi Yatsuda: Hiroshi Kawamoto, Senior Vice President, General Manager, Division Officer, Finance Division.
Hiroshi Kawamoto: I am Kawamoto. Thank you very much for joining us today.
Toshiki Kawai: Before starting the presentation, let me explain the flow of today's session. First of all, Kawamoto and Kawai will make presentations. After the until 7 p.m. Japan time, we'll have a question-and-answer session, we will entertain questions from the audience. This meeting uses 2 channels of Webex for simultaneous interpretation between Japanese and English. [Operator Instructions]. Since this conference is intended for institutional investors and analysts, we would appreciate your understanding that we receive questions only from institutional investors and analysts. We will post the audio contents of this conference in Japanese and English on our website within a couple of days. It will be appreciated if you could also visit our website. Now Mr. Kawamoto will present the consolidated financial summary. Kawamoto-san, please?
Hiroshi Kawamoto: Once again, good afternoon. I am Kawamoto, Finance Division. I'd like to present the consolidated financial summary of the third quarter of fiscal year ending March 2025. This slide shows the quarterly financial summary. I will mainly refer to the figures in the blue box. In the third quarter, we generated net sales of JPY 654.5 billion, 15.5% increase from the previous quarter. This was the second highest quarter in net sales. Gross profit was JPY 311.7 billion, 19.9% increase from the previous quarter. Gross profit margin was 47.6%, a 1.7 percentage point increase due to the rise of net sales. Operating income was JPY 199.6 billion, 34.7% increase from the previous quarter. Operating profit margin was 30.5%, raised by 4.3 percentage points from the previous quarter due to the increase of gross profit margin that I mentioned before. Income before income taxes increased by 30.3% to JPY 200.1 billion. Net income attributable to owners of parent was JPY 157.2 billion, 33.6% increase from the previous quarter. Capital expenditures in the third quarter were JPY 50.2 billion. Mainly focusing on the evaluation tools with development, we keep investing for future growth. This is the graphic representation of the financial summary shown on the previous slide on chronological basis just for your reference. This slide shows net sales by region. As for the net sales composition in the third quarter, proportion of Taiwan and Korea rose by 5.0 and 3.4 percentage points, respectively, quarter-over-quarter. Proportion of China fluctuated in the low 40% level as in the second quarter. This shows SPE new equipment sales by application. In the third quarter, from the bottom of this chart, sales to non-memory customer accounted for 57%, non-volatile memory accounted for 8%, and DRAM accounted for 35%. Sales to DRAM customers increased and its proportion rose by 9 percentage points from the previous quarter. This slide shows the field solutions sales. In the third quarter, field solutions sales were JPY 141.5 billion, growing by JPY 1.9 billion. Sales of parts and services rose along with improvement of utilization rate in the customer's fab. Modification sales were also strong. This slide shows the balance sheet. Total assets on the top are JPY 2,501.9 trillion. Cash and cash equivalents were JPY 295.5 billion, declining by JPY 230.0 billion from the previous quarter due to the dividend payment to shareholders, share repurchase, tax payment and so on. Notes and accounts receivables were JPY 510.9 billion, increasing by JPY 139.2 billion quarter-over-quarter, partly because sales were concentrated in November and December due to recovery of investment among our major customers. Inventories were JPY 765.0 billion, increasing by JPY 22.7 billion quarter-over-quarter. Investment and other assets were JPY 389.6 billion, increasing by JPY 3.1 billion from the previous quarter. For the liabilities and net assets shown on the right-hand side, liabilities were JPY 703.8 billion, decreasing by JPY 15.6 billion from the previous quarter. Net assets were JPY 1,798.1 trillion, declining by JPY 0.2 billion quarter-over-quarter. Equity ratio was 71.2%. This slide shows the cash flow. The cash outflow from operating activities in the third quarter was JPY 15.0 billion, because of such factors as transient increase of notes and accounts receivable and interim tax payment that I said before. The cash outflow from investing activities was JPY 49.0 billion due to acquisition of fixed assets, mainly including evaluation tools for development. Cash outflow from financing activities was JPY 170.1 billion, primarily because of dividend payment and share repurchase as described in the balance sheet. As a result, free cash outflow was JPY 64.1 billion. Free cash flow is expected to improve to post significant positive figures in the fourth quarter. Finally, I will present the status of share repurchase. As of December 31, 2024, we acquired 2,024,200 shares, spending JPY 46.9 billion in total. As presented in the timely disclosure on February 3, this share repurchase program was completed in January 2025. This concludes my presentation of the consolidated financial summary of the third quarter of fiscal year ending March 2025.
Koichi Yatsuda: Now we'd like to move on. Kawai will give you business environment and financial estimates. Kawai-san, please.
Toshiki Kawai: Once again, good afternoon, everybody. I'm Kawai. I will present business environment and financial estimates. Let me start with the business environment. We believe WFE market landed last year calendar 2024 at $110 billion in size, exceeding the original expectation by about $10 billion, because leading-edge technology investment to AI servers was very active and delivery to Chinese customers were pulled forward. Calendar 2025 WFE market size is expected to be comparable with last year around $110 billion, due to the pulled-forward delivery and low investment to automotive semiconductors and power semiconductors, as well as in mature-node investment by emerging Chinese IC vendors. Though current forecast is slightly lower than that of 3 months ago, very strong demand for AI semiconductor keeps growing. And along with technology evolution, driven by advanced logic and HBM, the WFE market size will continuously achieve record high level. Also in calendar 2026, growth of AI-related investment will drive WFE market. GPU and ASIC for AI server will shift to the 3-nanometer node from the current 4-nanometer node. HBM to be used will evolve from the current 8-layer stacking to 12- and 16-layer stacking while proceeding with device scaling. In addition, full swing introduction of AI to the edge site, such as smartphone and PC will start, which will trigger demand growth for 2-nanometer node logic and DDR5. Due to these drivers, the WFE market is expected to show a double-digit growth. For AI applications, cutting-edge semiconductor technologies are essential. Toward the realization of semiconductor devices, which are in large capacity, ultrahigh speed, high reliability, and low power consumption technology innovation is moving forward, supported by 2 primary drivers: the one is device scaling, which is well-known intrinsic nature of performance enhancement of semiconductor, and the other is new driver, heterogeneous integration, along with the evolution of such technologies as GAA, backside PDN, high-stacking memories and test processes, our business opportunities will expand furthermore. This shows business progress in the third quarter of fiscal year ending March 2025. Regarding the financial performance, as Mr. Kawamoto presented earlier, net sales, profit and all other indicators achieved our guidance. Our sales growth rate on the calendar year basis recorded 26%, significantly outperforming the market growth. In addition to expansion of Chinese market, AI-related investments drive the market growth. Toward full implementation of the investment for high-volume production leading semiconductors, we are receiving increasing number of inquiries for advanced logic, DRAM for HBM application and advanced packaging, which pushes up the proportion of our new product sales. This trend is expected to raise our full-year net sales and profit to the record high. In this ongoing quarter, we are steadily winning PORs with our high value-added strategic products. For cryogenic etching, which attracts attention in the market, one NAND customer has decided to adopt it for their high-volume manufacturing line, while evaluation is steadily in progress on multiple customers. For Episode 1, the single-wafer film deposition system we announced in July 2024, we have won PORs for logic backside PDN high-volume manufacturing from all major customers. Episode 1 was highly valued because of its lower contact resistance achieved by high interface controllability and its superior productivity. In December 2024, we released the 2 new models shown in this slide. They feature enhanced productivity and environmental performance and expected to contribute to our SAM expansion. We are on track towards the achievement of the mid-term management plan, winning PORs, and introducing new products. As shown here, our company has a broad range of product portfolio to support device scaling, which is well-known intrinsic nature of semiconductor evolution. In addition to product for wafer process, we will actively provide solutions for advanced packaging, which will become increasingly important in the future. In the IR Day event to be held on February 26, the head of each business unit will present our future growth strategy. We would really appreciate your participation. In the growing WFE market, we will pursue #1 share in each product group to further enhance our corporate value. In the WFE market, which will grow in the future, our dry etcher business is expected to grow drastically, as the number of etching processes will increase along with technology innovation and our share is growing. In order to capture such growth opportunity as much as possible, we have decided to construct a new production building in Tokyo Electron Miyagi. Based on the smart production initiative to realize next-generation manufacturing concept, the new production building will adopt automation of logistic function and manufacturing process. We will aim to increase labor productivity by 4x, double space efficiency, and reduce production lead time by a factor of 3 compared with the current condition. Next, I will present the financial estimates for fiscal 2025. Three months ago, we revised the financial estimate upward by JPY 100 billion. Our current estimate remains unchanged. Fiscal 2025 full-year net sales estimates are JPY 2,400 trillion, which represents 31% positive growth year-over-year. We expect to significantly outperform market growth. The details are shown it this stable. Net sales, gross profit, gross profit margin, operating income, net income, and EPS are planned to hit record high. This slide shows SPE new equipment sales forecast. Driven by progress in the third quarter, net sales in the second half of this fiscal year are expected to achieve all-time high of JPY 985.0 billion. This shows our plan for R&D expenses and CapEx. In fiscal 2025, we expect R&D expenses of JPY 254 billion, CapEx of JPY 170 billion and depreciation of JPY 63 billion. This slide shows dividend forecast. In fiscal 2025, the full year dividend per share is expected to be JPY 571 surpassing the record posted in fiscal year ended March 2023. This is my last slide showing total return amount over the past few years. The total return amount in this fiscal year, totaling the dividend per share and additional share repurchase that I presented earlier is expected to be JPY 413.3 billion establishing a new record surpassing the record in the previous fiscal year ended March 2024 by more than JPY 100 billion. This concludes my presentation. Thank you very much for your kind attention.
Koichi Yatsuda: Now we will have question-answer session until 7 p.m. Japan time. You can ask questions either in Japanese or English. But as our speakers are on the Japanese channel, please allow us to take all your questions only in Japanese. [Operator Instructions]. For questions in English, please use Webex chat box and give your affiliation, name and your question in text and send it to our secretariat where we refrain from answering question, if your name and affiliation are not given. [Operator Instructions]. So the first question is from Yoshida-san from CLSA Securities Japan.
Yu Yoshida: I am Yoshida from CLSA Securities. On Page 13, the WFE market forecast. I have a question. So 2024 result and '25 forecast by application, do you have any growth rate idea? Could you share that with us, please? And that growing rate in China, especially for 2025. What is your view on that? And WFE market forecast is updated for your next fiscal year, you may have more than flat expectation? Any positive factors and could you let me know your idea for next fiscal year?
Toshiki Kawai: Thank you very much. This is Kawai. Let me answer to your question. First of all, for next year, forecast by application that you asked for DRAM, plus 10% to 20% increase. For NAND, by and large, the proportion of NAND is about 10% in the market. I think the figure will be doubled compared with the figure in 2024. For logic, 10% to 20% decline is expected. The leading-edge logic, advanced logic remains flat. However, that China will show some negative trend. Therefore, DRAM is expected to increase or memory is expected to increase, while logic, the high-end logic remains flat, but the negative is expected for China market. So by and large, the market is expected to be flat. DRAM growth is driven by HBM followed by DDR5 for AI. For next year, AI server, the GPU and ASIC for AI server are now shifting to 3-nanometer node. Edge AI device for 2-nanometer investment will start next year. HBM, so number of layers will be increasing and further device scaling is also expected for HBM. PC and smartphones, edge AI and Windows 10 service support will be completed at the end of this year. Therefore, edge AI high-end penetration will be expanding where semiconductor contents gets higher. So that's cutting area is expected to grow furthermore. When you look at fiscal year, we can see the sort of trend from January to March period in fiscal year already. We are now scrutinizing our sales at this moment. Maybe double-digit growth in calendar 2026 can slightly be incorporated in fiscal year 2026, so that we can further increase or grow furthermore. And we are now scrutinizing details. Maybe we can share the idea with you in the next quarterly financial announcement.
Yu Yoshida: So, CY 2025 WFE market, how do you like to see China in calendar 2025?
Toshiki Kawai: We will expect the decline in Chinese market for non-memory areas, 10% to 20% decline is expected in China. For leading edge, that is no different from previous year, but non-memory, 10% to 20% decline is expected, mainly due to the Chinese customers, especially the emerging Chinese chip makers will suspend their investment. I think you can see more accurate figures. So Yatsuda-san, do you have any figures for that?
Koichi Yatsuda: As Kawai said earlier, so according to our market focus, actually, we think the market is flat, while memory increases were logic will decline. So the entire market remained flat, but memory increase can offset the decline in Chinese market. That's how we can see the entire market.
Operator: Next question is from Mr. Nakamura of Goldman Sachs Japan.
Shuhei Nakamura: This is Nakamura. I have a question regarding the progress of financial performance. The third quarter looks very good in terms of financial performance, but your full year forecast remain unchanged. That means it looks like the performance of finance will be going down from the third quarter to the fourth quarter. Are there any risk factors visible? That's my question. In addition, the calendar 2025 and beyond, so in order for you to outperform WFE market, there might be some drivers. You talked about several POR from manufacturing cry etcher and film deposition systems. For those 2 systems, how much contribution do you expect at which timing, could you share your idea, please?
Hiroshi Kawamoto: Thank you very much for your question. So let me give you some figures. I think you have done some calculation based on our figures. So after the financial settlement, you may see some upward revision to some extent, but this is the current focus that we have. At this stage, we don't have any factors for decline. That's not what we meant.
Toshiki Kawai: There is no need to change things precisely. So you should watch the big trend and the timing of delivery for each month. We will look at those figures. And we don't have any major factor, which forces us to change our financial estimates. But for inquiries from April inquiries may be pulled forward to March. So that's what we can report to you today. Also, toward next year, we do have our growth plan. As for the specific figures, maybe in the next financial announcement, we can give you more details. So one thing I can highlight today is last year, WFE market, $100 billion in size. And Tokyo Electron growth, positive 26%. So on a fiscal year basis, more than 30% growth is expected. So because of AI in our company, the AI investment helped us to improve our financial performance. That's the position we are in advanced logic, DRAM for HBM applications, advanced packaging, inquiries in those 3 areas are increasing. Next fiscal year, those 3 are the major drivers, and we expect the loss for further increase. For example, for DRAM capacitor etching, supercritical drive, logic, GAA, gas chemical etching and contact deposition. So these are the area that TEL has a core competence, and we have acquired some PORs and that will help us to make good financial results. And we are a very dominant position for prober for advanced logic and HBM bonder, our share is 60% to 70%. So that's also the reason why we can outperform the market growth. So in particular, for testing and packaging processes, the probers and the bonders, also the film deposition, coater and cleaning are also part of this area for testing and packaging equipment in total sales is doubled this fiscal year, about -- from JPY 100 billion to JPY 200 billion. So this kind of investment will continue or to be accelerated furthermore next fiscal year. Therefore, we can expect the growth next year. Specific figures or money basis, we are now scrutinizing figures. This is the big framework of our estimate for the future.
Koichi Yatsuda: Your question that contribution of POR. This time, we talked about NAND channel hole, the investment for this. It's only for pilot line for this year. So the contribution to next fiscal year sales is not so big. Another area, logic backside PDM, customer for the first time are fixing their PORs. Therefore, maybe the investment for mass production line should be next year and beyond.
Operator: Next question is from  Wadaki-san of Morgan Stanley [ MFC Research ] Japan.
Tetsuya Wadaki: I am Wadaki from Morgan Stanley. So I have 1 question regarding China. This fiscal year, -- so what is the proportion of China market sales? And what is the decline you expect for next fiscal year? I think there is a decline for next fiscal year. But actually, China market brings you huge money. And if that proportion of China goes down, I wonder you may have some difficulties further increasing your sales. What do you think about that?
Toshiki Kawai: For the first half of this year, the China market accounted for the high 40% level. But in the second half of this fiscal year, China market proportion is the high 30% level. Therefore, 40% plus is the condition for this year. Next fiscal year, the midpoint of 30% level. is the proportion of China market, China sales. So for profitability, high value-added leading-edge products are pursued by our company. Also, productivity should be high so that we can provide high value to the customers. We are proposing those things to our customers. So GPM has been increasing steadily. Right now, just for this fiscal year, when you compare the first half and second half of the year, although China proportion goes down, when you look at gross profit margin, there is no change, whether gross profit margin can be increased. So along this trend by country, -- how can I put it -- along with the China proportion changes, the impact of the gross profit margin, we don't have so much concern.
Koichi Yatsuda: Next question is from Hirakawa-san from BofA.
Mikio Hirakawa: For WFE, we got a very detailed forecast. So CY 2026, you said double-digit growth is expected. I think 2026 is far away, but which application will contribute to the double-digit growth? And are there any visible inquiries coming in? Could you let me know your feeling about calendar 2026?
Toshiki Kawai: So when you look at the big framework, DRAM remains strong, HBM and DDR5. HBM is for AI servers and for HAI device, including PC and smartphones. DDR5 is expected high next year. For logic, is expected to grow further more next year and onwards. So GPU and ASIC 3-nano node devices is one thing, and for edge AI 2-nanometer node devices. So 2 nano-node, there is one customer, but toward next year, multiple customers are expected to start investment to the 2-nanometer node. Therefore, for DRAM rather than this year, you can see more sales for DRAM more than this year, next year, and logic is expected to further grow. For NAND, compared with last year, this year, NAND is doubled. That's what I said. Next year, I think this kind of trend will continue next year. As for the proportion of NAND, it's about 10% next year as well. But when you think about those issues by taking account of those factors, we said double-digit growth is expected. Especially emerging customers in China are now starting up tools. And for mass production, they try to confirm their capability to start mass production. So proportion of China is about the midpoint of 30% level, that remains unchanged, but volume-wise, I think the China volume will keep growing as well.
Koichi Yatsuda: Next question is from Shimamoto-san from Okasan Securities.
Shimamoto Takashi: I am Shimamoto from Okasan Securities. Now my question is about next fiscal year sales. I want to understand your view. So the current fiscal year, you drastically outperformed WFE market because of the China investment is pulled forward. So if my idea is not correct, please let me know if my assumption is correct. So next year, when China declines a little bit, next fiscal year, your sales might underperform WFE market. How do you think about this kind of potential risk for next fiscal year?
Toshiki Kawai: Yes. About your question, so we have outperformed the WFE market because -- partly because of the pull forward sales in China, but also the advanced logic, HBM and advanced DRAM. As I said earlier, there are the major drivers for us to outperform the WFE market. So we were ready to address those 2 factors. That's how we analyze the situation. From that viewpoint, for next fiscal year, we can meet the market expectations, that's how we view next year. We are now scrutinizing detailed figures. I'm sorry for that. We can share the information in next financial announcement meeting.
Shimamoto Takashi: I have one follow-up question for advanced logic. So advanced logic. So this year and last year, when you compare those 2 years, I think advanced logic remains flat. The customer in Taiwan did a very huge investment, but is it correct if I understand advanced logic remained flat from last year to this year? Or did you receive any pull forward inquiries for advanced logic as well?
Toshiki Kawai: For advanced logic, the big customer will continue their investment.
Shimamoto Takashi: However, I said the advanced logic remains front maybe because of the drastic drop of the North America customer. Is that correct understanding?
Toshiki Kawai: Well at present, we are now trying to factor in the investment plan of all customers. As you know, many I see vendors are making financial announcement. So we incorporate those factors. So Taiwan investment gets larger for the advanced area. For memory, this year and next year, as far as Tokyo Electron is concerned, for memory, like HBM or DDR5, our products have been adopted by a customer. This is one of the driver of our growth. DRAM is expected to grow significantly. There is a way to think issued calendar year or fiscal year, but everything. We are now winning PORs steadily. This will help us to further improve our performance in next fiscal year.
Koichi Yatsuda: Next question is from Yoshioka-san from Nomura Securities.
Atsushi Yoshioka: I am Yoshioka from Nomura Securities. So I have a question regarding China. The inquiries from China or your focus for 2025 compared with 3 months ago, have there been any changes? There are some trend of getting stronger because your Japanese competitors said that it might be a very similar investment level for next year as this year. So are there any changes in China trend? And I have one additional question. The impact of regulations in December last year, American government issued the export control. And at the end of January, public comments started from the [ meeting ] Japan. So I wonder what sort of impact does it have on your customer's demand?
Toshiki Kawai: Thank you for your question. Needless to say, we have the broad product portfolio. Therefore, the American government regulations and additional public comment, as you mentioned earlier, we are being affected by those factors to some extent. It's inevitable. As I said before, we need to closely watch those impacts. So now we should be very careful and a lot to monitor what's going on. And based on that observation, we can expect some regulations to come. And if there is no big difference between our expectation and actual regulations, and our plan for growth is not significantly affected over the past 3 months. The only minor impact is detected for our growth plan and our performance.
Atsushi Yoshioka: I have one follow-up question. So compared with 3 months ago, are there any demands coming from China, which is pulled forward?
Toshiki Kawai: For some tools, we have received a request for pulled forward deliveries. So now [ public ] comment is being started already. So we don't think any request being pulled forward under the current regulations.
Koichi Yatsuda: We have about 15 minutes to go. But actually, we received quite a few questions. But actually, we received quite a few questions. So could you limit your questions to one. Next question is from Kamisaki-san from Tokai Tokyo Intelligence Laboratory.
Shouichirou Kamisaki: I am Kamisaki from Tokai Tokyo Intelligence Laboratory. So I have the cryo etching. I have a question for cryo etching. You won 1 POR from one company. I think there are some potential customers more, and how many more PORs do you expect for cryogenic etching? And I think there are several channel hole processes. And how much PORs have you obtained so far? So calendar year 2027, $2 billion market size was expected. Are there any changes for your forecast for 2027? Do you have any comments, if any, regarding the competitions. Are there any difference between your product and your competitions?
Toshiki Kawai: So, let me answer to your question as much as possible. For one customer, we won the high-volume production POR from one customer. So main portion is the investment for next year. We can see drastic contribution next year. Other NAND customers, they are evaluating the technology as planned, I think we are able to demonstrate the benefits and the advantage of our product to the customers. In our company, the edge rate is rather high. On top of that, we do have the coating process, and we are trying to improve productivity, including combining coating and etch rate and coating itself. As far as productivity is concerned, there are some positive or negative impacts for coating, but when we have more stacking layers, and if there are more etching processes, we can get the advantage of high throughput of our technology. So the technology for the future, I think we can provide high value to the customers. The benefit of coating, the cost of consumables, COC, operating cost, the customer can enjoy some benefits. So etch rate, the profile and operating cost or COC, these are the areas that we try to provide customers with the high values with our technology. Now we have one customer, which adapted our technology, we are going to increase the number of customers who adopted for mass production.
Koichi Yatsuda: Let me answer to you about the market size, $2 billion next year. That's our expectation, and there have been no changes, but customers try to improve investment efficiency. So there might be some decline, but as far as we are concerned at present, we haven't changed our forecast, $2 billion. Next question is from Mr. Yamamoto of Mizuho Securities.
Yoshitsugu Yamamoto: I am Yamamoto from Mizuho Securities. On Page 16, you talked about new production building in Miyagi. I misheard, but Kawai-san said, lead time is to be reduced by a factor of 3. If that's true, so TEL's etching cost goes down, how much reduction you can enjoy for cost, do you have any idea for that?
Toshiki Kawai: Now we are scrutinizing that sort of information, production lead time. That's the lead time in our factory, that's what we mean by production lead line, we can reduce it by a factor of 3. That's our target for lead time reduction. So production capability [ FY 2029 ]. This year is fiscal 2025. By [ 2025 ], production capability should be increased by 1.8x and capacity should be tripled for the future. And labor efficiency increased by 4x, double the space efficiency, and reduce the production lead time by a factor of 3. So high efficient production line will be established in Miyagi, new production building. By doing this, maybe we tried to increase the automation of our production line through the commonization of the parts and the standardization of the parts. Also chamber to chamber matching can be improved when we have higher automation rate in our factory. Then on-site process mandates can be reduced and incident can be reduced, also post shipment costs can be reduced. So we can enjoy quite a few benefits. And we are now studying how much numerical benefits we can enjoy quantitatively. So these are the factors for us to reduce the cost further more. So more than 1,000 people will be working there according to our current plan. On the other hand, automation rate will be increased furthermore. So the market grows, and that will help us to hire more people. However, the cost per tool or fixed cost per tool can be reduced. That's the concept of the new production building. The quantitative cost reduction is being now studied. So I'm sorry, I cannot give you any specific answer for quantitative value.
Yoshitsugu Yamamoto: Kawai-san talked about the drastic change. The construction is to be completed summer 2027. You have only 2 years to go. So this kind of drastic change is just attributed to the difference in assembling by including suppliers, are you going to change many things, including suppliers. I'm sure you have reformed a lot. is that kind of extension of the previous practices? Or do you try to increase some disruptive changes, which is totally different from what you have done so far?
Toshiki Kawai: So our major idea is, as you know, the semiconductor market is reaching $1 trillion. And according to IBS, $1.3 trillion is the size of market in the future. Year 2050, Quantum computing or 6G or 7G communications will be introduced and Industry 5.0, Society 5.0 will be emerging. We have a lot of expectations. Robotics will be implemented, I mean those are some concerns. Semiconductor market is expected to grow drastically. So what is important for Tokyo Electron is pursuing growth rather than bloating. And we should improve the efficiency in our operations. So manufacturing, digital transformation with AI and robotics. This is a concept that we should work on as a leader in this industry. Tokyo Electron alone cannot come up with high efficient factory lines. Therefore, we need to make supply chain wide effort to establish high-efficiency manufacturing line. So the supplier cluster or fab cluster, we have quite a few partners located very close to our factories. They have their own operation centers very close to Tokyo Electron's factory. So this is a supply chain wide effort to work on the smart manufacturing. And I hope the production building in Miyagi presents a model case. That's the backdrop of the decision made this time. So to your question, my answer is yes. I expect a lot.
Koichi Yatsuda: Next question is from a text in English. Let me read it out. This is a question from GAM Investment Management, Mr. Ernst Glanzmann. The question is, historically, operating margins have not exceeded 30% on a sustained basis. Under what circumstances could they possibly rise towards 40%, If not, what factors would prevent them from reaching such a level. Please provide argument to support both possibilities.
Toshiki Kawai: In our midterm management plan, 35% or more OPM is our target toward FY 2027, by working on the midterm management plan, 40% is mentioned in this question, that means we should further increase the OPM by 5% on top of the 30% or more target. Our target midterm target is just a target, is not the goal. So we should pursue further higher OPM to promote the growth and we should invest more under the high profit margin. So 5% more than 35%. For one thing, Tokyo Electron is a manufacturer. Therefore, we should provide high value-added next-generation products on a continuous basis to satisfy customers' demands. The gross profit margin has been growing by 7% over the past few years. So we provide value to the customer by machine from the viewpoint of the GPM or marginal profit ratio. So 2% to 3% enhancement is to be achieved for GPM or MPR, marginal profit ratio. And I said manufacturing DX with AI and robotics, that's what I said earlier. And also the business innovation, by introducing AI and digital capability. So under those trends, we are now working on the business innovation project by incorporating IT unit. So we should reduce fixed cost ratio against sales so that we can pursue the further efficiency. Now we have more growth and we can increase further share. At the same time, we should reduce fixed cost per sales, and we should pursue higher GPM and marginal profit ratio by several percentage points. So this is how we can add 5% more to the OPM target of 35% or more in our midterm management plan. So you talked about 40%, that's a very specific question we received. Therefore, I just gave you our way of thinking to answer your question. So our company, first of all, we must achieve our midterm management plan. At the same time, we are now studying the possible plan beyond the midterm management plan for further growth.
Koichi Yatsuda: Next question is also in English. Let me read it out. So this is a question from Paul Schwerda from Baillie Gifford. The question is as follows: what is your view on dry versus wet cleaning in wafers? How much will the industry move towards dry cleaning? So let me answer to your question. So by and large, the wet etching market is rather big. Partially, for critical processes, dry cleaning is also introduced. So our products, for example, aerosol-based the physical cleaning. This is not liquid. So aerosol is used in our technology, but compared with wet cleaning, dry cleaning market is rather small right now. So patent collapse prevention, the supercritical dry technology is also advantageous. We have very high technology and high market share. So by combining those technologies, we want to increase our sales and share for wet cleaning. Next question is from Yasui-san from UBS Securities.
Kenji Yasui: I am Yasui from UBS Securities. My question might sound strange. So the other day, SoftBank announces, the Cristal intelligence AI, that is AI agent of open AI used and SoftBank is going to promote the sales of the software using AI. I think you have quite a few engineers. So software innovation is to be advanced drastically this year. Process using AI. There are many possibility for that, but the company-wide introduction of AI for the total optimization. So have you started discussing the possibility to introduce AI on a company-wide basis or are you just thinking about AI. So what is the stage of the introduction of AI in your company? Do you have any midterm plan?
Toshiki Kawai: This year, I attended in the United States in January. So AI evolution, AI acceleration, it is true that is amazing situation going on now. Various applications will be emerging. And in many areas, efficiency can be enhanced by introducing AI. That's what we expect. In our company, every year in January, we hold internal technology forum where the engineers from different sites, including Japan, United States, make a presentation on their technology innovation and we share the technology innovation idea within group. That's the purpose of the internal technology forum in January and we select the champion in this forum. So IT utilized idea or development using IT or material selection by using IT. Those ideas are coming out one after another, and the volume of IT proposal is really huge. And I think IT has a huge potential. And now we have more and more sites. And from the viewpoint of the governance and security enhancement, and in order to ensure the compliance to various regulations, we must make the best use of AI. AI might detect things, which might be overlooked by the people. So AI spread furthermore. I'm sorry, my answer is rather abstractive. But AI, we are -- we must work on AI actively, and we want to do investment for that and one of the way of thinking is as a part of our business innovation project, the DX project, we have incorporated IT unit in our digital transformation activities within the business innovation project.
Koichi Yatsuda: We have 2 more questions. So I want to receive those 2 questions before closing today's session. Now we have Thong-san from Macquarie Capital Securities.
Damian Thong: I am Damian Thong from Macquarie Capital. One question, this fiscal year, now you can see drastic increase and what is your expectation for next fiscal year? In particular, you talked about utilization rate is going up and parts and consumable sales will be increasing. Do you think this continue next fiscal year, the WFE market remains flat. That's our focus for next year. But field solution, how do you see the prospects of the field solution sales in next year?
Toshiki Kawai: First of all, let me answer to your question. And Yatsuda-san, please add, if any. As you just said, the utilization rate has been improving. For DDR4, which is not sold a lot now, the DDR4 inventory is expected to reduce at the end of this year. And also NAND inventory is expected to be decline. So it is true that customers have utilization rate goes up, so we can have a huge expectation for field solution business. And for on-device AI is another trend emerging now and investment for on-device AI is also expected. So based on fiscal year, field solutions business is expected to grow. Yatsuda-san, do you have any addition?
Koichi Yatsuda: For field solutions sales, so we can see increasing trend. So by quarter, we don't have any announcement, but part service sales has been increasing over the past 4 quarters consecutively because of the utilization rate increase of the customers and our installed base is increased by 4,000 to 6, 000 units every year. So these factors help us to further increase the sales of field solution. The last question from Hanaya-san from SMBC Nikko Securities.
Takeru Hanaya: I am Hanaya from SMBC Nikko Securities. I'll try to make my question briefly. So for NAND, calendar year 2025, that is doubled. So your focus remained unchanged from 3 months ago. I think it's a kind of surprise because why? Investment is necessary for them. I want to ask you. So now the -- there are some vendors who set reducing the manufacturing volume and some other companies may reduce manufacturing. The absolute volume gets smaller, but why do they need investment? So because they are reducing the manufacturing volume. So the supply/demand recovery might come earlier, but I think maybe we can see some flat situation in 2026 NAND market. Is that correct understanding?
Koichi Yatsuda: So let me answer to your question. For this year, the customer investment as for growth rate is to be almost doubled according to our forecast. As for the [ concept ], the greenfield -- we don't expect any greenfield investment. So this year's investment is the brownfield investment for the purpose of migration. Why customers want to invest more to reduce cost according to our understanding through migration, they try to reduce unit price. This is how customer can improve their profit margin. This is the idea the customer must have according to our understanding. It's a bit early for us to say something decisive for next year. We don't have so much declining forecast. I think the current investment level will continue. That's our tentative assumption for next year.
Toshiki Kawai: As for image, the cutting edge area, NAND customer, for this -- rather than this year, next year, the investment will increase for cutting-edge NAND customers. The other areas, as Yatsuda-san said now, the almost flat for NAND investment.
Koichi Yatsuda: So now it's time for us to close today's financial conference. Before closing, however, I'd like to make one announcement as we informed you in the second quarter finance announcement, and also Kawai-san said earlier, we will hold IR Day event from 3:30 p.m. to 6 p.m. on February 26, Wednesday, 2025. In this event, we plan to present our business opportunities, expanding along with the growth of WFE and test assembly tool market, and new products and technology that we work on to embrace opportunities as much as possible. So we'd like -- very much appreciate your participation in this event. We will inform you of the details of this event later. Finally, we'd like to continue to improve our IR activities based on your precious feedback. So we appreciate your kind cooperation in filling out the questionnaire before you expect the Webex. Thank you very much for joining us despite your busy schedule today.