KOKUSAI ELECTRIC Aktie

We will now begin the financial results briefing of Kokusai Electric for the first quarter of the year ending March 2027. Thank you very much for joining today out of your busy schedules. I will be serving as the moderator, . Matsumoto from Corporate Communications. It is a pleasure. Firstly, I will introduce today's speakers. Mr. Kazunori Tsukada, Representative Director, President and CEO.

Hello.

Mr. Yoshitaka Kawakami, CFO and Senior Vice President.

Hello.

The proceeding is, at the beginning, Mr. Kawakami will present the first quarter consolidated results and the full year forecast. Next, Mr. Tsukada will present the outlook going forward. After which, we will have questions and answers and plan to finish at around 4:00 p.m. Today's briefing is broadcast live online via Zoom. If the stream disconnects or the video freezes during your viewing, please wait a moment and try reconnecting.

The presentation and answers during -- questions and answers will be delivered in Japanese. Simultaneous English interpretation service is available to the participants. As today's briefing is intended for institutional investors and analysts, please be advised that questions will be limited to institutional investors and analysts. Thank you for your understanding in advance.

Please also refrain from recording or taking photos. We will now begin the presentation.

Mr. Kawakami, please go ahead.

I am Kawakami, Senior Vice President and CFO. Thank you for joining us today at Kokusai Electric's Earnings Call. I will first go over our first quarter financial results as well as full year earnings forecast. These are disclaimers that I will omit explaining. First, here is an overview of our first quarter financial results. Page 4 are the highlights, where I will explain the specifics from the next page and onwards. Page 5 presents a summary of our consolidated financial results for the first quarter. Both revenue and profit increased quarter-on-quarter as well as previous quarter. This was owing to uptick in service revenue, mainly from component sales and others, resulting in both revenue and profit exceeding our initial forecast. Revenue of JPY 75.4 billion set a new record high for a single quarter.

The gross profit margin of 40.7% saw a 2.2 point decline year-on-year, where the proportion of NAND-related equipment sales was high. However, compared to the previous quarter, it rose by 1.3 points, owing to production utilization increase in others. Furthermore, the increase in revenue led to a decline in the ratio of SG&A expenses and profit margins from adjusted operating income onwards rose both year-on-year as well as the previous quarter. The first quarter orders received totaled approximately JPY 140 billion, exceeding initial forecast by about JPY 67 billion. The increase was particularly significant for DRAM for China as well as for NAND sold to non-China and China. The strong demand is expected to continue into the second quarter.

Page 6 details the factors contributing to the year-over-year changes in revenue and adjusted operating income for the first quarter. Revenue increased by 46% year-over-year to JPY 75.4 billion owing to growth in non-China equipment sales. Adjusted operating income increased by 59% year-over-year to JPY 17.4 billion as gross profit rose owing to a significant growth in sales despite the total gross profit margin declined due to product mix change.

Page 7 shows early equipment and service sales by application. In the first quarter, although sales for NAND decreased by 34% year-over-year, sales for DRAM increased by 158% and sales for Logic/Foundry increased by 82%. Although sales for DRAM decreased by 2%, in the most previous quarter, sales for NAND increased by 84% and sales for Logic/Foundry increased by 38%.

Page 8 shows equipment and service sales by application, broken down into sales to non-China manufacturers and sales to China manufacturers. In the first quarter, sales to non-China manufacturers saw increases in equipment and service revenue for major applications, both year-on-year and compared to the previous year -- previous quarter, resulting in a 75% year-over-year increase and a 23% increase versus the previous quarter.

Sales to local Chinese manufacturers in the first quarter saw an increase in equipment and service sales for Logic/Foundry applications, both year-over-year and the previous quarter. Yet year-over-year NAND segment equipment sales going through a transitional period resulted in a slight 3% decrease year-over-year. Compared to the previous quarter, sales rose 18%, marking a recovery trend following the low point in the fourth quarter of the previous fiscal year. Furthermore, while sales to non-China increased year-on-year, sales to China declined, resulting in a fall to 25% for share of sales to China.

Page 9 shows revenue by destination. First quarter sales to China decreased year-over-year, but increased quarter-over-quarter. Outside of China, sales increased in all regions, both year-over-year as well as the previous quarter. The percentage of sales to China remained at 28%, the same level as the previous quarter.

Page 10 shows the quarterly trends of the balance sheet. Total assets increased by JPY 11.2 billion compared end of fiscal year ending March 2026, owing to increase in inventory from production growth as well as increase in trade and other receivables. Total liabilities increased by JPY 5.6 billion compared to the end of the fiscal year ending March 2026 due to increased trade and other payables from increased production. Total equity increased by JPY 5.6 billion compared to the end of the fiscal year ending March 2026, primarily owing to an increase in retained earnings.

Page 11 shows the key financial indicators from the quarterly balance sheets. The equity ratio decreased by 0.4 percentage points from the end of the previous fiscal year to 60.6%. In addition, we maintained our net cash position from the end of the previous fiscal period with net cash standing at JPY 6.6 billion.

Page 12 shows quarterly cash flows. Operating cash flow -- cash flow inflows exceeded investment cash flow outflows resulting in free cash flow of JPY 6.6 billion. Cash flows from financing activities resulting in an outflow of JPY 6.4 billion due to dividend payments and buyback.

Page 13 shows quarterly R&D expenses, capital expenditures and depreciation expenses. Research and development expenses for the first quarter totaled JPY 4.5 billion. The ratio of R&D expenses to revenue fell to 5.9% owing to increase in revenue. R&D expenses for the fiscal year ending March 2027 are expected to increase by about 10% year-on-year projected to total approximately JPY 20 billion. Capital expenditures for the first quarter totaled JPY 4.8 billion. We are currently investing a total of JPY 20 billion to construct a demonstration center in Oregon, USA, aiming for operational start in January of 2027.

Consequently, capital expenditures for the fiscal year ending March 2027 is expected to increase by about 70% year-on-year to approximately JPY 29 billion. Depreciation expenses for the first quarter totaled JPY 3.9 billion. This figure is expected to remain at a similar level going forward and is expected to increase by about 10% year-on-year, reaching approximately JPY 16 billion.

Next, I will explain the full year earnings forecast for the fiscal year ending March 2027. Page 15 shows the highlights. Details will be shared starting on the next page. Please turn to Page 16. We are revising the earnings forecast and dividend forecast for the fiscal year ending March 2027 that was announced on May 13 at our full year earnings call for fiscal year ending March 2026. Revenue was expected to significantly exceed the previous forecast, owing to a substantial increase in sales in the equipment business. Consequently, we have revised the first half forecast upwards by 6% to JPY 161.0 billion, a 37% increase year-over-year and a full year forecast upwards by 21% to JPY 340 billion, a 45% increase year-on-year.

We have also revised our profit forecast upwards in line with the revenue increase. Adjusted operating income has been increased by 10% to JPY 39.2 billion, a 55% increase year-on-year and our full year forecast has been raised by 42% to JPY 86 billion, an 81% increase year-on-year. Adjusted net income for the first half was revised upwards by 11% to JPY 27.8 billion, a 60% increase year-over-year and a full year forecast has been raised by 40% to JPY 60 billion, a 76% increase year-on-year.

The dividend forecast has also been raised in line with the upward revisions to adjusted net income. With the interim dividend forecast increased by JPY 9 from JPY 23 to JPY 32 and have revised our year-end dividend forecast upwards by JPY 9 from JPY 24 to JPY 33. As a result, the projected annual dividend is expected to be JPY 65 per share, and the consolidated dividend payout ratio based on adjusted net income is projected to be 25.2%.

Page 17 summarizes the factors contributing to changes in the earnings forecast for the fiscal year ending March 2027, comparing it to the previous forecast announced at the earnings call for fiscal year ending March 2026. Revenue is expected to exceed previous forecasts for both equipment sales to non-China and China as well as for service revenue. Therefore, we have raised the forecast by 21% from the previous forecast to JPY 340 billion.

In addition, profitability is expected to improve due to product mix changes. And as such, the gross profit margin has been raised by 1 percentage point from the previous forecast of 42% to 43%. Regarding adjusted operating profit, owing to a significant increase in sales and a rise in gross profit margin, we have raised the forecast by 42% from the previous forecast to JPY 86 billion.

Page 18 summarizes the factors contributing to changes in earnings forecast for the fiscal year ending March 2027 compared to the previous fiscal year's results. Revenue was expected to increase owing to higher sales of equipment to non-China customers, higher sales of equipment to China and higher service revenue and is projected to increase by 45% compared to the previous fiscal year.

Adjusted operating profit is projected to increase by 81% year-over-year, owing to higher sales as well as rise in total sales gross profit margin from improvement in production capacity utilization resulting from increased production volume and the total gross margin improvement from product mix changes where the increase in SG&A was absorbed.

Page 19 shows chronologically revenue in non-China and revenue in China from March '23 to March '27 forecast. Revenue in non-China bottomed in March '24, since then, the revenue increase trend has been continuing with greater acceleration in March '27. Non-China revenue forecast is revised 14% upward compared to the last forecast, driven by stronger-than-expected demand for NAND and Logic/Foundry equipments including advanced packaging. NAND sales are expected to grow 95%, DRAM sales 39% and Logic and Foundry sales 89% year-on-year.

Each application is expected to grow significantly totaling non-China revenue growth of 49% year-on-year. Now revenue in China is revised upward by 39% compared to the last forecast, a 37% increase year-on-year with greater-than-expected increase in DRAM equipment demand. For China NAND sales, in the last forecast, we expected a sharp fall due to major device manufacturers, investment transition period, but are now projected to drop only slightly as demand has been increasing recently.

March '28 onwards, we expect China NAND equipment sales also to shift to a growth trend. With faster-than-expected pace of revenue growth in China, China revenue share rose 4 points compared to the previous forecast to 33%. We expect the share to trend around 30% going forward.

Page 20 shows revenue forecast by application of equipments and service. In March '27, driven by generative AI demand, we expect semiconductor device makers to accelerate CapEx for generational shifts and capacity expansion, mainly in high-performance devices. Therefore, equipment sales are projected to grow strongly across all applications, NAND, up 49%; DRAM, up 61%; and Logic/Foundry up 65% year-on-year.

Page 21 shows revenue forecast by destination. Revenues are projected to grow across all regions year-on-year. China's share is expected to reach 38% partly due to active CapEx by non-China manufacturers for their plants in China, while export controls and tariffs have no direct impact currently, we will monitor closely together with potential indirect impacts.

Page 22 shows revenue forecast by equipment. High value-added equipments are expected to account for about 70% of equipment sales in March '27. We will accelerate the adoption of high value-added products as generational shift investments progress in each application.

This concludes my presentation.

I am Kazunori Tsukada, President and CEO. I will explain future outlook. Page 24 outlines our business environment. Our view is that in the semiconductor device market, AI-related demand will continue to strongly drive CapEx, especially in high-performance devices among device manufacturers. On the other hand, non AI-related industrial equipment users are in a recovery phase, awaiting full recovery. For the mid- to long-term, our view remains unchanged that the overall semiconductor device market will grow at a pace faster than expected so far.

Regarding the calendar year 2026 WFE market size, during our March '26 earnings announcement, we projected a 15% year-over-year growth to around $120 billion to $125 billion, but with AI-related investments accelerating further centered on DRAM and NAND, we have raised our outlook by about 10 percentage points, now expecting year-over-year growth of over 25%, reaching around $140 billion.

Page 25 provides an update of our mid-term management plan. When we announced the March '26 results, following changes in the market environment, we reviewed the timing of achieving the midterm plan. We now expect to achieve our revenue target of JPY 330 billion in March '27, 2 years ahead of schedule. Sales mix by application is also approaching target levels as a result. For the midterm adjusted operating margin target of 30% or higher, we aim to achieve in March '28 through operating leverage coming from larger scale of revenue.

We will build higher profitability by raising the mix of high value-added products with device generational shifts, reducing production costs via higher utilization rate and controlling fixed costs and SG&A. Page 26 covers production capacity and sites. Capacity utilization is expected at an average of 70% to 80% in the first half. Over 80% in the second half of March '27 and higher next fiscal year. Production lead time is currently around 8 months. While current capacity secures our JPY 340 billion revenue forecast for March '27, we are expanding capacity to meet increasing demand, March '28 and beyond.

We are evaluating rapid capacity expansion on newly acquired land next to the Tonami plant, while ramping up production engineer recruitment, and putting in various measures. Through these efforts to increase production, monthly unit production capacity is targeted to reach 2.5x of the March '25 level in 10 years.

Page 27 outlines shareholder returns. It is our management priority to deliver stable, continuous and proactive returns to our shareholders. And the basic policy is a consolidated payout ratio of around 20% to 30% of retained earnings. Following this policy, with the revision to the guidance, we raised our annual dividend forecast by JPY 18 for March '27. Further, following the shareholder return policy, we announced share buybacks at the time of financial results announcement for the year ended March '26 and have subsequently announced the cancellation of these treasury shares. We completed up to JPY 5.3 billion share buyback, resulting in purchases of about 570,000 shares on July '27. All acquired shares will be canceled on August 31.

Finally, Page 28 summarizes the semiconductor device development roadmap, business environment and our catalysts. Semiconductor device makers are rapidly accelerating CapEx for high-performance devices for generational shifts and production capacity, and they are also expected to increase CapEx for generation -- general purpose devices. For NAND, we are optimistic that capacity expansion investments will finally resume. While for DRAM, Capex is likely to become more active for generational shift and capacity expansion driven by AI. In Logic and Foundry, we can expect more device manufacturers to implement Capex for GAA.

And in advanced packaging, our film deposition technology is our competitive advantage, and we can expect to win new PORs. For the evolution of semiconductor devices, we are actively collaborating with customers on the development of next-generation devices and will further promote proposals aimed at securing new PORs. In particular, we will create opportunities for our batch ALD compatible equipment and single wafer plasma treatment equipments, our strengths and aim for sustainable sales growth faster than the WFE market alongside a highly profitable business structure.

Thank you very much for your attention.

That concludes our presentation. We would now like to open the floor for Q&A.

[Operator Instructions]

Now we would like to open the floor for questions. Yu Yoshida-san.

This is from CLSA Securities, Yoshida. So congratulations on a great earnings call. So in terms of your by application equipment sales outlook, so in the first half as well as by application, when you look at the full year, when you look at the first half, do you have an outlook if that is available, please share.

And in the slide, I think it was JPY 234 billion for equipment sales previously, but then it's JPY 255 million -- JPY 225 billion now. But is there some kind of an upgrade from the previous version of your equipment included? If so, what is the percentage?

First surrounding the sales outlook of JPY 340 billion in terms of equipment by application. When we look at the first half for NAND, it is 17%; DRAM is 43%. Logic/Foundry will be 36% and others will be 4%. So this will be the percentage by equipment and by application. So upgrade portion has been included. Please give us a moment. Thank you. As for upgrade modifications, in the first quarter, sales was JPY 14 billion. And from the second quarter and beyond, it was JPY 11 billion for the second quarter. And overall, for March 2027, when we look at the full year, the upgrade modification will be JPY 39 billion that we are forecasting, and that has been priced in.

Just for clarification. For the first half when it comes to the value for just equipment, I think you gave us a breakdown for equipment only. So what is the value for just the equipment portion. And then the previous outlook for equipment, if the numbers have changed, so can you please give us a backdrop to why the numbers have changed for your outlook?

For the first half, the equipment sales was JPY 130.4 billion and service was JPY 30.6 billion. And that is our outlook of now. As for the upgrade modification, it is a new standard that we are going by and maybe that's why there is a change in the numbers.

Understood. So if there's anything that you can maybe elaborate separately, that would be very much appreciated. And secondly, and as for the WFE outlook, I think you have tried to see an upward revision. And going into next year, do you have an outlook at this point in time? And then from your earnings base, how are you observing how the next fiscal year will look? So is there a further uptick that you can expect? And when will that be more visible? And going into next fiscal year and going into next year, if you have an outlook and your thinking, that would be very much appreciated.

For WFE calendar '26 to '27, it should be maybe about a 20% increase that we are anticipating at this very moment. However, going into '27, if WFE -- there are some hints that maybe WFE will rise even further. But at this moment, we are expecting about 20% growth. And as for our sales, that was addressed in your question, needless to say, we want to grow above the WFE growth, and that's how we intend to expand our top line. For March 2027, we want to go for more than a 20% increase. And that is something that we are currently hoping for.

If you have by application, exactly where it could be growing and contributing, can you comment? That would be appreciated.

We expect that DRAM will be more hopeful continually. And NAND investments should be increasing to a certain extent as well. And that is what we anticipate. So NAND sales is very close to record highs, could be getting very close to record highs, and that's something that we are picking up as a hunch. And as for advanced packaging, there should be sustainable investment that should be happening. And therefore, advanced packaging's growth should be continuing. That's what we anticipate as an outlook as well. Thank you.

Thank you very much. Next is Suzune Tamura-san, please.

Morgan Stanley Securities, Tamura speaking. We are seeing WFE. And on this page, I have a question. Outlook of China. Chinese WFE market, if we look at the WFE market, just in China, what is the outlook? And then within that, what is the number by application, please?

China and non-China, we have divided. But within China, what is the breakdown by device and applications. Sorry, we don't have the information prepared. Excuse us for that. But China local, the WFE year-on-year is 5% plus. This is the current outlook.

That is year 2026 -- in year 2026?

Yes.

And then how about for 2027? Do we have the 2027 information?

For year '27 -- sorry, the overall field that I expressed earlier is about 20%, as I said earlier. But by region, we don't know. We don't have the information available yet. Many apologies.

All right. I see. And then my second question, in the presentation, you also touched upon somewhat, that is sales JPY 330 billion, once going more than that, you need to increase your production capacity, as you have said from the past. And this year, you are able to support the increase in production and in the production field and for supply chain, how pressed are you? going towards next fiscal year, how much can you support production-wise to cater for the demand? Production capacity wise, do we need to increase something big like an entire building?

No, even without doing that, we can increase production, for instance, the existing 3 production sites we have today already, how can we increase efficiency and effectiveness of production there will allow us to increase production. Therefore, first of all, we will increase the number of people working. We will increase the number of shifts. That is the preparation we are undergoing right now. And one more important point as raised in your question is the supply chain. Raising production capacity to the level we aim for, there are partners who can follow and keep up with us.

And there are also suppliers who cannot catch up so that they will not be the bottleneck so that we can work lock in step. We will provide all the support necessary from our side. We want to prevent any bottlenecks in the supply chain. We are preparing.

Lately, do we see any bottlenecks to prevent our production increasing?

No, we are not seeing that happening.

Lately, you said, but how about for next year? WFE will be growing 30% next year, we hear. In this backdrop, will the suppliers not become a bottleneck next fiscal year onwards? Don't you have this concern?

On this, it is not just limited to us, but SPE companies to the key suppliers have provided their production outlook, which means suppliers are also preparing and taking action to build production capacity and to increase production. At the beginning of the year, compared to the WFE, what we expected, then we are seeing about 2 years advancement in schedule, which means we need to increase production 2 years quicker. There has to be CapEx and capacity increases for 2 years necessary ahead of schedule.

I see. And as for the plan for this fiscal year, I want to hear the upside to this year's forecast. And you said lead time is 8 months, which means no different compared to the last time, which means for the second half of the year, you are fixed, which means sales revenue-wise, there can't be much upside any further. Is this the right understanding?

And profit-wise, year-on-year, if you have as much profit increase this much. And my impression is that other companies are increasing profits a bit more. How much profit upside can you expect in your case? There can be fixed costs. This will have to be increasing. Are you taking a conservative view, especially in certain aspects? In that case, please highlight.

For sales revenue, JPY 340 billion is the revised forecast now. This is the base that we can for surely clear. And profits since revenue is going up, some outsourcing will take place because of the increased production and payroll will go up which we have factored a increase, including bonus, which means profit wise, we can for sure defend this number.

But how much higher in profit compared to this number, we need to see further? In a sense, is this the minimum you're going to achieve as profit?

I think we can clear this number.

Next moving on to [ Wadaki-san ].

This is [ Wadaki ] from SBI Securities. First, this is the market earnings, I think theme, which is China exploding. So China is probably seeing an explosive situation. So how much have you priced that in? And how sustainable is this going forward? And what is the backdrop to this explosion that's happening in China. What is your read?

When it comes to demand from China, it is increasingly becoming very strong. So it is a major Logic/Foundry, DRAM, NAND across all areas, a very bullish situation is happening most recently. And then it's looking like it will continue from next fiscal year and onwards as well. And together with this, the medium to small cap emerging chip manufacturers demand is also proving to be stronger.

We don't think this is one-off. But having said that, at a minimum, this fiscal year, next fiscal year, a very strong situation should be continuing. There are some companies that have announced that they will be building new factories as well. And therefore, a very strong demand should be continuing for a while, and that is our read.

Hearing what you shared. So it seems like your sales revenue is really growing in China.

When it comes to Chinese customers, they try to match our production lead time when they place orders. And therefore, our sales outlook can be priced into a certain level.

And the graph that you see on Page 19, would it really exceed these numbers?

I don't think that is that probable. However, components that is under services. When there's order intake and there's sales, that will be booked immediately, could be some anticipation for an uptick.

And moving on to memory investments. So we do believe that WFE is going to be growing very solidly. And if there is going to be a turning point, exactly when would that be? And how would that happen, do you have an outlook? Do you have a view?

At this moment, even though it is a bit delayed, the DRAM-D1c transition has already been completed. D1d transition should be progressing going forward. Up until D1d, I do believe that each of the players seem to be a bit behind, but I do believe that it may try to meet the initial timing. If there are any changes, VCTA transition, is it really going to happen at the timing that we had initially anticipated. That is the question mark. And so we can't be that confident. There could be some changes to the initial read. And that's what we are picking up at the moment.

Understood. So lastly, maybe pricing change or maybe pricing transfer, could that be happening?

So there is material costs as well as personnel costs that is increasing. Therefore, we have been trying to price that in, into a pricing change as well, and we have been engaging on that front. As for things that have already been sold, and when there is a new negotiation timing, we have been negotiating with the customers very solidly, and that's what we have been doing to date as well.

And we will continue to negotiate going forward as well. As for the to-be newly released products and that product will be offering quite a bit of value. So based on that value, we hope that customers will be acknowledging the worth. And based on that, we would like to negotiate. And that's how we intend to change our negotiation approach as well.

Next is Nakamura-san from Goldman Sachs Securities, please.

My first question is next fiscal year, the adjusted operating profit margin, 30% is your target. And continuously, the jump from this year is quite big. And you are increasing sales -- with sales increase, you're going to aim to achieve this target of operating margin of more than 30%. But price increase that you just mentioned, would also this be contributory to the profit margin improvement, can you comment further about improving profit margin?

Pricing change is one important factor for margin improvement. Plus, one other factor is NAND. NAND CapEx is about to become quite strong. Because of this outlook as well, product mix will be improving. This will also contribute to improving operating margin improvement. Top line will go up. Product mix will improve. Higher-margin products will be increasing plus pricing revisions to be factored in. These are the factors for achieving 30% or higher adjusted operating margin.

One confirmation question. Earlier, the price increase stance you explained about material costs and personnel costs, you will be passing on to customers you mentioned. But even more than that, with price increases, do you want to further improve profit margin. For instance, same equipments? Looking at the changes in supply and demand, will you be changing prices, which means something like dynamic pricing.

Something like dynamic pricing, I think, is difficult to do. But even with the similar product groups, each product generation will have its proper value added. And we will have value recognized. For instance, in the Tsurugi series, there are several generations of products, and we are raising prices, we are raising price setting. We have this past track record. We will continue to do so.

My second question is production capacity, a confirmation question. Page 26, left-hand side is the image of production capacity and the bars. This is expressed in terms of sales or number of units in production. What is the scale? That is one question. And demand is pretty strong, whether you have enough production capacity, can you secure enough materials and components. This is the concern. But for instance, company-wide sales-wise, if you can express company-wide sales-wise next fiscal year's production capacity and March '29 production capacity, how much can you secure capacity for these timings?

First of all, the bars, this is unit basis, monthly unit production or annual unit production, whether it's a matter of whether multiplying by 12x or divide by 1/12, no different. It's a number of units wise. And how can we secure enough production capacity? On this question, as I mentioned earlier, in order to manufacture, we need the box. That is not the case. We do have enough box or the production plant. We do have the building. And the key is production engineers, the people engaged in production and the suppliers.

How do we get the suppliers increase their production capacity?

As I mentioned, for about 2 years, we are seeing timings advance. In our midterm plan, this is within our expectation, within our anticipation. In the midterm plan, we have identified what we need to do, and we are about to do them now. In this Tonami plant, next to this Tonami plant, the land was acquired. And in near future, we will be using this land, the neighboring land we acquired, and we want to achieve the necessary production capacity.

Next fiscal year, if you are going to grow more than WFE growth, which means more than JPY 400 billion sales next fiscal year, as of this stage, are you securing as much production capacity?

Have we already secured as much production capacity, then it is difficult to answer your question. But internally, what is the shape we need we have anticipated sufficiently. And how do we need to increase people -- and to what level do we need to ask suppliers to increase capacity. We have specifically been preparing.

Moving on to Yoshioka-san from Nomura Securities.

This is Yoshioka from Nomura Securities. Two questions, please. First, as for WFE '27 exactly how to understand this. In your response, you were saying that the NAND area should be growing to a certain extent as well. But allow me to once again understand further, NAND investment was basically tech migration. Now when we're going to 2027, there could be a new capacity increase, meaning greenfield investments could be increasing. Is that something that you already foresee? If so, what would be the advantages that you will be enjoying? Is tech migration going to be more advantage that you will enjoy? Or is it greenfield investments that will give you more of the benefit? So what would be the benefit impact that you will be enjoying from each of the respective investments?

When it comes to NAND, most recently, the demand-supply dynamics is really not fully adjusted yet. At this very moment, each of the memory players are allocating clean room for DRAM and making investments into the DRAM clean room area at the moment. But NAND wafer output needs to be increased. Otherwise, demand will not be met. And that is a situation that we're starting to see. Therefore, at a minimum, NAND greenfield investments should be seeing some action. And each of the memory players are starting to prepare for clean room building. And therefore, that is something that we could be hopeful of.

And further, when it comes to generational change investments versus greenfield investments. When it comes to generational shift investments, a specific process or specific equipment will be necessary for a generation change when the investments happen. But when it comes to greenfield investments, it will be a very broad equipment demand. And therefore, we definitely welcome that type of a situation.

Is there more of a benefit that we'll be concentrating for Kokusai Electric specifically when it comes to a tech migration investment? Or if it's like greenfield, it would be something that will be for the industry as a whole. So relatively speaking, how does that look?

When it comes to tech migration, there are equipment that can be used across different generations, and we offer that to a certain extent. However, when it comes to greenfield, the PORs that we have, all of them will be converting to sales to a certain extent. Therefore, we do believe that it will be more favorable for us, meaning that the greenfield investments will be broad of a positive impact for us.

And the second question is surrounding some numbers. Traditionally, I think you have been planning that for March '27, the GAA sales, how have you changed the outlook and for advanced packaging? I think in your presentation, I think you were mentioning that you would like to secure new PORs as well. So can you maybe share with us exactly how the planned numbers have been evolving? And what your most recent numbers are?

As for GAA sales, in this first quarter, it was about JPY 5 billion. And then from March 2027, full year base, we are thinking it will be over JPY 20 billion as an outlook.

And then for advanced packaging?

For March 2026, it was JPY 6 billion, where we landed. For March 2027, we are anticipating JPY 15 billion. First quarter was JPY 4.5 billion. And therefore, annualized terms, we are expecting JPY 15 billion.

As for advanced packaging, this JPY 15 billion that you have as a plan. Has there been an upward provision compared to the previous number that you had announced?

Yes. In the previous fourth quarter, I think it was JPY 6 billion. And so we have increased this to JPY 15 billion.

So that's a significant upward revision. So what is the backdrop to this? Is it because of the order intake that has increased? Or is there a POR that you have secured?

Both. But it's basically the customers' CapEx spending has been increasing and that would be the base. But Kokusai Electric has also increased the number of PORs that we have secured as well. So as a result of both.

Thank you very much. Next is Shimamoto-san, Okasan Securities, please.

Shimamoto from Okasan Securities. I have a capacity confirmation question. In the last presentation, Tonami plant, there will be need for a new clean room facility introduced. I think that was what you explained. How is the progress on this right now?

Did we say so? Tonami plant. In Tonami, in order to produce there is some space that is not yet turned into clean room. We are using like for warehouse use. We are going to renovate into clean room, which will allow us to increase production capacity. That is one aspect.

But lately, recently and also next fiscal year and March 2028, are we going to increase the clean room space?

Even without doing so, we will be able to increase the production capacity to the necessary level. This is the plan. But after that point, looking at future points beyond then, in parallel, we are considering to prepare for the clean room.

I see. And then the utilization rate, you disclosed more than 80%. How should we accept that? How should we think about this? Currently, what is your shift 1, 2 or 3 shift production? It may be possible, 3 shift production -- full production up to midnight. And on that basis, 80% or fully utilized, what is your utilization picture right now?

Using the current space, do we run 24/7 on full basis. If we do so, let's say that would be 100% utilization. And this is our thinking actually. Theoretically, this is the maximum used as a denominator. And shift-wise, we have 1.5 shifts right now. There is room to increase the number of shifts to increase production. In that sense for next year, what you're going to do is you are going to raise utilization to 100% without increasing shifts and then you can increase shifts and produce more. We will -- but if we increase shifts to 3 shifts, then this full usage of shifts would be 100% using this as the denominator, which means we have more room to increase production.

I understand that there are more questions that have been sent in. However, we would like to conclude a Q&A session here. Thank you all very much for attending the earnings call. After the earnings call has concluded, we will be sending out questionnaires. We would like to utilize this for our IR activities going forward. So we would very much appreciate your populating the questionnaires. We would like to conclude our earnings call here. Thank you once again for your attendance.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]

We will now begin Kokusai Electric Corporation's earnings presentation for the fiscal year ended March '26. Thank you very much for joining us today despite your busy schedules. My name is Matsumoto from the Corporate Communications Department, and I will serve as today's moderator. First, let me introduce today's speakers. Kazunori Tsukada, Representative Director, President and CEO; Yoshitaka Kawakami, Senior Vice President and Executive Officer.

As for today's agenda, Mr. Kawakami will first explain the consolidated financial results and full year forecast followed by Mr. Tsukada, who will discuss the future outlook. After that, we will move on to the Q&A session. We expect today's meeting to conclude at around 5:15 p.m. Today's presentation is being held as a live webcast via Zoom. If the stream is interrupted or the video freezes during the presentation, please wait a moment and reconnect.

The presentation and Q&A session will be conducted in Japanese. Participants may also choose simultaneous English interpretation. Please note that this meeting is intended for institutional investors and analysts. Accordingly, questions will be limited to institutional investors and analysts only. We also kindly ask participants to refrain from audio recording or photography.

Now I would like to begin the presentation. Mr. Kawakami, please begin.

I am Kawakami, Senior Vice President and CFO. Thank you for joining Kokusai Electric's financial results briefing today. First, I will explain our financial results for the fiscal year ended March 2026 and earnings forecast for the fiscal year ending March 2027. These are disclaimers. I will not go into them. First, here is the consolidated financial summary for the year ending in March 2026. Page 4 is the highlight. Specific details will be explained from the next page onwards.

Page 5 is the summary of consolidated financial results for the fourth quarter and the full year. In the fourth quarter, both revenue and profits decreased year-on-year, but both revenues and profits slightly exceeded the revised forecast announced at the second quarter financial results. Mainly service revenue was on the upside and gross profit margin also improved than expectation. For the full year, although revenue and profits decreased year-on-year, the previous forecast was exceeded in revenue by JPY 5.1 billion, adjusted operating income by JPY 3.2 billion and adjusted net income by JPY 2.3 billion.

Along the upside in adjusted net income, we will increase the year-end dividend by JPY 1 from the previous forecast of JPY 18 to JPY 19. As a result, the annual dividend per share is JPY 37, combined with the interim dividend of JPY 18. Consolidated payout ratio to adjusted net income is 25.3%. Bookings in the fourth quarter were approximately JPY 104 billion and bookings for the full year were JPY 264 billion, exceeding our assumption by about JPY 30 billion. The booking backlog at the end of the year was JPY 165 billion, and the strong momentum in inquiries is expected to continue into the year ending March 2027. R&D, capital expenditure and depreciation were more or less in line with the forecast.

Page 6 shows the factors for the fourth quarter year-on-year changes in revenue and adjusted operating income. In the fourth quarter, compared to the same period last year, mainly for DRAM, upgrade modifications that improve the performance and functions of existing equipment increased instead of new equipment sales, which led to an increase in service revenue. On the other hand, overall revenue decreased 4% year-on-year due to less stabilization in sales of equipment for China DRAM, which was active in the same period last year, resulting in equipment sales decrease. Changes by application will be explained later. Adjusted operating income decreased 17% year-on-year, mainly due to a decrease in gross profit stemming from lower sales and an increase in SG&A expenses.

Page 7 shows the full year factors for change. For the full year, similar to the fourth quarter, upgrade modifications for DRAM included in service sales grew significantly in place of new equipment sales in addition to an increase in equipment sales for NAND. On the other hand, with the coming down of equipment sales for Chinese DRAM and our advanced packaging, overall revenue decreased by 2% year-on-year. Adjusted operating profit decreased by 18% year-on-year due to a decline in the gross profit margin caused by a drop in production capacity utilization from lower production volumes and changes in the product mix, coupled with increased SG&A expenses from upfront investments such as R&D for the future.

Page 8 shows the quarterly revenues by business. In the fourth quarter, continuing from the third quarter, a portion of equipment demand was replaced by upgrade modifications, leading to a service revenue increase both year-on-year and quarter-on-quarter. The full year showed a similar trend with service revenue up 27% year-on-year, accounting for 40% of total sales.

Page 9 shows revenues by application of 300-millimeter equipment, which comprise the equipment business, and 200-millimeter or smaller legacy equipments included in the service business. In the fourth quarter, although equipment sales for major applications declined year-on-year, but compared to the quarter before, equipment sales for DRAM and logic/foundry increased. For the full year, compared to the previous year, equipment sales for NAND increased by 90%, equipment sales for DRAM by 44% and logic/foundry sales decreased by 11%. The significant decrease in equipment sales for DRAM was due to a drop in Chinese DRAM equipment sales, which were active previous year, and the replacement of some equipment sales with upgrade modifications in the service business.

Page 10 shows revenue by destination. In the fourth quarter, revenue from Taiwan and South Korea increased both year-on-year and quarter-on-quarter, while revenue from China decreased. For the full year, revenue from the U.S. and China decreased year-on-year, lowering the U.S. revenue ratio to 3% and China revenue ratio to 39%.

Page 11 shows non-China and China revenues by application. In the fourth quarter, sales to non-China manufacturers surged by 20% overall compared to the preceding quarter, with equipment and service sales increasing across all applications due to rising AI-related demand. Fourth quarter sales to Chinese manufacturers saw an increase in equipment sales for DRAM quarter-on-quarter, having going past the investment transition period. Logic/foundry equipment sales also increased, showing a recovery trend. In the fourth quarter, similarly to the third quarter, sales to non-China manufacturers increased, while sales to Chinese manufacturers decreased, causing ratio of China sales to decline further to 26%.

Page 12 is the balance sheet trend. Total assets at the end of March 2026 increased by JPY 18.1 billion from the end of March '25 due to an increase in cash and cash equivalents and an increase in PP&E from investments for a demo center in the U.S. Total liabilities decreased by JPY 5 billion from the end of March '25 due to the repayment of borrowings despite an increase in contract liabilities from the receipt of advances. Total equity increased by JPY 23.1 billion from the end of March '25 due to an increase in retained earnings.

Page 13 shows key management indicators of the balance sheet. The equity ratio at the end of March '26 rose by about 4 points from the end of March '25 to 61%. Regarding cash and debt relationship, we eliminated net debt due to an increase in cash and paying down interest-bearing debt, resulting in a net cash position of JPY 6.6 billion at the end of March '26. we achieved a net cash position 1 year earlier than expected. In accordance with our shareholder return policy, we have resolved to acquire up to JPY 5.3 billion of our shares, which was disclosed today. We plan to cancel the acquired shares as a general rule.

Page 14 is the full year cash flow. Free cash flow for March 2026 was JPY 31.8 billion as operating cash flows exceeded investment cash outflows. Free cash flow is expected to remain positive in March '27.

Page 15 covers full year R&D expenses, capital expenditures and depreciation. We are investing in R&D and CapEx in line with our midterm plan, anticipating demand recovery and mid- to long-term demand increases. R&D expenses were JPY 18.3 billion, about a 20% increase year-on-year. R&D expenses for March '27 are expected to increase by about 10% year-on-year. For capital expenditures, we recorded JPY 16.9 billion, a decrease of about 20% year-on-year.

Going forward, in addition to regular capital expenditure, we are currently constructing a U.S. demo center totaling JPY 20 billion as a large-scale capital investment aimed at opening in January '27, which means CapEx for March '27 are expected to increase by about 60% year-on-year. Depreciation was JPY 14.3 billion, a 10% year-on-year increase associated with large-scale capital investments. Depreciation for March '27 is expected to increase by about 10%.

Next, I will explain the full year earnings forecast for the fiscal year ending March 2027. Page 17 is the highlight. Specific details will be explained from the next page on.

Page 18 is the forecast for the fiscal year ending March 2027. In the fiscal year ending March 2027, semiconductor device manufacturers are expected to accelerate investments in generational shifts and production scale expansion, mainly for advanced devices. In our earnings for the year ending March '27, we aim to achieve revenue and profit growth above market by leveraging the technical superiority of our equipment for advanced devices. Specifically, we forecast year-on-year increases in revenue by 19%, adjusted operating profit by 27% and adjusted net income by 26%. Gross profit margin is expected to be 42%, 0.8 points higher year-on-year by improvements in production capacity utilization and product mix changes. Dividend forecast is JPY 47 annually, a payout ratio of 25.6% to adjusted net income, in line with our shareholder return policy.

Page 19. Starting from fiscal year March '27, we will change our business classification. 200-millimeter equipment, used equipment and upgrade modifications that were included in service business will be moved into equipment business to be more aligned with the WFE market.

Page 20 summarizes the factors for change in the March 2027 forecast compared to the previous year using the new standard. Overall revenue is expected to increase by 19% year-on-year, supported by a 39% increase in equipment sales to non-China and a slight 6% increase in service sales despite a slight 3% decrease in equipment sales to China. As for adjusted operating profit, we forecast a 27% year-on-year increase because of higher sales and gross profit margin improvement due to increased capacity utilization from higher volumes and changes in the product mix absorbing the increase in SG&A expenses.

Page 21 shows forecasted equipment sales by application and service revenue. For reference, figures under the old standard are also shown. Driven by generative AI demand, semiconductor device manufacturers are expected to further accelerate investment in high-performance devices through technology migration and capacity expansion. Against this backdrop, we expect the DRAM-related sales to increase 36% year-on-year and logic and foundry sales to increase 38%. For NAND, investment is expected to continue focusing on technology migration. And even under that environment, we expect NAND-related sales to increase 7% year-on-year. Under the new standard, service revenue will mainly consist of parts sales and maintenance services and is expected to account for 19% of total revenue.

Page 22 presents revenue trend under the new standard from FY March '23 through FY March '27 forecast divided between non-China customers and China device manufacturers. Revenue to non-China customers have been on a recovery trend since bottoming out in FY March '24, and we expect growth to accelerate further in FY March '27. We forecast NAND-related revenue growth of 50%, DRAM-related growth of 30% and logic and foundry growth of 50%. Overall revenue to non-China customers are expected to increase 30% year-on-year. Meanwhile, revenue to China devices manufacturers are expected to decline slightly by 2% year-on-year.

Although logic and foundry and DRAM sales are expected to increase, NAND equipment sales are projected to decline significantly due to temporary slowdown in investment by major device manufacturers. From FY March '28 onwards, we expect NAND equipment revenue to recover and return to a growth trend. Since revenue to non-China customers are growing faster than revenue to China device manufacturers, the ratio of revenue to China is expected to be 29% and remain around that level going forward.

Page 23 shows revenue by destination in our forecast. Compared with the previous year, revenue to Japan, the U.S., Taiwan and Korea are expected to increase, while the China revenue ratio is expected to decline to 34%. At present, we have not seen any direct impact from export controls or tariff policies in various countries, but we will continue to closely monitor both direct and indirect impacts.

Page 24 shows forecasted revenue by equipment category. Figures under the old standard are also shown for your reference. For FY March '27, the ratio of high value-added product is expected to reach 71%. As generational investment progresses across each device area going forward, we will accelerate the introduction of high value-added products.

This concludes my presentation.

I am Tsukada, President and CEO. I will explain our future outlook. Page 26 shows our market share trend. The bar chart on the left shows market share data from Gartner Research. The deposition market mainly consists of tube and non-tube categories, and we classify our batch deposition systems in the tube category. Treatment systems are included in the RTP and oxidation/diffusion category. In 2025, our share in the batch deposition market rose 8 percentage points year-on-year to 49%.

The chart on the upper right shows the breakdown of the batch deposition equipment market. In the batch ALD compatible equipment segment, our market share reached 80%, as shown in the pie chart. In 2023, the batch ALD compatible equipment market and our revenue declined due to reduced NAND investment. However, since 2024, the market has recovered steadily and both our revenue and market share have continued to increase.

The lower right chart shows the breakdown of the treatment equipment market. Within the plasma gate modification tools segment, where our single wafer treatment systems are categories get divide, our market share declined slightly in 2025. We believe this was mainly because China local makers, which had invested aggressively in 2024, entered a temporary investment slowdown phase in 2025. Our single wafer treatment systems are also being increasingly adopted for DRAM applications. Since DRAM-related revenue are expected to expand significantly in FY March '27, additional NAND investment could lead to further market share gains.

Page 27 shows our outlook for the business environment. In the semiconductor device market, demand related to generative AI continues to drive capital investment by device manufacturers and investment in high-performance devices is expected to increase further. On the other hand, investment in mature node logic/foundry is slowing, not only in the U.S. and Asia, but also in China and recovery is still awaited.

That said, our medium- to long-term growth expectations remain unchanged. In fact, we believe the overall semiconductor device market could grow faster than previously expected. Regarding WFE market size in calendar year '26, at the time of our third quarter results briefing, we projected year-on-year growth of 10% plus alpha. Given stronger-than-expected AI-related investment, we have now raised that outlook to 15%, an upward revision of roughly 5 percentage points.

Page 28 provides an update on our POR wins in 3D NAND. In FY March '27, we expect major manufacturers to continue technology investment for the 200 to 300-layer generations, which are expected to account for more than 80% of total NAND-related equipment sales. For generations above 200 layers, we continue to maintain and expand the PORs for batch ALD compatible systems centered on our latest mini batch deposition systems as well as for single wafer treatment systems. As device migration progresses, demand is expected to increase for replacing conventional deposition systems with our latest models as well as for upgrade modifications, supporting recovery in our NAND-related equipment revenue. As devices continue to become more highly stacked, we intend to further expand POR wins for our flagship mini batch ALD compatible systems and single wafer treatment systems, providing customers with higher value-added solutions.

Page 29 provides an update on our POR wins in DRAM. In FY March '27, we expect major manufacturers to continue technology investment in the D1C and D1D generations. Revenue related to D1C and D1D are expected to account for roughly half of total DRAM-related equipment revenue. We have already secured the PORs for single wafer treatment systems in DRAM starting from the D1B generation, and we expect significant revenue growth in FY March '27. Looking ahead, as DRAM technology evolves towards the 0 generations and vertical channel transistor, DRAM device structures will become increasingly finer and more complex. As a result, we expect more opportunities for adoption of batch ALD compatible systems and single wafer treatment systems.

Page 30 provides an update on our POR wins in GAA. In FY March '27, investment in first-generation GAA is expected to continue following the previous year. We have already secured PORs for first-generation GAA and are actively promoting proposals for second-generation GAA as well. Sales related to GAA in FY March '26 came in at JPY 15 billion, below our previous forecast of JPY 20 billion. For FY March '27, we forecast revenue of JPY 20 billion. Thereafter, around FY March '28, as the industry transitions to second-generation GAA, we expect additional opportunities for adoption of that ALD compatible systems and treatment systems, which should support further revenue expansion.

Revenue related to advanced packaging were JPY 3 billion in FY March '26, and we expect FY March '27 revenue to remain at least at the same level. While continuing to expect additional customer investments such as multisite investment deployment, we will also continue promoting new applications.

Page 31 provides an update on our medium-term management objectives. At our IR Day held in June 2024, we announced our medium-term management plan and target. Given significant changes in the market environment since then, we have now revised the plan. First, our original medium-term target assumes a WFE market size of USD 120 billion or more. We now expect to achieve this target no later than FY March '29. Second, starting from FY March '27, we changed our business classification by transferring upgrade modifications and revenue of 200-millimeter and used equipment from the service business to the equipment business. As a result, the target revenue mix has been revised to approximately 80% equipment business and 20% service business.

Third, we revised our target revenue composition by application. Previously, the target mix was 25% DRAM, 25% NAND and 50% logic and foundry plus others, reflecting rapidly growing demand for AI-related advanced devices and slowing mature node logic investment, we revised the mix to 40% DRAM, 20% NAND and 40% logic and foundry plus others. We will continue driving our growth strategy to achieve these medium-term objectives.

Page 32 explains our acquisition of new land adjacent to the Tonami Manufacturing Center. In October '24, we began operations at the Tonami site and have been expanding production capacity across the group in anticipation of future semiconductor market growth. However, the semiconductor market is now expected to grow faster and larger than originally anticipated. Accordingly, we decided to acquire additional land adjacent to the Tonami site where we can effectively utilize existing supply chains and logistics infrastructure. We plan to use the site for a range of initiatives, including production and R&D expansion to support future market growth.

Page 33 summarizes semiconductor device road maps, the business environment and our growth catalysts. As semiconductor devices continue evolving towards multilayering, more miniaturization, complex and 3-dimensional, opportunities for our core technologies, particularly batch ALD compatible systems, especially minibatch systems and single wafer treatment systems are expected to increase. Accordingly, we believe we can continue achieving revenue growth above overall WFE market growth.

We also remain committed to achieving adjusted operating profit growth at a pace faster than revenue growth through a higher mix of high value-added products and lower SG&A ratios resulting from revenue expansion. To achieve these goals, we will continue pursuing new POR wins for new generation devices while steadily advancing toward our medium-term objectives. This concludes our presentation. Thank you for your attention. This concludes our presentation.

This concludes our presentation. We will now begin the Q&A session.

[Operator Instructions]

Tamura san, please.

This is Morgan Stanley Securities, Tamura speaking. First of all, I have a question about the WFE outlook that you have. This time, you showed 50% 2026, but by application and for the Chinese market, what are your outlook? Please explain.

Thank you very much. As of now, the new outlook that we have is for application by application, year-on-year growth rate-wise. I will expect NAND is plus 15%, DRAM plus 25% to plus 30%. Logic/foundry and others together, plus 5% to plus 10%. These include China and non-China overall. Next, about China and non-China, China minus 5%, non-China plus 20%. This is what we expect.

And what is the image of first half versus second half of the year split?

First half and second half split, we don't have a clear view as of now.

All right. Then when we're looking at your company's business plans, second half, you were expecting less revenue and profit half-on-half. And when looking at other companies with forecast, I don't think your forecast matches. Second half, our image was that there will be an acceleration. Is there anything in particular for your company that is serving differently for you or is there not simply not much visibility in the second half of the year, therefore, you have a more conservative view?

The second half of our company for the revenue as of now, the changes are more for the increase. This is the change taking place lately. But right now, as of today, as a number that we show you today, it's the number I have mentioned and shown you already. In fact, from several clients in 2027, the investments planned, they want to implement earlier. We are receiving asset inquiries from customers.

And when did you put together this plan? When was the plan made, February of this year, right?

Yes, February of this year. This was the snapshot as of February this year.

And then over the past 3 years, you think that demand is increasing and coming in earlier and not reflected and not updated over the past 3 months?

You are exactly right.

Because there are other people wanting to ask questions, I will come back later and stop for now.

Thank you very much. So we would like to take a question from you, Yoshida san.

Yoshida of CLSA Security is asking a question. So my question may be similar to what the question now has been raised. On Page 21, you're showing the guidance of the new equipment revenue for the year. So what is your assumption for the first half? And can you share the numbers by application and account for the first half?

So under new standard, in the first half, equipment sales is JPY 119 billion. In the second half, we are expecting JPY 98 billion of revenue.

So can you give us the composition by application?

In the first half, NAND is 18%, DRAM is 40%, logic and foundry and others is 42%. And in the second half, for the new equipment sales, NAND is 23%, DRAM is 50%, logic and foundry and the others is 27%.

So this is the composition for the total revenue of equipment, right?

The numbers look slightly different from the numbers shown on slide because yes, this includes service revenue.

And by account, can you share some numbers between first half and second half?

For 200-millimeter because we have some of those, I would like to share the information when we have a separate meeting.

So my second question is about the revenue growth. And it doesn't look like you are not going to benefit from the leverage on your profit. And last time, you talked about the expectation for the margin expansion by several percentage points and OP margin is going to improve by 1.4% and gross margin improvement is only 0.8%. So does that mean you are seeing expansion of your expenses faster than you had expected?

In terms of gross margin, we were targeting for 43%. That is the message we conveyed. But this time, we are expecting 42% gross margin. So we do have a conservative gross margin outlook, which is 1 percentage point lower than original forecast. Because conventional equipment revenue mix is going to be higher than we had expected. And for OP margin this time, compared to last time, our outlook looks more conservative because for the future investment, the personnel cost and R&D expenses and we are replacing our main system. So there is an increase in our DX-related expenses. So SG&A is going to see a JPY 8 billion increase compared to FY '25. So we are showing some conservative margin outlook.

So why are you going to see an increase in the conventional equipment mix?

There is a slight change in the mix by account.

Moving over to the next person, Yoshioka san of Nomura Securities, please.

This is Yoshioka from Nomura Securities. I also have 2 questions as well. The first question is in a sense confirmation question of the previous quarter that is this time, the WFE market of 2026 growth outlook, you said 15%. But compared to other companies and compared to WFE-related companies, you appear to be cautious. And in your explanation earlier, until February, you have reflected in your forecast only. In this sense, March or more updated census are not reflected in the forecast. Maybe that is the only reason I am bullish.

But in any event, last time, 3 months ago, you said 10% or more growth you expected and other companies were saying 15% or higher growth. Other companies were bullish in their growth outlook. Therefore, compared to other WFE companies in comparison, only your company appears to be cautious. Is there any particular question? What is the reason? As demand, do you have more difficulty in demand visibility compared to other companies?

Our company uniquely -- are we applying any lowering bias ourselves alone? Not in particular. We don't do that. But what is included in the WFE number, when we assessed our company and after assessing we put together our number. It took some time to assess the number. Maybe we have not had a timely number, but there is no particular circumstance resulting in a lower number. We are not biasing the number to be lower.

All right. Then JPY 30 billion upside you have in the bookings and bookings maybe the upside was greater in March. Was that the case?

Bookings in the fourth quarter, big upswing more than we expected, JPY 30 billion upside than we expected. Maybe we have not been able to reflect the circumstance to next year's sales forecast sufficiently.

Then second question, this is longer matter. Page 29, for example, and Page 31, for example, midterm sales, especially DRAM sales. Recently, you are seeing DRAM sales. But calculating the numbers you gave us, Page 29, the chart on Page 29 appears that from March '27 and up to the midterm target, DRAM sales is only going to increase by 8%. That seems to be your plan. But the number of PORs, you said will be increasing which means there seems to be more potential for growth. The midterm DRAM growth is only 8%. Why only 8%? Can you explain?

When it comes to the midterm, the customer's fab circumstances we need to take into consideration. The big DRAM players, they are all quite aggressive in constructing their plants. This situation, we are, of course, aware of, but the fab circumstance is one factor that we should take into consideration. But all the companies are very bullish and strongly eager to construct their plants earlier than their schedule. Maybe when we review our forecast at that timing, we will be reflecting this aspect as well.

Then to the DRAM market, you are taking a conservative stance. You have a conservative assumption for the DRAM market. That is why it appears that your DRAM sales is not increasing. Is that correct?

The POR metrics I showed you earlier, there, you can see what we have visibility in POR. We have been increasing PORs that we obtained at what timing, which companies, what generations of ramp-ups to take place, we are securely going to grow more than the market, for sure. From the mid- to long-term perspective for DRAM, we need also to assess and look at how the manufacturing plans go as well.

Thank you very much. So we would like to take a question from Nakamura san of Goldman Sachs.

Thank you for giving me the opportunity for the question. My first question is your guidance for new fiscal year. You said you prepared that in February and there could be potential upside. And can you give us some more color on what kind of upside you can see by application or destination? It seems like in Q1, there was JPY 100 billion of increase in bookings. So it seems like the outlook for the revenue in the first half looks rather weak, too. Can you comment on that?

So if I may start to answer the latter part of the question. So for the first half, because there are some delivery time issues, I don't really think there is much potential for an upside because there is more visibility. And talking about potential upside, so for advanced node or non-China DRAM and largest of the foundry, those can be a potential the upside to us.

Thank you very much. So for China market, compared to 3 months ago for memory and nonmemory, it seems like there has been a slight increase. What's your feeling?

So major four makers, as I have been saying, we can expect a firm investment from them. But for large DRAM makers investment, we have more clarity of their investment.

Is that reflected in your new guidance for the fiscal year? It seems like there is not much change from 3 months ago.

Yes, it is reflected in our new guidance.

Understood. So even with that compared to March '26, the China device manufacturers revenue in March '27 is not going to show much increase.

Yes. If you can look at the revenue outlook by application, we are going to see some increase of DRAM, but the overall trend is going to be more flat. As far as we can see now, that is the outlook.

And my second question is about SG&A, you're expecting JPY 7.9 billion of increase in the new fiscal year. Can you tell me where the increase will be?

The biggest increase will come from personnel costs, more than JPY 3 billion growth will come from that, JPY 2 billion increase from R&D. And for DX related, the main system, we are replacing them. That's about JPY 1 billion of increase. And we also have some other items.

You have a visibility of executing those budgets, right?

Yes. We believe we need to expect this level of increase.

On Page 28, for NAND, on the right-hand side, for POR win update from the 200 to 500 layers, the blocking side is missing. And compared to what you had to share on IR Day, it seems like you lost some of the PORs. So can you talk about that? And for Logic and Foundry, the revenue for gate-all-around?

We are expecting JPY 20 billion for new fiscal year. We think there was some delay in booking the revenue last year.

So for advanced and the Logic and Foundry and for Logic and GAA, can you comment on the revenue outlook?

Okay. So there is one decline of a checkmark. It's not like we lost it against the other competitor, but the application itself disappeared with a certain customer. So if we just show with a realistic picture, this is what it looks like. But it does not mean our performance did not meet the expectation. That is not the reason.

And for GAA, in March '26, we expected JPY 20 billion, but it was JPY 15 billion of revenue. And in FY March '27, as I mentioned, as of now, we are expecting JPY 20 billion of revenue. For this large foundry maker investment, if they accelerate their investment, if that is seen, we may see some uplift to this number. Thank you very much.

Thank you very much. Through text, we have received several questions. We would like to move on to the text questions. For March 2027, the operating margin seems to be weak. What are the main reasons? That was one question.

And this partially applied to the earlier question. The biggest reason is, we are still continuing to make growth investments. For future, we continue to invest. And SG&A, JPY 7.9 billion is factored in as I mentioned plus anyways, they are the biggest reasons.

And next, we would like to read the question that was submitted on text. As the NAND is showing a recovery -- sign of recovery for GAA, ASM and Lam, they are becoming more aggressive for the single wafer. So can you talk about the situation?

So for logic GAA, if I can update you on the situation, for GAA first generation to nanometer generation, we have already finalized one POR. So once the scale of investment of our customers is determined, so we can book our revenue too. But as we move on to second generation GAA and beyond, we are trying to win PORs. We are in the competition for that.

So on the complex surface, we needed to do deposition. And the competitive advantage of our batch ALD can be exerted more. So we believe that will give us an opportunity to get the more POR wins. With the latest update for 1.4 nanometer, we are not able to share much information about our new POR wins. But in the competitive landscape, we are still trying to going to do our best to see the evaluation of our batch ALD.

Then I will read out another question. Korean memory maker, one of them says for NAND, existing equipment is sold and using the freed up space. New equipment is expected to be installed. That is their plan. If this is the truth, what is going to be the impact on your company sales? This was the question.

When generational change takes place, clean room space may be lacking. And for generational change, some equipment may not be introduced. And older equipment may be moved out to free up space for the clean room. This used to take place in the past. This has been taking place from the past, which means when generational change takes place, new equipment will become necessary and that is what we are creating in POR. In the freed up space, we will be able to bring in our equipment. From our perspective, the generational change will be accelerated. This is going to be a welcoming situation for our company.

We are coming close to the end of the scheduled time, but we will be happy to take the last question. So Tamura san, please.

Thank you for giving me the opportunity to raise question again. This is Tamura of Morgan Stanley. For China, when we look at the WFE outlook for application, NAND outlook looks rather weak, and you are expecting the NAND revenue growth for China to decline. And the Chinese, the NAND makers, I think they are going to accelerate their investment from the second half. So I understand there could be some upside opportunity. So what was your assumption when you prepared your guidance?

So our China customer, they place their orders matching our lead time and also they share their forecast. Based on the information we received from our customer, we prepare our business plans and guidance. And for the China NAND manufacturers based on the information we receive from them, we are not adding our excess expectation, but we are just showing cautious guidance. But as you said, we are going to start a new plant and they are -- sorry, they are going to start new fab and they're going to install new equipment. So we hear that is their plan. So that could be a potential upside for us too.

So when you talk about your lead time by how many months before they want to receive the equipment, do they have to place orders?

Production lead time is becoming longer. So it's around 8 months now. But the capacity for production is declining itself, too. So in the second half, we are trying to -- if we can use some of the additional capacity, then we can capture the opportunity to achieve a slight increase in our revenue in the second half.

Thank you very much. This is now time to close today's meeting. Thank you very much for your participation to our results briefing meeting. After the meeting, we will be distributing to you a survey questionnaire. We want to improve our future activities. Therefore, we ask you to kindly respond to the survey. We will now conclude the meeting. Thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]

We will now begin Kokusai Electric Corporation's Financial Results Briefing for the Third Quarter of the Fiscal Year Ending March 2026. Thank you very much for taking the time to join us today despite your busy schedules. My name is Matsumoto from the Public Relations and Investor Relations Department, and I will be your moderator today.

First, I would like to introduce today's participants. Mr. Kazunori Tsukada, Representative Director, President and CEO; Mr. Yoshitaka Kawakami, Senior Vice President and Managing Executive Officer, Finance and Accounting. Today, Mr. Kawakami will first explain the overview of the consolidated financial results for the third quarter and the full year earnings forecast, followed by Mr. Tsukada's explanation on the outlook going forward. We will then move on to the Q&A system.

This briefing is conducted via Zoom webinar. The presentation and responses during the Q&A will be given in Japanese. Participants may also select English simultaneous interpretation. Please note that this briefing is intended for institutional investors and analysts only. Questions will be limited to institutional investors and analysts. Thank you for your understanding. We also kindly ask that you refrain from video recording, audio recording or taking photographs.

Now we would like to proceed to the presentations. Mr. Kawakami, please begin.

This is Kawakami, Senior Vice President and CFO. Thank you very much today for participating in the financial results briefing of Kokusai Electric.

At the beginning, I will explain the third quarter results and the full year forecast. Here are the disclaimers for you to note. First is the third quarter results summary. Page 4 is the highlight. I will go over the specifics from the next page onwards.

Page 5 is consolidated results summary of the third quarter and third quarter year-to-date. Although the October to December third quarter saw a decrease in revenue and profits year-on-year and quarter-on-quarter, both revenue and profits were in line with the revised forecast released at the time of the second quarter results. The third quarter year-to-date saw a slight decrease in revenue year-on-year and each profit line decreased year-on-year due to changes in the product mix and upfront investments for the future. The lower gross profit margin for the third quarter and third quarter year-to-date year-on-year and quarter-on-quarter is because of the decrease in production volume and changes in product mix in the second half, as we explained at the second quarter results. Orders received in the third quarter was JPY 62 billion, exceeding expectations. We expect the same trend to continue in the fourth quarter. R&D expenses, capital expenditures, depreciation and amortization were largely in line with expectations.

Page 6 shows third quarter year-on-year factors for change in revenue and adjusted operating profit. The third quarter year-on-year saw increases in upgrade modifications of existing equipment performance and functionalities instead of new equipment sales, primarily in DRAM sector, resulting in an increase in service revenue. Conversely, equipment sales declined due to a moderation in sales to China's domestic DRAM sector and in our advanced packaging, which had been robust in the same period last year. Consequently, overall revenue decreased by 7% year-on-year. I will explain the ups and downs by application later. Adjusted operating profit decreased by 19% year-on-year, mainly due to a decrease in gross profit resulting from lower sales and other factors.

Page 7 shows cumulative third quarter factors for changes year-on-year. As in the third quarter, cumulative third quarter sales saw a significant increase in service revenue due to an increase in upgrade modifications for DRAM equipment resulting in new equipment sales as well as NAND equipment sales growth. On the other hand, as in the third quarter, overall sales revenue decreased by 0.9% year-on-year due to a settling down of sales of DRAM to China and of our advanced packaging. With regards to adjusted operating profit due to a decrease in gross profit resulting from changes in product mix and a reduction in production volume, coupled with an increase in SG&A expenses, reflecting upfront investments in future-oriented research and development, adjusted operating profit decreased 18% year-on-year.

Page 8 shows quarterly revenue by business. In the third quarter, following the first and second quarters, part of equipment demand was replaced by upgrade modifications, resulting in a decrease of equipment revenue year-on-year and quarter-on-quarter, while service revenue increased. The same trend was seen for cumulative 3 quarters with the service revenue ratio increasing to 40%.

Page 9 shows sales by application for the 300-millimeter equipment comprising the equipment business and the 200-millimeter or less legacy equipment included in the service business. In the third quarter, while equipment sales for major applications decreased year-on-year, sales for DRAM equipment continued to increase quarter-on-quarter, continuing on from the second quarter. Cumulatively, for the third quarter, sales of NAND increased year-on-year. The significant decline of DRAM sales was due to a decrease in equipment sales to China, which had been active in the same period last year and the fact that a portion of equipment sales was replaced by upgrade modifications, which fall in the service business.

Page 10 shows revenue by destination. For both the third quarter and the cumulative third quarter, revenue generated from Japan and South Korea increased year-on-year, while revenue generated from the U.S. and China decreased. For the cumulative third quarter, the revenue ratio of the U.S. decreased to 3% and that of China decreased to 42%.

Page 11 shows sales revenue by application divided between non-China and China manufacturers. Sales in the third quarter to non-China manufacturers grew, driven by increasing demand for AI-related products. Compared to the quarter before, sales increase include equipment for DRAM and logic/foundry as well as upgrade modifications primarily for DRAM included in services. The third quarter sales to Chinese manufacturers turned upward in DRAM emerging from the transitional period for investment. In Q3, while sales to non-China manufacturers increased, sales to Chinese manufacturers decreased, resulting in the mix of Chinese manufacturers falling to 31%.

Page 12 shows the quarterly balance sheet trend. Total assets at the end of the third quarter increased by JPY 10.6 billion compared to the end of March 2025 due to decreases in trade and other receivables and increases in inventories and tangible fixed assets. Total equity increased by JPY 16.7 billion from the end of March 2025 due to increases in retained earnings and others.

Page 13 shows key management indicators from the quarterly balance sheet. The equity ratio at the end of third quarter was 60.4%, down 0.3 percentage points from the end of the previous quarter. Net debt was largely in line with the plan at JPY 8.1 billion, a decrease of approximately JPY 2.5 billion from the end of the previous quarter.

Page 14 shows quarterly cash flows. In the third quarter, operating cash flows exceeded investment cash flow outflows, resulting in free cash flow of JPY 7.3 billion. Cash flow from financing activities amounted to outflows of JPY 4.3 billion, primarily due to dividend payment.

Page 15 shows quarterly R&D expenses, capital expenditure and depreciation. Third quarter R&D expenditure was JPY 4.2 billion, progressing as planned with the R&D ratio to revenue reaching 7.4%. The R&D expenditure forecast for March 2026 remains unchanged and an increase of approximately 20% year-on-year to around JPY 18 billion. Capital expenditure for the third quarter was JPY 4 billion. For the fiscal year ending March 2026, capital expenditure is forecast to decrease by 10% year-on-year to approximately JPY 18 billion. Currently, as a major capital investment, we are constructing a new U.S. demonstration center involving a total investment of JPY 20 billion over the 2-year period of March 2026 and March 2027. Depreciation for the third quarter amounted to JPY 3.6 billion. Due to the depreciation of the Tonami plant completed in the previous fiscal year, depreciation for the year ending March 2026 is expected to increase by approximately 10% year-on-year, reaching around JPY 14 billion.

Next, I will explain the full year forecast for the fiscal year ending March 2026. Page 17 explains the highlights. I will explain the specific details on the following pages.

Page 18 is the forecast for the fiscal year ending March 2026. Revenue and profits for the third quarter progressed in line with the revised forecast announced at the time of the second quarter results. As the fourth quarter is expected to follow a similar trend, there is no change to the full year earnings forecast. There is also no change to the dividend forecast. However, third quarter order intake exceeded expectations. And with stronger inquiries to equipment for high-performance devices, we have revised our production plans for the fourth quarter and beyond. The effect of this production increase will be realized in the fiscal year ending March 2027.

Page 19 summarizes the factors contributing to the ups and downs in earnings of the forecast for the year ending March 2026 versus last year actual. There are 2 main factors driving the increase in revenue. One is increased sales of NAND equipment trending upwards, both to non-China and China. The other is non-China sales of DRAM equipment benefiting from brisk capital expenditures and DRAM upgrade modifications, which is included in service.

Conversely, there are 2 major factors contributing to the decrease in revenue. Firstly, as mentioned earlier, sales of DRAM equipment for China, where last year's aggressive investments have settled down. The other is the decrease in equipment sales for logic/foundry to non-China. The decline in sales of equipment to non-China logic/foundry is attributable to the delayed recovery in demand for mature nodes and the moderation in demand for advanced packaging, which was robust last fiscal year.

Sales for advanced nodes continue to show an upward trend with cumulative sales of GAA-related products in the third quarter increasing significantly to JPY 12 billion, a 2.4-fold increase compared to the previous year. However, the full year target of JPY 20 billion is not likely to be achieved. Regarding adjusted operating profit, we anticipate a 24.8% decrease compared to the previous quarter. This is due to reduced sales and production volumes, a decline in gross profit resulting from changes in product mix and increased SG&A expenses associated with upfront investments.

Page 20 presents chronological revenues to non-China and China from the fiscal year ending March 2023 through to the full year forecast for the fiscal year ending March 2026. Sales to non-China continues to be on an upward trend since the bottom March 2024. For March 2026, we anticipate a 9% increase year-on-year, driven by growth in equipment sales for NAND and DRAM and increased service revenue, mainly from DRAM upgrade modifications. For March 2027, demand for equipment for advanced devices is expected to continue sustaining the upward trend in our revenue. On the other hand, sales to Chinese manufacturers are expected to decline temporarily in March 2026.

Although sales of NAND and logic/foundry equipment are projected to increase in this period, sales of DRAM equipment are anticipated to decrease significantly due to an impact of an investment transition period. Overall, a 20% decrease compared to the last fiscal year is expected. From March 2027 onwards, DRAM equipment sales is expected to recover and revenue trend should turn positive. Further, as the pace of revenue growth for non-China is faster than that of China, the proportion of sales to Chinese manufacturers is expected to decline to around 30%.

Slide 21 shows the revenues by business. Upgrade modifications, which are recorded as revenue in place of equipment sales are influenced by device manufacturers' capital investment trend in the same manner as equipment sales and are also correlated with trends of WFE. Accordingly, going forward, we will separately disclose the revenue from upgrade modifications that is included within service revenue so that the equipment revenue, revenue from equipment of 200-millimeter and below and upgrade modification revenue can be viewed together. We plan to present aggregated historical data as soon as it becomes available.

At the time of the second quarter results briefing, we explained that because a portion of equipment demand had been replaced by upgrade modifications within the service business. The service revenue ratio for the fiscal year ending March '26 was expected to be 39%. For reference, upgrade modification revenue for the fiscal year ending March '26 is expected to increase 2.5x year-on-year to JPY 28 billion and the service revenue ratio, excluding upgrade modifications and equipment of 200-millimeter and below is expected to be approximately 21%.

Page 22 shows equipment revenues by application, combining revenue from global manufacturers and Chinese local manufacturers. This chart does not include upgrade modifications. We plan to disclose application level data for upgrade modifications once aggregation becomes available. However, the majority of the upgrade modifications in the FY ending March '26 are expected to be related to DRAM application. For the fiscal year ending March '26, NAND-related equipment revenue is expected to double compared to the previous year. DRAM-related equipment revenue is expected to decline by 47% due to the impact in investment in China and replacement equipment sales with upgrade modification.

Logic and foundry-related equipment revenue is expected to decline by 11% due to a delayed recovery in demand for mature node and decline in demand for advanced packaging. With regard to equipment for SiC and GaN power devices for 200-millimeter and below included in the service business, revenue is expected to remain at the same level as the previous year due to the slowdown in demand.

23 shows revenues by destination. Compared with the previous fiscal year, the revenue share for Japan, South Korea and other Asian region is expected to increase while revenue share for China and U.S. and Taiwan is expected to decline. No direct impact in our business with the Chinese local manufacturer has been observed as a result of the state of Japan-China relations. In addition, no Japan impact from trade friction has been observed at factories operated by global manufacturers in China and the CapEx continues. We will continue to closely monitor indirect impacts, including export regulations and tariff policies in various countries as well as effects on procurement.

I am Tsukada, President and CEO. I will explain the outlook going forward.

Please turn to Page 25. First, I will provide an update on the outlook for the business environment. In the semiconductor device market, demand related to generative AI continues to drive CapEx by device manufacturers and investment in equipment for high-performance devices is expected to increase further. On the other hand, CapEx in mature node logic and foundry application is slowing in Europe, the U.S., Asia and China and recovery is awaited. There is no change in expectations for medium- to long-term growth, but we feel that the overall semiconductor device market may grow at the pace exceeding our previous assumptions.

Regarding the size of the WFE market in calendar year 2025, at the time of second quarter results briefing, we held the view that it would slightly exceed the previous year. However, the prevailing view is now that AI-related investment exceeded expectations slightly, and we recognize that the market likely settled at approximately a 5% year-on-year increase. For calendar year '26, assuming a further increase in AI-related investment, we revised our view from around a 5% Y-o-Y increase as explained at the second quarter briefing to around a 10% year-on-year increase. We expect the timing at which the WFE market reaches a scale of USD 120 billion to be as early as 2027 or at the latest 2028.

On Page 26, I will provide an update on the directional outlook for the FY March '27, which we explained at the time of the second quarter briefing. Since late November, inquiries for equipment for leading-edge devices have strengthened, and we feel the turning point has been reached. At present, including carryover from the FY March '26, orders for equipment to be recognized as revenue in the FY March '27 have been accumulating at the level exceeding the assumptions made at the time of the second quarter briefing.

In particular, in line with market trends, demand for equipment for advanced DRAM and logic foundry application has strengthened. At the time of the second quarter results briefing, we explained that we aimed for a year-on-year growth of more than 10% in FY '27 revenue, combining equipment sales and upgrade modifications. However, in light of the current situation, we have revised our view and believe the growth of more than 20% is achievable. Even excluding the carryover from the FY March '26, we aim to achieve year-on-year growth of more than 15%, exceeding overall market growth.

Page 27 summarizes the business environment by application and our status. Restrictions that have been revised since the second quarter briefing are underlying, and we have also added our outlook for the fiscal year ending March '27. First, regarding NAND. For global manufacturers, generational transition investment are progressing. However, investment in DRAM is being prioritized and cautious investment in NAND is continuing. At our company, we are not assuming production capacity expansion investment, and we expect revenue growth to continue in the FY March '27 through generational transition investment. On the other hand, for Chinese local manufacturers, both generational transition investment and production capacity expansion investment are continuing. For FY March '27, we believe the first half will correspond to an investment transition. However, we expect to be able to record a meaningful level of revenue in the second half due to active investment.

Next, DRAM. For global manufacturers, investment aimed at the generational transition and high-performance devices and production capacity expansion is proceeding [indiscernible], and demand for both equipment and upgrade modification is expected to increase. As demand for commodity DRAM is also recovering, we expect the growth rate in FY March '27 to exceed that of the previous year. For Chinese local manufacturers, the investment law has ended and the equipment sales have been recovering since second half of this fiscal year, and we expect revenue in FY March '27 to increase.

Next, regarding logic and foundry. For global manufacturers, sales of equipment for leading-edge nodes centered on GAA continue on an upward trend. In the fiscal year ending March '27, we expect the growth in equipment sales for FinFET 3-nano generation nodes as well as recovering equipment sales for advanced packaging applications driven by the acquisition of new PORs. For mature node applications in Europe, U.S. and Asia, we believe that conditions bottomed out in FY March '26, and we expect sales to recover beginning in the FY March '27. For Chinese local manufacturers, while investment by emerging manufacturers is slowing, active investment by major manufacturers is expected to continue in the FY March '27, and we anticipate continued revenue growth.

Regarding power devices, while our POR share has increased and sales of existing products have been steady, there are signs of the slowdown in equipment demand. Going forward, we aim to achieve growth through increased demand for new products such as high-temperature activation annealing equipment accompanying the shift to 200-millimeter wafers and trench gate structures.

Page 28 shows trends in product mix. There is no change to the outlook for product mix since the second quarter briefing. After bottoming out in FY March '24, the proportion of high value-added products, namely Batch ALD compatible and single wafer treatment equipment has begun to increase. In the FY March '26, in line with the recovery in demand for NAND-related equipment, sales of mini batch systems, which are high-end models of batch deposition equipment are expected to increase and the ratio of high value-added products is expected to reach 70%. In FY March '27, sales of high value-added products are expected to increase further.

Page 29 is a slide summarizing the semiconductor device development road map, along with our catalysts and growth potential. As the semiconductor devices continue to advance toward greater layering, miniaturization, complexity and 3-dimensional structures, opportunities to leverage our strength in our Batch ALD capable equipment, particularly mini batch systems as well as single wafer treatment equipment are expected to increase. Accordingly, we believe that we can sustain revenue growth exceeding WFE growth.

In addition, through an increase in the ratio of high value-added products and revenue growth accompanied by reduction in the SG&A expense ratio, we maintain our view that we can achieve a pace of growth in adjusted operating profit that exceeds the pace of revenue growth. Efforts to acquire new PORs for new next-generation devices in order to realize these goals are also progressing. and we plan to provide an update on the status of POR acquisition at the time of the full year results announcement.

Please turn to Page 30. Our major shareholder, Applied Materials, sold a portion of their holdings of our company's shares to securities firms as of January 30, and the securities firm subsequently resold those shares to institutional investors. As a result, Applied Materials ownership ratio declined from 10% to about 5%. Although Applied Materials is no longer a major shareholder as a result of this transaction, there is no change in the business relationship between our company and Applied Materials.

Page 31 are the key activities for management and the businesses and the ESG initiatives. At SEMICON Japan held in December last year, we conducted a panel exhibition of a newly developed high insulation heater with superior environmental performance. Compared with the conventional heaters, this new heater can significantly reduce power consumption, thereby contributing to reductions in GHG emissions through our customers' business activities. In addition, our Toyama site obtained the highest rating, platinum status in the RBA VAP Audit. We will continue to promote the corporate activities in compliance with the RBA code of conduct throughout our entire group.

That concludes my presentation. Thank you very much for your attention.

This is all for the presentation from our company. [Operator Instructions]

CLSA Securities, Yoshida speaking. I have a question about the forecast, Slide 25. You are reviewing WFE increase. And if you have any increased perspective by app, please let us know in addition to the 10% overall. And for 2026 increase by app, if you can have 2026 forecast by app and by regions such as China and non-China, I very much appreciate.

First question is about WFE. For WFE, this time, WFE outlook for 2026, we raised by app or by device app, Y-o-Y situation is the following: for NAND, plus 15%, DRAM, plus 20% Logic/foundry, 3% or so. This is the outlook we have revised to.

Moving on to the next question, Page 26, the part on Page 26. Here, by application, we do not have all the details ironed out yet. But broadly, the blue part here, equipment, about [indiscernible] JPY 170 billion to JPY 175 billion. And the green part, upgrade modification instead of new equipment, about JPY 30 billion is the sense of direction that we have.

And this upgrade, this will continue mainly to be in DRAM for upgrades and for equipment, in particular, which equipment is going to increase. Qualitative comment would also be appreciated or if any sequence.

The blue equipment part, DRAM will, yes, will grow strongly in our expectation. Next is the leading edge or advanced logic foundry. And then for the green upgrade portion, upgrade modification for DRAM purpose will be close to all.

And my second question, next year's profitability. Other than the usual marginal profitability, maybe with more value-added mix may be improving. And for recent situation, we may have to think about cost increases. How will profitability change going into the next year? If you have any thoughts as of this stage, please let me know.

This fiscal year, as I touched upon earlier, production decreased a lot this year. This affected us. We have not been able to recover the fixed costs. But for next fiscal year, production will increase significantly, plus product mix will improve as well. And this year is going to be the bottom for gross profit and next fiscal year, more than we initially budgeted for this fiscal year at the beginning of the year, we want to reach gross profit level. And because we can expect sales to increase more than 20% upside, overall profit margin can raise several points compared to this year.

So let us take a question from Nakamura-san of Goldman Sachs.

This is Nakamura from Goldman Sachs. So about this Slide 26, you are showing your outlook for your sales next fiscal year. 3 months ago, you were expecting about 10% growth. So there has been an upward revision of 10 percentage points. So what exactly have changed in the last 3 months? I think there was some change in DRAM and logic. Can you talk about the difference against the 3 months ago? And also, if you can give me the breakdown of the change in the market outlook and your POR acquisition, can you give me the comment?

So out of the growth, -- so the active investment from DRAM, that had accelerated. That explains the majority of the upgrade, especially from the production increase of HBM and shift to HBM4. So for like a commodity DRAM, I mean non-HBM manufacturers. So those manufacturers specializing in the commodity DRAM, their investment is also increasing. And for logic and foundry, the leading edge 2-nano GAA on top of that, as we mentioned, FinFET, the 3-nano investment for the production increase is seen. And on top of that, for advanced packaging, we are seeing the recovery of our sales as well. That is the situation.

And can you also give me the breakdown of the change of the market outlook and your POR acquisition?

So for our POR acquisition for DRAM and logic and foundry, POR is already frozen. So there are no major changes. But for advanced packaging, so for within the deposition area, our business was mainly focused on deposition. But on top of that, for like the thermal, the processing or heat processing that is the new business opportunity we are seeing.

And for GAA-related sales, originally, you were expecting JPY 20 billion, and you kind of hinted you are not going to reach that target. Can you talk about the background behind that?

So the largest foundry in Taiwan, it continues to be active. But compared to what we had expected, the shipment is not going to reach our expected level. There is going to be some pushout. That is the feeling we're getting. So now we feel it's going to be slightly difficult to reach our target of JPY 20 billion. It's not like the appetite for investment has slowed down or there are any changes for our POR situation. That is not what we know.

And my second question is about the WFE outlook. You are expecting 10% growth now. So as we listen to the briefing of other SPE manufacturers, they are more bullish about the outlook. So it seems like the USD 120 billion, we may reach that number this year. So what is your outlook for that? And as you gave us some breakdown, logic and foundry is showing a 3% increase. And it seems like there is some weakness in the mature node. Do you think there could be upside opportunity there?

As you say, WFE could fluctuate over time. And as of now, what we see is 10% growth. In the absolute level, it's going to be around 118. So it will be coming close to USD 120 billion. We would not deny that possibility. And logic and foundry demand by application, the weakness from logic and foundry, as you asked, within the mature node investment in all regions in the world, including China, there seems to be slight weakness. That's why we are taking a cautious view.

Next is Shimamoto-san from Okasan Securities.

This is Shimamoto from Okasan Securities. I have 2 questions, but asking 2 questions will be all right?

That's fine.

The first question is about WFE outlook. China, when we look at China only, then 2026 WFE outlook, can you share with me your outlook? China only 2026 WFE?

The 2026 WFE, if we divide China and non-China, China as of now is minus 5% or so is our outlook. And non-China, plus 15% is our view.

I see. And then my second question, sales revenue, third quarter versus fourth quarter outlook, I want to ask about the balance between the 2. If I misunderstand, then please correct me, but third quarter seems stronger than expected. Was there any demand that was realized ahead of time? And then fourth quarter, not much different compared to the third quarter, which is profit coming down quite much. If third quarter was stronger than expected, then I can understand. If not, what is going to press profit margin? Can you explain?

Third quarter, more or less, when we said at the time of the second quarter, things materialize as we set them. But reality is a bit to the upside. And mostly because of the upfront uploading from the front-loading from the fourth quarter, therefore, full year outlook is no different. And in case of mix, the conventional equipment -- more skewed to conventional equipment, therefore, profit margin EBIT down. And fixed costs also take place a lot in the end of the year. Therefore, fourth quarter overall profit margin is expected to come down.

I see. A follow-up question. Fourth quarter, considering the market environment compared to the third quarter, fourth quarter, sales can be greater. In that case, fourth quarter, if fourth quarter is on the upside, next fiscal year's outlook of 20% or more growth, with this growth rate for next fiscal year be coming down? Will the next year growth be less?

As of now, the fourth quarter outlook, we have -- due to the production situation, we do have the visibility of the fourth quarter now. We have lead time necessary to produce, which means customers with this need for capital expenditure is increasing in demand, but any big movement of demand from the fiscal year end 2027 to the fourth quarter, we do not see such a big movement.

I see. I understand about the probability certainty of the fourth quarter.

So let's move on to Yoshioka-san of Nomura Securities.

This is Yoshioka of Nomura Securities. I also have 2 questions. First question is about the competitive landscape. So your vertical, the heat processing reactor, the competitor is now going to release the new type of the processing reactor. So do you think that may cause some change in the landscape? And the largest competitor, what do you see their position is? And the competition against the Chinese local players, can you talk about any change in the competitive landscape?

So as you mentioned, in Japan, there is a competitor. And the number of the units that is treated is going to increase, and they have introduced a new model at the SEMICON Japan. And we also have the equipment with a similar number of the units to be processed. And we already have started the sales of those new equipment, especially for memory makers, adoption is progressing. So extra large batch, if you call it, in that area, we are taking the lead. That is our recognition.

And as for the Chinese local SPEs, in the noncritical technology area where we don't need to differentiate ourselves, we understand the competition is becoming more fierce. But in the area where we are strongest in for the high value-added deposition equipment for the conventional Batch ALD and the mini Batch ALD, in those areas, there is no entry of the Chinese local automakers in those areas.

And my second question is about the latest situation. The order in Q3 exceeded your expectation as you commented. And can you also talk about the level of the orders and the content of the orders? And do you see a pickup in the momentum for your new orders? If that's the case, in FY March '27, from the third quarter, are you expecting to see a Q-on-Q increase in the orders? Is that the kind of outlook you have for next fiscal year? So can you talk about the current status and the outlook for next year?

So talking about our orders, in Q3 this year, so the new order was about 20% higher than our expectation. So DRAM for the global regions and for logic and foundry and within services for the components, the orders exceeded our expectation. And for the full year basis, when we made announcement of our second quarter results, we lowered our order outlook by JPY 20 billion, but it seems like our order is going to be slightly above our original expectation on the full year basis. So it seems like our full year order is going to be that level.

So sales for March '27, if we talk about the trend by different customers, the required delivery date, it will be linking to our sales. And depending on the demand -- when the demand from each customers will be seen, we will determine our orders, and we don't really know if there is going to be a stable increase on the quarterly basis. There may be some fluctuation depending on the timing of when the demand from each customer is seen.

So as an image from the second half of this year to the first half of next year and the second half of next year, you are still expecting the upward trend, right?

Yes, there will be an increasing trend. But over time, but we don't really know if it will be like the straight the increase, but there may be some fluctuation over time. And also closely related to orders for our production in FY April -- sorry, the March '27 in the first half, there will be about 10% increase in our utilization. We expect the utilization to be higher in the first half. So that is another information I want to share.

Now I understand the situation.

Next is Nakanomyo-san of Jefferies Securities, please.

This is Nakanomyo of Jefferies Securities. In GAA, I want to ask further. FY 2025, a bit less than JPY 20 billion. But FY 2026, what is your expectation as of this stage?

Do we have the number? Let's see. Please go ahead.

For March 2027 GAA, basically about JPY 20 billion plus, any slides from this fiscal year will be topped up. That is the sense of the scale.

The intention of my question is, earlier, we heard the breakdown of WFE. In the case of your company, memories will be -- because of some delayed projects memories, maybe stronger growth than WFE. But on the other hand, logic/foundry, if GAA is not going to grow that much yet, then compared to WFE, GAA may not be growing that strongly for FY 2026. That is what I wanted to ask.

Investments for GAA, the Taiwanese biggest foundry manufacturer is mostly dominating the investments. But the Korean comprehensive chip manufacturers, North American plant will be also investing, resulting in some. The Taiwanese biggest GAA investment may have actual customers behind the scenes and may act even stronger. Depending on this, there can be further upside or not.

Then the legacy part is where competition is becoming more harsh. Is that right?

For logic/foundry, both legacy and advanced PORs first take place and then CapEx takes place. Customers' production increase investments, how strong is this investment amongst the customers or not will be the determining factor, especially Chinese local manufacturers, especially those small and medium-sized manufacturers, we do not have sufficient forecast updated from them yet. How much movements will there be and how much demand movements will there be or not will affect our logic and foundry sales of our company.

Do we have any other questions? [Operator Instructions] Are there any other questions? We still have some time left, but there seems to be no further questions. So we would like to conclude the Q&A session.

Thank you very much for participating in today's briefing. After the session, we will send out the questionnaire to all participants. We would greatly appreciate for your cooperation as it will help us improve our future IR activities. With that, this concludes today's session. Thank you very much.

Thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]

We will now begin Kokusai Electric Financial Results briefing for the second quarter of the year ending in March 2026. Thank you very much for taking the time to join us today. My name is Matsumoto from Public Relations and IR Department, and I will serve as the moderator. First is the introduction of today's speakers, Mr. Kazunori Tsukada, Representative Director, President and CEO.

Thank you.

Mr. Yoshitaka Kawakami, Senior Vice President, Executive Officer and CFO.

Thank you.

Today's agenda is as follows: First, Mr. Kawakami will present the consolidated financial results for the second quarter and the full year forecast. Next, Mr. Tsukada will provide an outlook going forward. After that, we will move on to the questions-and-answer session. This briefing is conducted by a Zoom webinar and both the presentation and Q&A responses will be in Japanese. Participants may also choose English through simultaneous interpretation.

This briefing is intended for institutional investors and analysts, questions will be limited to this audience. Thank you for your understanding. We kindly ask that you refrain from video or sound recording or taking photographs. Now let us proceed to the presentation. Mr. Kawakami, please go ahead.

I am Kawakami, Managing Executive Officer and CFO. Thank you for joining Kokusai Electric's earnings call today. First, I will go over our second quarter results as well as our full year earnings and dividend forecast. These are disclaimers that I will skip.

First, starting with an overview of the second quarter results. Page 4 carry the highlights. Since both sales and revenue and all profit figures for the first half of the fiscal year exceeded our previous forecast, we have today announced the difference between forecasted and actual figures for the first half interim period of the fiscal year ending March 2026. Details will be discussed on the next page and beyond.

Page 5 shows the consolidated earnings summary for the second quarter and the cumulative second quarter. For the second quarter, July to September, both revenue and profit increased compared to the same period last year as well as the most recent previous quarter. For the first quarter, sales increased year-on-year, while profits decreased due to changes in product mix and advanced investments for the future. Compared to the previous forecast, sales and profits both exceeded expectations, owing to our bringing forward sales of some equipment that was originally planned for the second half to the second quarter in response to the anticipated change in demand dynamics.

The sales brought forward primarily involved NAND equipment and logic foundry equipment for local Chinese manufacturers. Additionally, a portion of upgrade products for global manufacturers included under the service business were also brought forward. The gross profit margin for the first half of the fiscal year was 42.2%, although this was a 2.6 percentage points lower than the same period last year, where profitability was extremely high, owing to the concentration of equipment shipments to local Chinese manufacturers, it was generally in line with the plan. Regarding the interim dividend, we resolved today to pay JPY 18 per share as previously forecasted and announced the notice concerning dividend from surplus interim dividend.

Page 6 details the year-on-year factors affecting revenue and adjusted operating profit for the second quarter. Compared to the same period last year, the second quarter saw growth primarily in equipment sales to local Chinese manufacturers as well as service revenue, resulting in an overall revenue increase of 33% year-on-year. We will explain the increased decrease by application later. Adjusted operating profit increased 28% year-on-year, where increased sales and other factors absorbed the decline in gross profit margin due to changes in product mix and higher SG&A expenses.

Page 7 shows the year-on-year factors affecting the cumulative results for the second quarter. Overall revenue increased by 2% year-on-year for the first half since service revenues grew, while equipment sales to local Chinese manufacturers decreased. Equipment sales to manufacturers worldwide saw declines in logic/foundry equipment and other equipment such as Si power devices. However, NAND equipment sales grew. Sales of equipment to Chinese domestic manufacturers saw a significant decline in DRAM-related shipments, which saw a concentration in the same period last year. However, NAND-related sales grew substantially and logic/foundry-related sales also increased.

Service revenues grew, primarily driven by upgrades to existing equipment. Adjusted operating profit decreased 17% year-on-year due to the decline in gross profit margin caused by changes in product mix and increased advanced investments such as R&D spend for the future growth. Page 8 shows the quarterly sales breakdown by business segment. In the second quarter, both equipment sales and service sales increased compared to the same period last year as well as the most recent previous quarter.

For the cumulative second quarter, upgrades and modifications in the service business increased, replacing new equipment sales. Consequently, equipment sales slightly decreased year-on-year, while service sales increased, raising the service sales ratio to a slightly higher level of 38%.

Page 9 shows sales by application for the 300-millimeter equipment as that constitutes the equipment business and the 200-millimeter and smaller legacy equipment included in the service business. For both the second quarter and the first half of the fiscal year, sales for NAND and logic/foundry applications increased year-on-year.

On the other hand, sales for DRAM applications halved. This was partly due to some new equipment sales being replaced by upgrades and modifications within the service business and partly due to the impact of major Chinese DRAM manufacturers being in an investment low.

Page 10 shows sales revenue by destination. In quarter 2, sales to South Korea and China increased year-on-year. For the cumulative second quarter, sales to South Korea and Taiwan increased while the sales ratio for the U.S. decreased to 3% and the sales ratio for China decreased to 47%. Page 11 shows sales revenue by application, divided into sales to global manufacturers and sales to local Chinese manufacturers. The global manufacturers in quarter 2, driven by aggressive investment by device manufacturers, equipment sales for NAND and DRAM, along with service upgrades and modifications grew compared to the most recent previous quarter.

For Chinese domestic manufacturers in quarter 2, equipment sales for NAND and logic/foundry increased compared to the previous quarter, while equipment sales for DRAM also began to increase, rebounding from the low point of quarter 1, which was a transitional period. Due to the impact of some orders from Chinese domestic manufacturers being brought forward from the second half of the year, the sales ratio to Chinese domestic manufacturers temporarily increased to 44% in the second quarter.

Page 12 shows the quarterly balance sheet trends. Total assets at the end of the second quarter increased by JPY 1.8 billion compared to the end of March 2023, 2025, owing to increase in inventories and tangible fixed assets despite decline in operating credit and other credits. Total equity increased by JPY 12.1 billion compared to the end of March 2025, owing to an increase in retained earnings.

Page 13 shows key management indicators from the quarterly balance sheet. The equity capital ratio increased by 2.5 percentage points from the end of the previous quarter to 60.7%. Net debt was largely in line with plan at JPY 10.6 billion. Page 14 shows quarterly cash flow. In the second quarter, operating cash flow inflows exceeded investment cash flow inflows, resulting in free cash flow inflows of JPY 7.1 billion. Cash flow from financing activities resulted in outflows of JPY 6.4 billion, primarily due to repayments of borrowings.

Page 15 shows quarterly R&D expenses, capital expenditures and depreciation and amortization. R&D expenses progressed as planned for the second quarter at JPY 4.8 billion with the R&D expense ratio to revenue at 7.4%. The forecast for March 2026 R&D expenses remain unchanged at approximately JPY 18 billion, a 20% increase year-on-year. Capital expenditures for the second quarter totaled JPY 5.2 billion. We are currently advancing the construction of a new U.S. demonstration center, representing a major capital investment totaling JPY 20 billion over the 2-year period across fiscal year ending March 2026 and March 2027.

Consequently, while capital expenditures for the fiscal year ending March 2026 was previously projected to increase by 10% year-on-year, a portion is now expected to be recorded in the fiscal year ending March 2027. Therefore, capital expenditures for the fiscal year ending March 2026 are now projected to decrease by 10% compared to the previous fiscal year, amounting to approximately JPY 18 billion. Depreciation expense for the second quarter was JPY 3.5 billion. Due to depreciation of the Tonami plant completed in the previous fiscal year, depreciation expenses for the fiscal year ending March 2026 are expected to increase by 10% year-on-year, reaching approximately JPY 14 billion.

Next, I will explain the full year earnings forecast and dividend forecast for the fiscal year ending March 2026. Page 17 shows the highlights. As sales in each profit category for the fiscal year ending March 2026 are now expected to fall below the previous forecast, we have revised our full year earnings forecast and announced the notice regarding revision of full year earnings forecast today.

The specific details will be explained in the following pages. Please turn to Page 18. Sales revenue has been reduced by 6% and adjusted operating profit by 20% compared to the previous forecast since sales of certain equipment anticipated for the second half are now expected to be delayed into the fiscal year ending March 2027. Sales are expected to be delayed due to equipment sales for NAND to manufacturers worldwide totaling JPY 9 billion and equipment sales for DRAM to local Chinese automakers totaling JPY 5 billion. These sales are projected to be realized in the fiscal year ending March 2027.

A larger percentage decrease in profits compared to the decrease in sales revenue is due to the reduction in gross profit caused by delayed sales and the ratio of SG&A expenses, including upfront investments becomes relatively higher as sales revenue decreases. This is not a structural change and profitability is expected to improve as sales expand. Furthermore, as primary factors for this earnings forecast revision is a temporary sales decline due to delayed shipments, annual dividend forecast will be kept unchanged.

Page 19 compares the current earnings forecast with the previous forecast and summarizes the factors contributing to the increase or decrease. Regarding revenue, compared to initial expectations, shifts occurred between equipment sales and upgrade modifications as well as varying strength across applications. However, downside factors and upside factors, excluding sales deferred to the fiscal year ending March 2027 are expected to offset each other. Therefore, we made a downward revision of JPY 14 billion from the previous forecast.

Excluding this delay, we have lowered the forecast for NAND by JPY 5 billion and for logic/foundry by JPY 4 billion compared to the previous forecast. For DRAM, as some new equipment sales are now expected to be replaced by upgrade modifications, equipment sales were reduced by JPY 4 billion from the previous forecast. However, upgrade modification sales were increased by JPY 14 billion, resulting in a net increase of JPY 10 billion.

Adjusted operating profit was lowered by JPY 10.8 billion from the previous forecast due to reduced sales resulting from the delay of the accompanying decrease in production volume for the current period and a decrease in gross profit resulting from changes in product mix. Page 20 shows the breakdown of sales between global manufacturers and local Chinese manufacturers comparing the previous forecast with the current forecast.

The left side shows sales to global manufacturers where equipment sales were reduced by JPY 36 billion compared to the previous forecast, while service sales was increased by JPY 18 billion, resulting in a net decrease of JPY 18 billion. For NAND, we stated during the quarter 1 earnings that equipment demand was not as strong as initially expected. In addition to that, we now anticipate some sales will shift to the next quarter.

For DRAM, as mentioned during the quarter 1 earnings call, some new equipment sales are expected to be replaced by upgrade modifications. Therefore, equipment sales were lowered and service sales were raised. Combined equipment and modification sales are expected to increase more than anticipated. For the logic/foundry segment, GAA-related demand is growing largely as expected, but we have lowered our forecast for mature nodes where recovery is lagging.

Next, for the Chinese domestic manufacturers on the right, we have raised equipment sales by JPY 6 billion compared to the previous forecast, while lowering service sales by JPY 2 billion, resulting in a net increase of JPY 4 billion. For NAND and logic/foundry, as mentioned during the first quarter earnings call, equipment demand has been stronger than initially expected, leading us to raise our forecast. For DRAM, since part of the sales is now expected to shift to next fiscal year after shipment timing was adjusted, as mentioned during the first quarter earnings call, it is leading to a downward revision of the forecast.

As a result, the sales ratio for local Chinese manufacturers for the fiscal year ending March 2026 is expected to increase by 4 percentage points from the previous forecast of 33% to 37%. Page 21 shows sales to global manufacturers and sales to Chinese domestic manufacturers in chronological order from the fiscal year ending March 2023 to the revised forecast for the fiscal year ending March 2026. Sales to manufacturers worldwide have been on an upward trend since bottoming out in the fiscal year ending March 2024.

For the fiscal year ending March 2026, sales to NAND and DRAM customers, along with growth in services centered on upgrades and modifications are expected to increase by 9% compared to the previous fiscal year. On the other hand, sales to local Chinese manufacturers for the fiscal year ending March 2026 are expected to decrease by 20% compared to the previous fiscal year. This is due to a decline in sales for DRAM amid an investment low despite growth in sales for NAND and logic foundry. Sales to DRAM are expected to resume an upward trend after the fiscal year ending March 2027 as investment low ends.

As the revenue growth pace for global manufacturers is faster than that for Chinese domestic manufacturers, the sales ratio to Chinese domestic manufacturers is expected to decline to around 30%. Page 22 shows sales revenue by business segment. Due to the revision of our forecast, some new equipment orders will be replaced by upgrade and modification projects within our services business. Consequently, for the fiscal year ending March 2026, equipment sales are projected to decrease by 16% compared to the previous fiscal year, while service sales are expected to increase 20%. As a result, the equipment sales ratio is projected to be 61%.

Page 23 shows installed revenue by application combining sales to global manufacturers and local Chinese manufacturers. For NAND, while we have lowered our forecast this time, it is expected to double compared to the previous fiscal year. For DRAM, sales are expected to decrease by 45% compared to the previous quarter. This is due to a significant decline in sales to local Chinese manufacturers, combined with the impact of some equipment sales to global manufacturers being replaced by upgrade modifications.

For logic/foundry, revenue is expected to decrease by 11% compared to the previous quarter. This is due to the delayed recovery of mature nodes and the impact of interposer demand, which was a JPY 9.7 billion in the previous quarter, entering a transitional period this quarter. For legacy equipment, 200 millimeters and below included in the service business, demand is expected to remain at the same level as the previous quarter due to the slowdown in demand.

Page 24 shows revenue by destination. Compared to the previous year, the sales mix to Japan, Korea and other Asia is expected to increase, while the mix to China, U.S. and Taiwan are expected to decrease. Regarding tariff policies, our contracts are generally based on delivery at airports or ports near production sites. So we do not bear tariffs on equipment. Therefore, there has been no direct impact. At present, there is no indirect impact either, but we will continue to monitor potential indirect effects such as device makers revising investment plans due to economic downturns or rising costs. Export regulations have not caused direct or indirect impacts either. We will continue to monitor the situation. That concludes my explanation.

I am Tsukada, Representative Director, President and CEO. I will now explain the outlook going forward. Please turn to Page 26. First, based on the revision of the March 2026 earnings forecast, I will explain the sense of the course for March 2027.

Let me begin with the business environment surrounding our company. We had expected WFE in 2025 to be flat year-on-year. But considering the recovery of the Chinese market, we now see it slightly exceeding the previous year. Our view of WFE in 2026 remains unchanged, mid-single-digit growth, around 5% year-on-year. While there are signs of increasing demand for AI-related memory lately, this has not yet been factored into our market outlook or our business plans. As explained earlier, JPY 14 billion worth of equipment sales are expected to be delayed from March 2026 to March 2027. These include NAND equipment to non-China and DRAM equipment to China. And based on discussions with customers, the likelihood of selling them in March 2027 is high.

For March 2027, including the delayed portion, we expect more than 10% growth in combined sales of equipment and upgrade modifications. Even excluding the delayed portion, we aim for growth of 5% or more. Page 27 shows the outlook for the business environment. In the semiconductor device market, generative AI demand is expected to continue driving capital investment by device manufacturers. For high-performance DRAM and logic foundry, active investment for generational shifts and production capacity expansion is expected to continue sustaining growth in equipment demand.

For NAND, in addition to current equipment demand for generational shifts, there are expectations for NAND to replace server hard disk drives and DRAM. However, it will take more time to assess how this will translate into concrete equipment demand. For mature node logic foundry, Chinese manufacturers are maintaining investment at a considerable scale and equipment demand is expected to stay at current levels, but non-Chinese manufacturers continue to restrain investments. Nevertheless, device demand is gradually recovering, and we expect equipment demand to rebound in the not-too-distant future.

Page 28 summarizes the business environment and our situation by application. First, regarding NAND. At the time of the first quarter results announcement, we stated that demand from Chinese manufacturers was stronger than expected, while demand from non-China was weaker than expected. In the second quarter, the concerns became more pronounced. Although for non-China, equipment demand is increasing due to generational shift investments. We feel that investments in DRAM are being prioritized. So NAND investment is likely to be slower than we anticipated. Demand for equipment in March '27 is expected to exceed that of this year, but we are not currently assuming capacity expansion investments.

On the other hand, for China, generational transition and capacity expansion investments are progressing faster than we expected and equipment demand is expected to continue in March 2027. Next, regarding DRAM. At the time of the first quarter results announcement, we stated that non-China demand for equipment, especially modifications was stronger than expected, while shipment timing for China was getting fluid. In the second quarter, both the expectation and concern materialized.

For non-China, investments for generational shift and production capacity expansion are progressing in parallel and combined demand for equipment sales and upgrade modifications has exceeded our expectations. Demand in March 2027 is also expected to surpass this year's level. For Chinese manufacturers, after shipment timing adjustments, some equipment sales were delayed. However, having passed the investment transition period, we expect investments to become active again in March '27.

Next, regarding logic/foundry. At the time of the first quarter results announcement, we stated that demand for mature nodes from non-China, particularly in Europe and the U.S. was weak. In the second quarter, this concern materialized. For non-China, demand for advanced node equipment, mainly GAA continues to grow, but recovery in mature node demand is expected to be slower than we anticipated. Notably, GAA-related equipment sales increased from JPY 2.7 billion last year to JPY 8.8 billion this year, second quarter year-to-date. Although interposer demand has entered a transition period, we will continue to make proposals to create and expand demand for advanced packaging. For China, investments by large manufacturers have been stronger than expected, and we expect investments to continue going forward.

Finally, regarding power devices, sales of existing products have been steady, but equipment demand is showing signs of slowing. Going forward, we aim to capture demand shifts toward new products such as high-temperature activation annealing associated with migration to 200 millimeters and trench gate adoption and pursue growth. Page 29 shows the transition of product composition. With March 2024 being the bottom, the mix of high value-added products such as batch ALD compatible equipment and single wafer treatment equipment has started to increase.

In March '26, sales of mini batch equipment are increasing in line with the recovery in demand for NAND equipment. The ratio of high value-added products in March '26 is expected to reach 70%. In March '27, the ratio is expected to rise further, leading to improved gross profit margins. Chinese manufacturers are emerging in areas such as batch diffusion equipment and CVD compatible equipment. However, in the field of highly difficult film formation where we excel, they have no presence and our market share in batch ALD equipment continues to expand. We will continue to monitor the trends of Chinese manufacturers while focusing on expanding TAM and market share in advanced edge devices.

Page 30 is our usual material summarizing the semiconductor device development road map, our catalyst and growth potential. There are no changes to our medium- to long-term strategies and goals. Our view that the timing for achieving medium-term target will be when WFE reaches $120 billion also remains unchanged. As semiconductor devices become more multilayered, miniaturized, complex and 3-dimensional, opportunities to leverage our strength in batch ALD equipment, especially mini batch equipment and single wafer treatment equipment will increase.

Our belief that we can sustain sales growth exceeding WFE growth. This remains unchanged. Although mass production of 3D stacked DRAM and logic CFET is expected to be slightly delayed, we will increase new PORs in vertical channel transistor DRAM and GAA 1.4 nanometer generation. With a higher ratio of high value-added products and lower SG&A ratio due to sales expansion, we will achieve a faster pace of adjusted operating income growth than sales growth.

Please turn to Page 31. Applied Materials, which has been our largest shareholder, sold part of its shares in our company to institutional investors through a securities firm on October 8, reducing its ownership ratio from about 15% to about 10%. As a result, KKR, which holds about 11% of our outstanding shares, once again became our largest shareholder.

Page 32 shows the topics of management and business activities in the first half. In September 2025, we signed a joint development agreement with ASMPT of Singapore regarding semiconductor packaging technology. We are not yet at the stage to present specific goals or results. But by combining our advanced thin film formation technology with ASMPT's high-precision bonding technology, we aim to develop optimal solutions in the semiconductor 2.5D and 3D packaging fields, which are expected to be applied to next-generation high-performance computing and AI.

Finally, Page 33 summarizes the ESG initiatives in the first half. In July 2025, we received the highest rating in CDP's 2024 Supplier Engagement Assessment. In the Supplier Engagement Assessment, this evaluates company's efforts to address climate change issues in their supply chains. Our company has been engaging in business activities conscious of the environment across various fields, and these efforts were recognized. This concludes my presentation. Thank you for your attention.

Concludes the presentation from Kokusai Electric. We would now open the floor for questions.

[Operator Instructions] Starting with Tetsuya Wadaki-san.

I'm Wadaki from Morgan Stanley. Thank you very much for your engagement. As for the downward revision, I do believe this was more of a consensus in advance, so we can understand that. However, it is quite significant. And for NAND, I understand that there is a shortage in supply. However, even though there's not going to be a large construction, there could be some increase in maybe capacity. However, this is what's happening. So how do you analyze the current situation?

Some NAND manufacturers could not really procure the components and they were not able to really build the SSDs and maybe that is one impact factor. But when NAND is undersupply situation, you decided there are manufacturers that are delaying their investments, and therefore, that is probably impacting your earnings. So how do you monitor that type of development?

Thank you very much for the question. So it's not as if customers give us very detailed information. However, as for the forecast changes that we have been informed of as well as how the orders are being placed, we are assuming that traditionally, it was a larger scale, I think, investment for generation change that investments were being made. However, most recently, it is small steps and gradual steps that customers are taking by monitoring the situation and installing the equipment.

So that is how the behavior is changing. Maybe it is for a better demand-supply dynamics. Maybe it is due to maybe component procurement situation. We don't know the clear answer to this. However, versus the demand-supply dynamics, maybe they are trying to have a very leveled investment so that there will not be an oversupply situation. I think that will be the factor to note.

And the second question, going into 2026 -- for calendar year 2026, it is 5% WFE growth. And by application, maybe you can divide this into China and non-China. And we would like to understand your thoughts on this with that breakdown.

For the WFE growth for calendar year 2026, currently, we are not changing our view to date. However, when we look at this by device, the situation is changing quite significantly. And when it comes to China and non-China, we have not been able to go with that breakdown yet. But when we look at this by device, the changes year-on-year will be that for NAND, it will be maybe positive 20% levels, and that would be our observation. And for DRAM, plus 15% levels, and that would be our observation. And for logic/foundry, it will be minus 2% to maybe minus 3% levels.

So in a nutshell, it is a plus 5% levels. Even though it is not divided by device when it comes to Chinese as well as non-Chinese with all of the devices together, for Chinese local area, it will be minus 5% to minus 10%. And that will be the year-on-year change. And for non-China, plus 10% to plus 15%. And that would be our observation of now. So logic foundry, it would be lessened because of the local Chinese players that will be lessened. So it is not just the local Chinese manufacturers, but non-China is continuing to be a bit more weak. Understood. Because TSMC, I thought would be increasing some of their investments, but I guess that's your prerequisite. As for the largest foundry in Taiwan, as for their investments, I think it will be investments for gate-all-around, but maybe N minus 1 will be some investments that could be happening. And that's what we're picking up. Therefore, we will be monitoring the situation more closely.

Moving on. Yoshida-san, please.

CLSA, Yoshida speaking. This slide, Slide 26 that you are showing now. Looking at this slide, from this fiscal year to next fiscal year, if the equipment itself did not slip back, March 2027 outlook would be less compared to March 2026 expectation in that case. What is your view of next year? How has your view for next year changed compared to 3 months ago? In particular, where it is related to AI, the AI-related memory investment. we get the feel that is becoming stronger. This is our skin feel.

But this stronger investment, this sense has not materialized specifically from forecasts coming from customers, we do not have a clear view yet. When time passes a little further, going into calendar year '26, we will be able to see the content more clearly. Especially when it comes to DRAM, we get the feeling that DRAM will continue to be strong. NAND generational shift will continue. This is our view.

The second question is midterm management plan. You said you have not changed your plan or target and WFE market would be affecting you. Conventionally, you would have considered achieving 2025 or 2026 is achieving timing. But with the fiscal year 2026 outlook you have shared, it would be difficult to achieve the target at that point. Compared to the time when you develop midterm plan, what are the changing assumptions and the demand environment? What are the changes compared to them?

What are stronger and what are weaker compared to that time? What is becoming stronger is HBM DRAM CapEx represented by HBM. We did not factor in that much strength as we see today. This was not factored in. This strong strength was not factored in. It will be positive. And the other point, mature logic/foundry, also non-China and China as well, especially China, the emerging manufacturers, more than expected, they are weaker. And non-China mature logic/foundry, they have not come back to CapEx either. These are the minus factors that we feel.

What about NAND? Is NAND going as expected?

For NAND, greenfield would be very rare to see, we assume. For generational shifts, the equipment will be replaced. That was the assumption to start with. With general shifts, there will be more increases. And for NAND, the positive is possibly the China NAND because we viewed possibly there can be no more CapEx for NAND in China, but this is going up to quite a bit of a scale. Whether this will sustain or not, we don't know, but this can be a positive factor.

Now from Nomura Securities, Yoshioka-san.

This is Yoshioka from Nomura Securities. I have 2 questions as well. The first will be for fiscal year ending March of 2027, we would like to understand the direction. You have been showing us exactly how the sales revenue is going to be progressing. I would like to have some details. So the WFE market growth is going to be more than maybe 10%, and that's why you're thinking sales revenue can increase by 10% plus. When you look at the current market and when you look at the customers' trends as well as other trends, when you look at the WFE market, exactly how much can you exceed the WFE market? Or do you think you cannot exceed the WFE market growth? Maybe it's difficult to explain in numbers. However, what will be the factor for you to be able to grow above the WFE market growth?

When it comes to the WFE market growth, we're expecting this to be about 5% levels, and that is our outlook. And as for the delayed shipments, even with that being deducted, we do believe a sales revenue growth of 5% plus can be achieved. And that is what we have as an outlook for March end of 2027. And if you include the delayed portion, it will be above 10% level of growth, as we explained before. But if we consider the delay as a bonus, then even minus the delay, we would be able to see a sales revenue growth above WFE market growth, and that will be our current outlook.

And if there's going to be a further upside, then that would be a possibility due to DRAM CapEx spending, which will be more than what we anticipate, and that could be stronger than our anticipation, especially for March 2027, there will be new factory operations that will be launched. And that is expected. Therefore, there could be upside factors.

And as for NAND, for this fiscal year, I think there could be a same type of generation shift investment similar to that of this year. And it will be generation shift as well as capacity increase in China. So therefore, we do believe that we would -- there's probability -- a high probability that we would be able to exceed WFE market growth.

That's well taken. Now moving on to the second question. Based on the material, it may be off of the material that you have shown us today. But as for your POR by application, there's going to be a generation shift, and you would be able to increase the POR wins. And I think that's something that you have been saying to date. But after 6 months since the beginning of the year earnings call, have you been able to secure POR as expected? Or are you unable to really meet your expectations surrounding how you have been able to acquire these new PORs?

Even though it's not in the presentation deck, the PORs that we were expecting to acquire is proceeding as we had anticipated. Luckily, the integration scheme has changed due to customers' situation and our POR may not be used for mass production and such unfortunate situations have not happened to date. And therefore, all of the PORs that we have been accumulating to date will, for sure, move to mass production, and we should be able to convert them into sales revenue.

And furthermore, when it comes to the GAA, gate-all-around POR, there are the major 3. When it comes to South Korean logic foundry manufacturers, U.S. investments, the number of PORs tend to be more numerous when it comes to mass production. And therefore, that is also a very welcoming situation for us.

Thank you. So it is a very solid POR acquisition that you've been able to go for, and it's very comforting to know.

Next, Nakamura Shuhei-san please.

Nakamura, speaking. Page 26 -- Slide 26. I want to ask and confirm about the sense of the numbers. Are you talking about the company-wide numbers? Or is just the new equipment plus upgrade portion only? I want to confirm about this point. And your equipment sales next year will be increasing. But by application and by destination, what is the sense? Calendar 2026, you talked about WFE. And is your sales going to be pretty similar to the 2026 WFE direction or different?

First of all, Page 26. This shows new equipment and new equipment equivalent upgrade modifications.

I see, which means company-wide sales will also include service sales on top of this, right?

Yes, you're right. Upgrade equivalent to new equipment is here, but other upgrades that is not equivalent to new equipment will also be added on top of this as well.

I see. As of this stage, next fiscal year's company-wide sales would be nice to know. But will the service sales grow in a similar manner as well?

Service sales, DRAM investments will continue. The upgrades will be continuing according to our perspective.

If I may say the following, March 2027, this graph, the blue portion, equipment would be about JPY 160 billion. The bottom green portion, upgrade modification, JPY 25 billion to JPY 30 billion is the current expectation. Plus will this be in sync with WFE or not?

Earlier, I touched upon on WFE Y-o-Y. And compared to that, the feeling where we have a difference is the NAND part. NAND earlier, I said plus 20% as my view, I think we can be equivalent or a bit higher than WFE for sure. Why? Because for NAND greenfield investment is difficult to expect that much, which means the NAND part will be different compared to the WFE field.

And this March 2027 sales expectation, once you achieve the sales expectation, what is going to be the gross profit margin? This fiscal year, a little less than 43% you are expecting, I think, at least you can return back to this level or if there is any yearly forecast, please share with us.

As you pointed out, this year's budget is 42.8%. Next fiscal year, fiscal year 2026 with the sales expansion and with advanced edge equipment percentage increasing, we expect close to 43% or 43%, we should be able to form our budget at.

And finally, just briefly, GAA-related sales. This year's outlook plus next year's expectation, can you share with us? And interposer, you said transition timing but wafer level package CapEx in itself, I think, is going quite briskly. What is your expectation here as well?

First of all, for GAA, this fiscal year and next fiscal year, which is March '26 and March '27, GAA generation, we expect about JPY 20 billion sales for GAA generation. Lately, the biggest Taiwanese foundry GA investment was the only investment. But going forward, Korean foundries and comprehensive chip manufacturers, North American plants will enter into GAA generation. Therefore, we should sufficiently be able to aim for the JPY 20 billion.

And then for the interposer, silicon interposer for core S, I think we have one course. But a different and slightly different application we can capture, and we are working to capture such demand. We will look at the situation and carefully assess the situation. Certainly, lately, for interposer course, yes, we think that investments are starting to take place. What kind of business to what extent can we capture? We want to take a little bit more time to assess the situation.

Moving onto Shimamoto-san.

This is Shimamoto from Okasan Securities. As for 2026, WFE memory area would be the question I would like to pose. So it was going to be NAND 20% and DRAM 25% increase. I think that was your outlook. Most recently, when it comes to the memory ASP increasing, I think memory manufacturers' investments can be anticipated as an environment, and that's what the market is expecting. And based on that, when it comes to your outlook, is it something you have assumed as a volume from the historical pattern of investments? Or are you looking at more of a realistic number? And are you accounting for the current market environment as a positive factor to come to these numbers? Can you maybe share with us the underlying factors for the numbers that you came up with?

As I mentioned before, there are many different views on WFE, and we are referencing off of all of these different angles. And then we are trying to see how much that is in line with what we are feeling on the ground. Specifically when it comes to the NAND area, the chip manufacturers investment model, as I mentioned before, is starting to change a bit. there's a demand. And then ASP seems reasonable. However, they're very cautious about CapEx spending. And I think that is how the behavior is changing.

And based on different research companies, WFE market outlook, I did say it was a positive 20%.

Is this -- yes, I do want this type of CapEx spending to happen in the NAND space, but is it really going to happen or not?

When we monitor the most recent behavior of the chip manufacturers investments, I myself am questioning myself. However, when it comes to CapEx spending for generation shift, you need to go for that. Otherwise, you cannot manufacture new generation chips in volume. Therefore, you will shift from the older generation to the new generation, and they will be installing new equipment to cater to that. And then that is what we want to make sure that we actually capture. And that's the prerequisite to the numbers.

When it comes to the 15% in DRAM, would it be the same type of simple thinking that you have applied? Or did you have a different set of thinking?

For DRAM, the GPU release schedule needs to be met. And based on that, the HBM manufacturing increase will happen. and it needs to be in sync. And so that's how CapEx spending will happen. On the other hand, when it comes to multipurpose DRAM, once demand starts to recover more solidly, then I think it will be unlinked to HBM CapEx spending. So I think when it comes to DRAM, I think the investment behavior will be a bit different from NAND. And that is what I'm picking up.

Then because time is coming up, the next will be the final question. Mr. Yamamoto from Mizuho, please.

Yamamoto-san of Mizuho, please. Please go ahead. Please, unmute. Yamamoto-san. Are you alright. Is it working? The question is withdrawn, then we will be concluding.

With this, we conclude questions and answers. Thank you very much for participating in our meeting. After this meeting, we will be sending to you a questionnaire survey. To make use for the future IR activities, we ask you to kindly respond to the questionnaire survey. We will be closing the meeting. Thank you very much indeed for today. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]