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Sumco Company (OTCPK:SUMCF) Q3 2023 Outcomes Convention Name November 8, 2023 1:00 AM ET
Firm Members
Takayuki Komori – IR
Mayuki Hashimoto – Chairman and CEO
Michiharu Takii – Vice President, CFO
Hiroshi Itoh – Government Officer and Normal Supervisor of Accounting
Convention Name Members
Takashi Enomoto – BofA Securities
Atsushi Ikeda – Goldman Sachs
Yuta Nishiyama – Citigroup Securities
Go Miyamoto – SMBC Nikko
Shigeki Okazaki – Nomura
Shuuichi Nakahara – Tokai Tokyo Securities
Yu Yoshida – CLSA Securities
Mikiya Yamada – Mizuho Securities
Takayuki Komori
Thanks to your participation right this moment. That is the outcomes briefing for the Third Quarter of the Fiscal 12 months Ending December 2023. Earlier than beginning the presentation, enable me to substantiate right this moment’s supplies, which consists of three gadgets: the temporary assertion on consolidated monetary outcomes for Q3 fiscal 2023; the announcement relating to revision to dividend forecast; and the presentation deck entitled outcomes for third quarter of fiscal yr 2023. This will probably be a 60-minute briefing, which is able to finish at 5:00 p.m. Subsequent, a disclaimer. The estimates, expectations, forecasts and different future data mentioned right here and proven in right this moment’s supplies have been ready primarily based on the data obtainable to the corporate as of right this moment and on sure assumptions and {qualifications}, together with our subjective judgment. Precise monetary efficiency or outcomes could differ considerably from the long run data contained on this materials attributable to threat elements, together with home and international financial circumstances, traits within the semiconductor market and international trade charges.
We can have shows right this moment from Consultant Director, Chairman and CEO, Mayuki Hashimoto; and Vice President, CFO, Michiharu Takii. Hiroshi Itoh, Government Officer and Normal Supervisor of Accounting can be available. Chairman and CEO, Hashimoto, will talk about our forecast and working atmosphere to be adopted by an evidence of the monetary outcomes by CFO, Takii. We now have put aside time for a Q&A session as nicely.
I’ll now hand over to Chairman, Hashimoto.
Mayuki Hashimoto
I’m Chairman Hashimoto. I’ll begin with the overview on Slide 5 of the presentation. It is a abstract of the Q3 outcomes. Income have been nicely forward of our forecast however the important elements have been the weak yen and higher than anticipated prices cut up roughly evenly. The decrease than anticipated prices have been attributable to delays in incurring depreciation and price discount initiatives additionally cut up roughly evenly. Income got here in roughly ¥4 billion greater than projected. Gross sales was largely in keeping with forecast, down solely barely. Turning to the This autumn earnings and forecast. Whereas we count on gross sales to be unchanged Q-on-Q, we challenge vital sequential declines in OP. This begs the query of why OP is predicted to fall a lot regardless of gross sales being largely flat sequentially. The decline is a operate of an anticipated drop in manufacturing volumes. Though gross sales are forecast to be unchanged Q-on-Q, Sumco has lowered manufacturing volumes considerably. As well as, we will probably be conducting common upkeep at our flagship plant in November. Because of this, we challenge a ¥6 billion impression from decrease manufacturing volumes on a Q-on-Q foundation. There are a selection of different elements as nicely, resembling an anticipated enhance in depreciation, which is able to contribute to the ¥8.6 billion Q-on-Q drop in OP. The choice to cut back general manufacturing quantity is as a result of we all know that volumes going ahead into 2024 will decline. We now have chosen to behave preemptively, in adjusting manufacturing to make sure our stock doesn’t rise to extreme ranges. Please flip to Web page 6. This slide reveals shareholder returns. We’re guiding for a fiscal year-end dividend per share of ¥10 for a full yr whole of ¥52. This represents a dividend payout ratio of 30.5%.
Subsequent web page, please. So what does the market atmosphere for silicon wafers appear like? Very merely, the market atmosphere in each Q3 and the outlook for This autumn continues to be weak. The weak point is in each logic and reminiscence. Shopper and different functions for 200 millimeter wafers are additionally weak. The rationale for this weak point is clearly the US, China commerce battle, which has considerably depressed the Chinese language economic system. Different geopolitical dangers are additionally contributing to the lackluster markets. The state of affairs in Ukraine has led to inflation, which is miserable client sentiment. That is additionally the numerous issue. The drying up of elevated pandemic demand can be an element, stock turnover is sluggish. On our outlook going ahead, if we take a look at 2024, the one space of finish demand that’s agency is EV associated demand. All different areas are seeing continued weak point. Though PCs seem to have bottomed out, demand has solely reverted to earlier low ranges, highlighting simply how depressed current circumstances have been. We count on demand to stay at low ranges. On the cadence of a restoration, there are variations between logic and reminiscence. Clearly, with logic, the most important gamers are the foundries, which produce to order. In distinction, the IDMs are the most important gamers in reminiscence, so manufacturing relies on anticipated demand. By nature, subsequently, Reminiscence tends to overshoot. This time is not any exception. This time round, reminiscence gamers are carrying elevated ranges of product stock. Because of this, even when the markets get well, it could take time earlier than wafer inventories are labored down and wafer demand picks up. Within the case of reminiscence, I think there’s more likely to be a large time lag earlier than wafer demand recovers. This makes it very troublesome to forecast however I imagine that logic could steadily get well from across the center of 2024. For reminiscence, it could nicely take till the top of the yr earlier than there’s a restoration when it comes to wafer purchases, in my opinion.
Web page 8, please. This slide reveals the wafer development for 200 millimeter by quarter. 200 millimeter wafers have been impacted by weak point in client functions. The bottom stage since we started amassing knowledge had been in 2016. Nevertheless, market traits are lackluster with the wafer development dropping under 2016 ranges. Nevertheless, I believe the underside for 200 millimeter wafers could also be round this stage. Possibly what we see is a few backside crawling for some time earlier than issues begin lookup. In any case, present circumstances are uninspiring. Relative to the height, the market is down by round 25%. Web page 9, please, for the development for 300 millimeter. As you may see, there was a drop off in Q3. I count on to see this development persist. As talked about earlier, I count on we may even see a restoration round mid 2024 or later, so the weaker development is more likely to proceed till then. Please leap ahead to web page 11, please. Up so far, most of what I’ve talked about has been miserable. Nevertheless, if the query is, will the market development for wafers stay weak going ahead, I’d say, clearly not. By nature, the semiconductor market is a market that could be very lumpy. Nevertheless, if we glance past the cyclical traits for the market, there are technological developments that may change the slope of market progress by producing new demand. I wish to cowl this in additional element.
As an illustration, if we take a look at Logic Chips, there are continued enhancements in performance, that are driving progress within the transistor rely. The vertical axis on the left is transistor rely with the blue dots representing transistors. As you may see, transistors have grown linearly over time. Transistors are important for computing operations. In order computing efficiency rises, it additionally drives progress in chip space. Chip space is represented by the orange dots with the dimensions proven on the vertical axis to the correct. We now have plotted firms A, B, C, and D on the chart. As we have now recognized firm D as producing GPUs, you may in all probability guess which firm this refers to. As you may see, chip space has been rising considerably. As such, not solely will there be a rise within the variety of vanguard wafers, however the floor space of vanguard wafers can be more likely to develop over time.
Slide 12, please. More and more, there was a development towards combining chips, mounting separate chips onto an interposer. At the moment, that is restricted to solely vanguard chips. Nevertheless, the person chips aren’t merely positioned on a base however have to be interconnected. Provided that the substrate should incorporate connecting circuitry, the substrate have to be comparatively excessive grade silicon. It is a new and rising software that didn’t exist beforehand. Slide 13, please. If we take a look at CMOS picture sensors, demand for ever higher picture decision is driving a development in direction of chip stacking. That is notably true for automotive functions. If we take into consideration the necessities for autonomous driving at evening, there will probably be a must develop the scale of the photodiode. Nevertheless, because the photodiode will get bigger, it won’t be doable to accommodate the peripheral circuitry that had beforehand been integrated in the identical chip. There may also be a rise in complexity as nicely. This might drive a shift to 2 chips for now. This development will drive a rise within the variety of wafers. Slide 14, please. This slide examines enhancements in 3D DRAM stacking. Attaining better bit density and sooner switch speeds in the end would require a 3D construction. The stacked construction might want to have a silicon interposer on the backside. The emergence of interposers or carriers is a departure from the development up to now. We are actually beginning to see demand for interposers emerge. We now have already acquired many requests from prospects and have been delivery samples. That is the development for vanguard, which counsel demand for extra wafers.
Slide 15, please. Lastly, taking a look at reminiscence. Not too long ago, we have now seen an rising development towards bonding reminiscence to logic. YMTC in China is doing this. Up to now, logic circuitry would have been integrated within the periphery of reminiscence, however the construction has just lately grow to be extra advanced. What we are actually seeing is a shift to particularly fabricating logic circuitry, which is then bonded to reminiscence. Directionally, the development is towards rising layer numbers. However given the problem of fabricating 300 or 400 layers, it is doable we may even see a shift to bonding two 300 layer NANDs again to again to get to 600 layers. This could suggest a doubling of wafer consumption. So technologically, I imagine there’s a development towards utilizing extra silicon wafers. Sadly, nevertheless, the trade is susceptible to sturdy volatility on account of adjustments within the macro backdrop. It is because the fast tempo of progress makes it troublesome to challenge the long run, in my opinion. That is being compounded by rising geopolitical threat. The elevated complexity of circumstances surrounding the market are additionally making it troublesome to forecast. Slide 17, please. This reveals buyer wafer stock traits. Optically, it seems as if September stock ranges declined, however the drop is a mirrored image of the very fact that there have been prospects that suspended orders in September. The precise development stays unchanged with inventories at persistently excessive ranges. Slide 18, please. This reveals the breakout of buyer inventories between logic and reminiscence. You’ll be able to see that wafer stock ranges are equally excessive.
Slide 19, please. This chart reveals traits for logic use epi wafers. The orange line is stock. Sadly, stock is at document excessive ranges. Nevertheless, the important thing function of epi to focus on is that the blue line, which is demand, will not be dropping off sharply, however as an alternative is declining steadily. As nicely, costs haven’t fallen. That is in distinction to Slide 20. This is identical chart for reminiscence use PW. As you may see, there continues to be a steep enhance in wafer stock, however within the case of reminiscence, you may see that demand is falling too. That is really fairly uncommon. Though there have been situations up to now the place there have been slight declines, it’s uncommon to see such a pointy decline in demand, though, it displays measures to cut back stock. Successfully, it is a double whammy with each a decline in demand and a list correction coming on the identical time. That is the present state of affairs. Please see Slide 21 for the general forecast. As you may see, 2023 has fallen sharply, down 10% plus. But when second half 2023 circumstances stay unchanged, then we’d count on to see a slight fall in 2024 as nicely. I be aware that the market was comparatively strong in first half 2023. Nevertheless, for those who take a look at 2025, we count on a comparatively sturdy restoration in 2025. The blue dotted line is the PPP GDP development, which we have now up to date with current knowledge factors. Though, we have now seen vital strikes just lately, in spite of everything is alleged and accomplished, our view could be that the development will revert in direction of the PPP GDP line.
For some time, in 2021 and 2022, I had thought that we’d see a divergence from this development, but it surely would not seem like the case. It seems that buy ranges in 2020, 2021 and 2022, have been too excessive relative to PPP GDP, and we’re paying the worth for that overshoot now. In different phrases, what we’re seeing now’s a correction for excessively excessive buy ranges. That is an trade that tends to overreact in each instructions. If we again out the numbers from the PPP GDP line, it implies that the magnitude of the surplus purchases might be round 10 million wafers. On that foundation, you can argue that the correction may very well be labored by means of over the course of a yr in 2023. But it surely appears doubtless we are going to see a lingering impression in 2024. Another excuse for the unprecedented change within the development curve is the emergence of geopolitical threat, notably the US, China commerce battle. The recession in China is a significant component in my opinion. If you happen to look again to 2009, even once we had the worldwide monetary disaster, we didn’t see such a pointy decline in silicon wafers. Due to this fact, the present wafer and semiconductor recession is the results of a posh mixture of things. Given this, I believe it would take time for the market to get well. Nevertheless, the general development for semiconductors, as you already know, is that they’re important constructing blocks, so I do count on to see a restoration over time. This completes my part of the presentation. I’ll hand over to CFO, Takii, to speak about particulars of our earnings.
Michiharu Takii
I, Takii, will current the earnings in additional element. Please flip to slip 23. This slide reveals the outcomes for the primary 9 months of 2023. 9 month gross sales weren’t down that a lot on a year-on-year foundation however OP dropped ¥18.1 billion year-on-year. The massive decline got here in Q3 with stand alone OP for Q3 at ¥15.1 billion, down considerably year-on-year. Atypical revenue additionally fell. Nevertheless, revenue attributable to house owners of the mother or father was up ¥7.2 billion year-on-year on the extraordinary positive factors of ¥20.1 billion generated in Q1 associated to the acquisition of the polysilicon enterprise. 9 month CapEx was up considerably year-on-year at ¥225.3 billion on continued greenfield investments. Equally, depreciation additionally rose. EBITDA was down on a year-on-year foundation with many of the declines coming in Q2 and Q3. The EBITDA margin was additionally down. Please flip to slip 24. That is the evaluation of adjustments in working earnings. First, the sequential evaluation. Q3 working revenue dropped ¥5.7 billion Q-on-Q. This was significantly better than anticipated. If we break down the ¥5.7 billion sequential decline, prices have been largely flat Q-on-Q. We had been forecasting a rise in prices. In precise reality, prices did enhance however have been offset by favorable yields and expense self-discipline throughout a variety of bills. Depreciation was decrease than we had anticipated by round ¥1 billion, rising ¥2.7 billion Q-on-Q on the again of slight adjustments within the ramp up of recent tools. Gross sales associated variance was in keeping with expectations on account of sharply decrease wafer volumes falling ¥5.7 billion. ForEx made a constructive contribution of ¥2.6 billion owing to the weak yen. The yen was weaker than we had anticipated.
On the correct, we present the 9 month OP waterfall chart. There was a major year-on-year enhance in value of ¥18.3 billion. This breaks down into an ¥8 billion enhance in supplies value, one other ¥8 billion in greater electrical energy value and a ¥2.1 billion year-on-year rise in labor prices. Prices have been barely higher than we had anticipated on higher than anticipated yields and different elements as touched upon within the dialogue of Q3 sequential change. Depreciation elevated ¥6.7 billion year-on-year. This was talked about within the dialogue of forecast. However for gross sales associated variance, there was a detrimental impression of round ¥6 billion with quantity declines having a detrimental impression of ¥24 billion, which was offset by a constructive of ¥18 billion on the year-on-year will increase in worth. ForEx had a constructive impression of ¥13 billion on the again of a ¥10 weakening of the yen year-on-year. Slide 25, please. Slide 25 reveals the steadiness sheet and money move assertion. Money and time deposits on the steadiness sheet fell ¥76.4 billion. I’ll clarify this in additional element in speaking concerning the money move assertion. Completed merchandise and work in progress elevated. Uncooked supplies and provides rose ¥23 billion. The impression of the acquisition of the polysilicon enterprise pushed up polysilicon stock by ¥6 billion.
Because of the fast discount in manufacturing ranges, supplies consumption fell barely resulting in the rise. Provides additionally elevated on the again of a buildup of stock associated to greenfield investments. Tangible property elevated considerably on the again of upper greenfield CapEx. Curiosity bearing debt elevated roughly ¥50 billion. This breaks all the way down to new borrowings at FST of ¥20 billion and at Sumco in Japan of ¥30 billion. If we take a look at the capital account, retained earnings elevated, reflecting the impression of the roughly ¥60 billion in web income, offset by ¥30 billion in dividend funds for a web enhance of ¥28 billion. On the money move assertion to the correct, the subtotal of pretax income, extraordinary earnings and depreciation was ¥113.6 billion. The rise in stock was a detrimental ¥16.4 billion. Beneath others, a significant factor was tax funds on the again of sturdy revenue ranges within the earlier fiscal yr. Working money move was ¥75 billion. Capital expenditures have been ¥220 billion. With regard to the detrimental free money move, after dividends paid, we raised round ¥50 billion in new borrowings and tapped into money and time deposits, therefore, the decline in money available.
Slide 27, please. On Web page 27, we present our forecast for This autumn. We count on income to be down considerably in This autumn. I’ll go into extra element later. Chairman Hashimoto commented earlier on the decrease capability utilization. The main target will probably be on delivery from stock. On a full yr foundation, we challenge OP to fall ¥41.3 billion year-on-year. A significant contributor to the drop is the year-on-year drop in Q3 provided that Q3 2022 OP was round ¥30 billion in comparison with the ¥15.1 billion in Q3 this yr. For This autumn, final yr, we generated near ¥30 billion as nicely, however are projecting ¥6.5 billion for This autumn this yr. The year-on-year decline in second half OP accounts for almost all of the ¥41.3 billion year-on-year drop in OP. We generated extraordinary earnings in Q1, however after deducting earnings tax funds, we challenge web revenue to fall ¥8.8 billion year-on-year to ¥61.4 billion. Full yr depreciation is projected to be ¥71.8 billion. The OPM and EBITDA margins will decline as nicely with the drop acute in second half and notably This autumn. That mentioned, we count on to take care of our ROE over the ten% stage.
Slide 28, please. Slide 28 reveals the evaluation of change in working revenue. First, the This autumn sequential change on the left. Gross sales are largely unchanged Q-on-Q. We’ve not considerably modified our ForEx assumption. There is not a lot of a change when it comes to gross sales quantity. However in October, we carried out common upkeep in any respect three of our crystal ingot vegetation. In November, the Imari plant, which is the mainstay 300 millimeter plant, will conduct common upkeep. As well as, we will probably be decreasing capability utilization on the 200-millimeter plant. Because of this, there will probably be a major decline in capability utilization for each 300 and 200-millimeter. This may cut back work in progress and completed product stock, though, we are going to incur will increase in prices. Gross sales associated variance is predicted to drop a considerable ¥7.1 billion Q-on-Q. Successfully, we’re decreasing manufacturing considerably relative to gross sales. Wanting on the evaluation of year-on-year change for full yr OP on the correct, we count on OP to fall ¥41.3 billion. We count on value to extend ¥18.7 billion year-on-year. This isn’t considerably greater than the ¥18 billion year-on-year enhance in value for the 9 month OP, we’re not anticipating to see a major year-on-year enhance in value in This autumn. That mentioned, the anticipated breakdown is a ¥10 billion year-on-year rise enhance in supplies value, a ¥7 billion to ¥8 billion year-on-year enhance in electrical energy prices and a ¥2 billion year-on-year rise in labor prices. Depreciation must also enhance. Gross sales associated variance breaks down right into a roughly ¥22 billion constructive from greater costs year-on-year however a hefty ¥45 billion detrimental from decrease volumes. On a year-on-year foundation, we count on a constructive contribution of round ¥13 billion from the weaker yen. Web page 30, please. On your reference, you may see that the EBITDA margin will not be off that a lot as much as Q3. However in This autumn, for the particular elements cited beforehand, together with the numerous drop in capability utilization, we count on to see a significant decline. This completes my part of the presentation.
Query-and-Reply Session
A – Takayuki Komori
Thanks. We are going to now open the ground to questions. We are going to begin with Mr. Enomoto of BofA Securities.
Takashi Enomoto
Please speak about your expectations for the wafer market on a quarterly foundation. The place do you see the large backside for the market, was it Q3 or will or not it’s This autumn? Additionally, this time, you could have stepped up your manufacturing cuts, however when do you count on to be accomplished with manufacturing cuts? The rationale why I ask is as a result of it seems that DRAM and reminiscence have already bottomed out, which means that semiconductors are actually beginning to get well. Primarily based on what you could have mentioned, plainly a restoration in wafers could take extra time, which makes it difficult to challenge when wafers will backside. Any shade you may present could be useful.
Mayuki Hashimoto
It’s the identical for me as nicely. Though, I can speak about how issues would possibly end up, there is no such thing as a assure that my prediction will probably be proper. I say this as a result of this time round, it is rather troublesome to make projections. Specifically, with regard to geopolitical threat, we had no manner of anticipating that the Trump administration would take such aggressive motion on China or that the Biden administration would take it even additional with sanctions. We didn’t count on to see such actions. Moreover, these actions muddy the water considerably as they can’t be predicted throughout the framework of regular market economics. This makes it extraordinarily troublesome to make projections. What I can say at a minimal is that with regard to reminiscence, we have now no sense the market has bottomed in any manner. Clients proceed to maintain manufacturing ranges low. The truth that costs have recovered very barely is extra a consequence of the dramatic discount in manufacturing, which has led to decrease provide volumes. So I do not really feel in any respect that the market has bottomed. In my opinion, the underside will probably be subsequent yr. Circumstances for logic are related and if something, the correction in logic actually solely bought began in Q3. Given this, the September quarter was actually not the underside. I believe the underside will come subsequent yr.
On the query of the timing of a restoration, as you’ll have seen, buyer inventories are at document excessive ranges. Clearly, we wish nothing higher than to see an early restoration. However for those who take a look at the inconvenient actuality, it appears clear that the market is unlikely to get well that rapidly. As an alternative, I believe the market bottoms subsequent yr after which we see a restoration. For reminiscence, the trough is definitely fairly deep. The trough for logic will not be as deep compared. I’ve talked about this numerous occasions. But when you consider reminiscence, when shoppers have cash, they may purchase a smartphone with loads of reminiscence, however when financial circumstances are weak they commerce down. I believe that is the way in which to consider it. Due to this fact, when there’s a recession, reminiscence is the primary to be impacted. The identical cannot be mentioned of logic. Simply because you do not have cash, you may’t purchase a smartphone with out a logic chip. It would not be a smartphone with out a logic chip to start with. Given this, a downturn in logic demand is more likely to be milder in my opinion.
So to reiterate, I believe the top markets for logic are more likely to get well someday midyear subsequent yr. Nevertheless, a restoration in reminiscence is more likely to take till the top of subsequent yr when it comes to wafer demand. By way of the restoration of the top markets, logic advantages from traits resembling AI, so finish product demand ought to get well towards the top of the primary half of subsequent yr in my opinion. However from reminiscence, I believe it would take till the second half of subsequent yr for a restoration. It is because not solely our finish product stock is at very excessive ranges, the reminiscence gamers are carrying vital stock. By way of restoration, if you consider it, the world’s inhabitants is 8 billion, however China alone accounts for 1.45 billion. On the again of China being pushed right into a recession, I believe the drop in consumption in China is having a significant impression. The timing of a restoration in Chinese language consumption is critical. And if the US have been to place additional stress on China, it will additional lengthen the recession. These elements make it very troublesome to make projections. I’d be involved in realizing what you, Mr. Enomoto, take into consideration this.
Takashi Enomoto
Thanks. The rationale why I used to be asking was as a result of the forefront buyer has bottomed out. So I hoped that whereas it could be a way away, there could be some indicators of sunshine on the finish of the tunnel.
Mayuki Hashimoto
Forefront has certainly bottomed out, not reminiscence, however vanguard logic. However legacy product remains to be weak. What is especially problematic is that the entire reminiscence gamers throughout the board with no exceptions have minimize manufacturing considerably. If you happen to take a look at logic, whereas there are prospects which have made main manufacturing cuts, there are others which were capable of get by with solely a slight dip in margins regardless of reducing manufacturing. Such gamers haven’t dropped into the crimson. There are very vital variations between the person firms in logic, so it is powerful to generalize. Nevertheless, vanguard manufacturing on the firms which have managed to stay comparatively unscathed hadn’t dropped a lot to start with and appeared to be coping comparatively higher.
Takayuki Komori
Subsequent is Mr. Ikeda of Goldman Sachs.
Atsushi Ikeda
How ought to we take into consideration the availability demand steadiness associated to what you present on Web page 21? You may have mentioned that quantity, which has been falling from second half 2023, will decline considerably into 2024. Given these circumstances, do you count on it is possible for you to to proceed to lift costs? It appears to me that the most effective you may count on is that costs don’t fall given the sheer scale of buyer losses. That mentioned, you could have indicated that the costs replicate the suitable compensation for greenfield investments and that, subsequently, it’s essential see costs proceed to rise. Please speak concerning the steadiness between quantity and worth for 2024. For quantity that prospects select to push out past 2024, how do you plan to make sure that the LTAs are revered? Any shade you may present could be useful.
Mayuki Hashimoto
100% of Sumco’s 300 millimeter wafers are coated by LTAs out to 2026. Our pondering is that we’ll not make adjustments to both the full quantity of the LTAs or costs. Nevertheless, with prospects reducing manufacturing and with no warehouse house for extra wafers, it will be not possible to power the shoppers to take supply of wafers. In such instances, we have now agreed to defer supply timing with out altering the general contract quantity, though, actions could differ from customer-to-customer. We purpose to reach at an answer the place the ache is shared. So we have now not made any adjustments to costs in any respect. If we have been to decrease costs, we’d not be capable to obtain our goal return on funding. Our prospects are respecting whole contract volumes however we have now allowed them to have some flexibility when it comes to supply timing, agreeing to supply push outs the place essential. Forcing prospects to take wafers they can’t use or retailer just because it’s within the contract will not be a practical strategy to strategy enterprise. Nevertheless, decreasing costs would have implications for our return. We now have not modified pricing.
Atsushi Ikeda
With regard to pricing for 2024, I think about that renegotiations are upcoming. However even when the costs do not rise 10% in 2024, directionally, you may be elevating costs. Is that appropriate? In case you are unable to lift costs in 2024, directionally, you may be in search of the client to make up for it in 2025?
Mayuki Hashimoto
Sure, that is appropriate. There are prospects which are slated for worth hikes in 2024. We’ve not began negotiations but. However principally, we count on prospects to respect the phrases of LTAs.
Atsushi Ikeda
I maintain excessive expectations for Sumco. Thanks.
Takayuki Komori
Subsequent is Mr. Nishiyama of Citigroup Securities.
Yuta Nishiyama
In wanting on the chart on Web page 18 exhibiting stock ranges for the reminiscence makers, the conditions in March and September seem like very related. In different phrases, in each of those months, buy volumes fell, which appears to have led to a dip in buyer stock ranges. What I discover attention-grabbing is that your peer has made related feedback. In saying March quarter outcomes, they mentioned that wafer shipments would enhance within the June quarter. This time round on the September quarter outcomes briefing, your peer indicated that they anticipated to see a slight restoration in shipments within the December quarter. Is the background to the dramatic drop in wafer buy volumes in September much like what you noticed in March? If that’s the case, can we count on to see an identical development to the June quarter in December quarter shipments?
Mayuki Hashimoto
The drop in March is totally different than the drop in September in my opinion. What occurred in March was that the decline in that month was offset by a rise in shipments in April. The client was wanting on the common for these two months, and it was merely a timing distinction. So the essential underlying development from March and April was the identical. Nevertheless, the drop in September was a mirrored image of the absence of orders. There was no suggestion that prospects would make up for this by shopping for extra in November as an example. So the September drop is a mirrored image of an general pushout in supply timing and is totally different than the exercise in March and April. In different phrases, prospects are actually decreasing manufacturing.
Yuta Nishiyama
If that is the case and there will not be a rebound in buy volumes in October, does that imply you count on reminiscence buyer inventories can have peaked out?
Mayuki Hashimoto
So we do not count on inventories to maintain falling. We count on stock ranges will stay excessive for some time, however we hope that over time there will probably be a gradual decline. Nevertheless, the entire prospects have considerably minimize manufacturing from September onward and are decreasing buy volumes. So perhaps there will probably be a flattening of the rising development in inventories with stock ranges declining steadily over time from subsequent yr. I believe that’s doubtless given present capability utilization. Clients are more likely to really feel the identical manner, which is why they’re deferring deliveries.
Yuta Nishiyama
Does that imply it has peaked out?
Mayuki Hashimoto
I’m not clear on what you are referring to if you say peak out. However with the shoppers reducing manufacturing dramatically, I do not suppose you may say that issues have peaked out.
Takayuki Komori
Subsequent is Mr. Miyamoto of SMBC Nikko.
Go Miyamoto
I wish to additionally ask concerning the outlook for costs as we head into 2024. First, can we count on the rise in costs for 300 millimeter wafers coated by LTAs to rise by the identical magnitude as they rose in 2023? For the non-LTA portion, which might be solely the FST portion, is there a threat that costs could fall barely? For 200 millimeter wafers, equally, what’s the outlook for costs, notably given a tougher provide demand state of affairs? Please speak about 2024 costs in additional element.
Mayuki Hashimoto
With regard to LTAs, there are some LTAs the place the costs rise in a stepwise operate yearly and a few the place the worth is mounted for the 5 yr interval. So I do not know if the magnitude of the rise would be the identical because it was for 2023. A few of that’s as a result of it’s topic to negotiations, however there are additionally variations associated to product combine. Nevertheless, for these contracts the place costs are set to rise, after all, we will probably be asking for greater costs. By way of spot, there is no such thing as a spot enterprise on the mother or father, however there’s spot enterprise at FST. It’s true that spot costs have declined, though, the magnitude of the declines will not be as dangerous as we have now seen up to now. The rationale for that is that the spot market has just about dried up. The entire prospects are locked into the LTAs. The present market will not be one the place you may drive extra quantity by decreasing costs. If you cannot purchase, the worth level is irrelevant. That is the present state of affairs with prospects having minimize manufacturing considerably. For 200-millimeter, my sense is that, surprisingly, costs haven’t fallen that a lot. Spot costs could have fallen. However inside 200-millimeter, Sumco Japan is concentrated on excessive efficiency, so costs haven’t declined that a lot. Nevertheless, for easy commodity PW, I believe costs have fallen.
Takayuki Komori
Subsequent is Mr. Okazaki of Nomura.
Shigeki Okazaki
You may have mentioned you’ll cut back manufacturing considerably in December quarter. Please touch upon the picture of manufacturing ranges for the March 2024 quarter and past. December manufacturing will probably be down on the mix of normal upkeep and demand elements, however are you able to remark in your present view of anticipated manufacturing ranges for each 300-millimeter and 200- millimeter within the March 2024 quarter and past?
Mayuki Hashimoto
For the March quarter, I’m aiming to lift manufacturing ranges barely Q-on-Q. The December quarter manufacturing is impacted by common upkeep, which we’re not offsetting in any manner. As well as, we’re reducing manufacturing considerably to decrease stock as a result of I do not need to carry an excessive amount of stock. The plan for the March quarter is to align manufacturing quantity with gross sales demand so manufacturing ranges ought to rise barely.
Shigeki Okazaki
So principally, from a manufacturing standpoint, the December quarter would be the backside, appropriate? And topic to demand, manufacturing within the March quarter will enhance?
Mayuki Hashimoto
Sure.
Takayuki Komori
Subsequent is Mr. Nakahara of Tokai Tokyo Securities.
Shuuichi Nakahara
Are you able to touch upon how you’re enthusiastic about worth and quantity because it pertains to the waterfall charts for change in OP? Given progress in scaling, there ought to be a better quantity of excessive worth level wafers. I think that the manufacturing cuts are being focused at lower cost level wafers. Am I appropriate to imagine that the impression of the implied enchancment in combine is included within the worth impression?
Mayuki Hashimoto
Mainly, the reply is, sure. Forefront product instructions greater costs and it’s also true that vanguard quantity is rising. It’s also true that legacy volumes are falling. That mentioned, whole volumes are down, which makes it powerful to say. Nevertheless, it’s honest to say that blend ought to be higher.
Shuuichi Nakahara
Mainly, is it honest to say that greater priced wafers are worthwhile?
Mayuki Hashimoto
Sure, after all.
Takayuki Komori
Subsequent is Mr. Yoshida of CLSA Securities.
Yu Yoshida
With regard to CapEx and depreciation, given the difficult working atmosphere, how are you enthusiastic about subsequent yr? If doable, are you able to speak about how you’re enthusiastic about each 2024 and 2025? Final time, you indicated that depreciation could be flattish out to 2025 after which would drop off considerably in 2026. Has there been any change in your long run view of CapEx and depreciation?
Mayuki Hashimoto
On depreciation, I’ll have CFO Takii remark later. However we’re slowing down CapEx, notably in Taiwan the place PW is the principle focus. We now have considerably moderated the tempo of CapEx in Taiwan. On the home facet, we’re monitoring the state of affairs and monitoring the tempo the place doable. Nevertheless, we have now already positioned orders and purchased all of the tools. Additionally, it is not doable to defer capability growth funding for a number of years, so we are going to do what we have to do. Luckily, it is a progress trade, so the tools we have now bought won’t go to waste. So we’re monitoring the state of affairs and adjusting ourselves accordingly. That mentioned, as I discussed earlier, with geopolitical threat, politics does make it troublesome to make projections. It’s actually true that we’re severely engaged in discussing how issues could play out. CFO Takii, are you able to touch upon depreciation?
Michiharu Takii
We present 2024 depreciation within the desk on slide 21. For 300 millimeter, we count on a slight decline in comparison with the common for 2023. Given there is not a powerful must ramp up amenities in a rush, depreciation could also be pushed out barely from what we have now talked about beforehand.
Yu Yoshida
So among the depreciation forecast for 2024 may probably be deferred? What’s your view on depreciation for 2025 and 2026?
Michiharu Takii
Possible that there will probably be some additional pushouts when it comes to timing for depreciation.
Takayuki Komori
Subsequent is Mr. Yamada of Mizuho Securities.
Mikiya Yamada
This pertains to the earlier query. However when it comes to how to consider value for This autumn, there will probably be a detrimental impression on income from the change in manufacturing ranges, a detrimental impression from common upkeep, a detrimental impression from the earnings linked bonuses since this could solely be mounted in This autumn, in addition to depreciation? Given that you simply apply the declining steadiness methodology, deferring the timing of the ramp up of kit, I imagine, will result in Q-on-Q declines in a minimum of Q1. Of the elements of prices I’ve listed, are there gadgets the place you count on to see Q-on-Q will increase in Q1 2024?
Michiharu Takii
This yr, supplies prices and electrical energy unit costs rose considerably. This was the most important motive for greater prices in 2023, though, we did increase base wage ranges as nicely. I’d count on that these two main gadgets, supplies value and electrical energy unit value, ought to stabilize subsequent yr. It is because a key element of the elevated value this yr was the weaker yen, which ought to stabilize subsequent yr. Labor prices will probably be impacted by annual wage will increase. However other than depreciation, there actually aren’t value gadgets the place we count on sturdy year-on-year will increase. To your level about depreciation, it’s true that depreciation ranges will reset as we begin the brand new fiscal yr and ought to be down versus This autumn. Nevertheless, as new amenities come on-line, depreciation will enhance over time. So depreciation is more likely to be greater than this yr.
Mikiya Yamada
On that time, can I affirm? Q1 depreciation will certainly enhance year-on-year and full yr depreciation for 2024 will probably be greater than 2023. However relative to the This autumn stage, Q1 2024 depreciation is more likely to fall sequentially, however then depreciation ought to rise sequentially over the course of the yr. Is that appropriate?
Michiharu Takii
Sure, that is appropriate.
Mikiya Yamada
In order that’s the right manner to consider it, proper?
Michiharu Takii
Sure, that is honest.
Mikiya Yamada
And on supplies and electrical energy prices, provided that they’re already excessive, it would not really feel like there will probably be a major Q-on-Q enhance into Q1. Is that honest?
Michiharu Takii
Sure, that is honest.
Mikiya Yamada
And labor prices will enhance to replicate the rise in base salaries. However given that you’re paying earnings linked bonuses in This autumn, which is able to push up labor prices, In Q1, the absence of this bonus ought to imply that there will not be a giant Q-on-Q enhance in labor prices for Q1, proper?
Michiharu Takii
We really accrue for the bonus, so this is able to not be a driver for a selected enhance in labor prices for simply This autumn.
Mikiya Yamada
So labor prices will enhance Q-on-Q?
Michiharu Takii
Sure.
Takayuki Komori
Thanks everybody for becoming a member of the Q3 2023 outcomes briefing. We’re grateful to your participation right this moment. We are going to finish the assembly right here.
Mayuki Hashimoto
Thanks.
Michiharu Takii
Thanks.
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