Tokyo Electron Ltd

TSE:8035

Earnings Call Transcript 2020-Q1

[Koichi Yatsuda, executive]

So it's time for us to start Tokyo Electron financial announcement for the first quarter of the fiscal year ending March 2020. Thank you very much for joining us despite a very tight schedule. I am Yatsuda of IR office acting as a moderator for today's meeting.

So first of all, I'd like to introduce the attendees on our side. Mr. Tetsuo Tsuneishi, Representative Director, Chairman of the Board; next, Mr. Toshiki Kawai, Representative Director, President and CEO; and Mr. Yoshikazu Nunokawa, Corporate Director, Executive Vice President and General Manager of Finance Division.

Okay. First of all, we'd like to ask Mr. Nunokawa, Corporate Director, Executive Vice President, General Manager of Finance Division, to present the consolidated financial summary. Mr. Nunokawa, please?

[Yoshikazu Nunokawa, executive]

Good afternoon, ladies and gentlemen. Thank you very much for joining us despite a very hot weather. I am Nunokawa. I'd like to make a presentation on consolidated financial summary for the first quarter of this fiscal year.

First of all, here, you can see the highlights for the first quarter of fiscal year ending March 2020. The financial results of the first quarter showed good progress, along with the plan for the first half of this year. We have repurchased 2.9 million shares since May 2019, as of June 30, 2019. The total share acquisition cost amounted to JPY 43.2 billion, achieving 29% of the planned maximum of JPY 150 billion.

Next. Here you can see the financial summary. The sales -- net sales in the first quarter, as you can see over here, JPY 216.4 billion. Gross profit was JPY 89.8 billion. The net sales decreased. But as you can see, the gross profit margin is 41.5%, remaining at the same level as the previous quarters. The operating income was JPY 42.5 billion. Net income attributable to owners of parent, JPY 31.8 billion.

As I said in the previous slide, we are doing well as planned, and we will expect the increase of the sales and income toward the second half of this year.

Now you can see financial performance represented in a graphical manner. As you can see here, sales was declined from the previous quarter, JPY 216.4 billion. However, the green line on the top, gross profit margin, when you look at this, remains at the same level at around 41.5% over the past few quarters.

Next slide, please. Now you can see segment information. You can see the sales and segment income as well. On the left hand, you can see SPE. For this first quarter, SPE sales was JPY 198.1 billion, declined from the previous quarter.

In the middle, you can see FPD segment information. Sales was declined from the previous quarter, JPY 18.2 billion. However, when you look at the segment profit margin, which is 19.2%, very high level. So this is attributed to increase of inventory of the products which were shipped but not yet recognized as sales. That is the major reason of high level of the segment profit margin.

Next slide, please. Now you can see SPE division sales by region. On the right-hand side, you can see this quarter's results. As you can see over here, in particular, just in the middle of this bar graph, orange-colored portion, Korean portion, the sales drop in Korea was rather conspicuous. This is mainly because of the sales reduction for -- of SPE for memory customers.

Next slide, please. Now you can see the new equipment sales by application. Once again, the top 2 boxes, the blue color and purple color, representing memories. You can see drastic drop of those 2 portions for memory. The sales decreased drastically.

Next slide, please. This shows sales of the Field Solutions. When you look at odd-number quarter, the first quarter and second quarter, as general trend, the sales in the odd-number quarters tend to be lower than the sales of the even-number quarters, Q4 and Q2. But this first quarter, sales is lower than even compared with the third quarter of the last previous year. However, the sales are fluctuating steadily.

There are several reasons. Actually, modification sales was reduced in Japan, Europe and Korea slightly. That is some of the factors. However, parts sales are very solid.

Next slide, please. Now you can see balance sheet. On the left, you can see assets. As you can see over here, the cash and cash equivalent dropped from the previous quarter drastically because of the payment of the dividends and share repurchase.

Just in the middle, the light-blue portion represents inventories. The inventory increased from the previous quarter in order to prepare for the sales increase in the second quarter. Equipment shipment is making good progress. Accordingly, equipment on the start-up is now increasing. That's the reason why you can see some increase of the inventories here.

On the right, you can see the liabilities and net assets. You can see drop in net assets because of the repurchase of our shares.

Next slide, please. This shows inventory turnover and accounts receivable turnover. On the right-hand side, JPY 216.4 billion. The upper line, the green line represents inventory turnover, 116 days at a high level. This is because of the reduction of sales. Also, as I said earlier, we see the increase of the inventories. So these are the 2 major reasons for that.

On the other hand, you can see the lower line graph. Accounts receivable turnover has decreased. We are collecting account receivable steadily, and we can see some reduction in sales. So those 2 are the major reasons for the reduction of the account receivable turnover.

Next slide shows cash flow. This shows cash flow. On the right-hand side, you can see downward bar, orange color bar, which is rather conspicuous, representing cash flow from financing activities, minus JPY 99.9 billion; the payment of dividends, JPY 56.6 billion; and share repurchase of JPY 43.2 billion. So those 2 are the components. So big downward bars over here.

On the other hand, cash flow from operating activities was JPY 59.4 billion. And cash flow from investing activities, the acquisition of fixed asset declined in the first quarter relatively because of free cash flow was JPY 50.9 billion.

Thank you very much. That's all about the financial summary. Thank you very much for your kind attention.

[Koichi Yatsuda, executive]

Next, I'd like to ask Mr. Kawai, our CEO, to make a presentation on business environment and financial estimates. Mr. Kawai, please.

[Toshiki Kawai, executive]

Once again, good afternoon. Thank you very much for joining us despite a very busy schedule. I am going to make a presentation on business environment and financial estimates. So business environment, there are no major differences in our outlook, both for SPE and FPD from the previous meeting in April 2019.

For the SPE, the capital investment in CY 2019 is expected to decline by 15% to 20% on a year-on-year basis. Also, the CapEx for logic and foundry is strong, very much. The CapEx for memory is expected to go through a temporary adjustment due to the softer demand, but now we can see the very good inventory adjustments. Along with the inventory adjustment, memory investment is expected to recover in calendar year 2020.

FPD production equipment. Although full year capital investment is expected to drop by 30% on a year-on-year basis, we expect a recovery in the second half of this year.

So now you can see the WFE market environment and business opportunities by application. 3 months ago, the WFE market for logic and foundry was considered to grow by about 25% on a year-on-year basis. But this time, we have made 10-point upward revision, and it is expected to grow by 35% on a year-on-year basis.

For memories, for nonvolatile memory and DRAM, both of them, we have made 10-point downward correction from our outlook in April. The WFE market for nonvolatile memory is expected to decline by about 60% on a year-on-year basis. And WFE market for DRAM is expected to decline by about 40% on a year-on-year basis.

For this year, memory and logic and foundry composition was above 50% and 50% at the beginning, that's what we showed in the beginning. However, the logic and foundry increased by 10 points, and the other half, memory declined by 10 points. So there is no major change when you look at the full year.

The capital investment for memory. We think the current, we are now at the bottom. So we need to see one more quarter, and we will see a new investment plan maybe after one quarter. That's how we analyze the market situation.

Now we can see the business highlights in the first quarter for fiscal year 2020. The SPE business strategies are implemented as planned. We are winning PORs in focus areas.

So etching, as you can see, it's both IoT and automotive areas, for mid-term, long-term plan, we think IoT and automotive is expected to grow just like storage and demand is increasing in those 2 areas. In that area, we got a new POR from a customer. That's what happened in etching.

For film deposition and cleaning, we want PORs in critical processes for memory. For the film deposition for 3D NAND, we've got one POR for DRAM. We've got 2 PORs in total, 3 PORs are got in the first quarter in ALD business in Korea. For cleaning as well, critical premium process, we've got the opportunities and we are now making business there.

In other area than 3 focus area, we won a new order for Cellcia in the nonvolatile memory market. Cellcia is high value-added wafer prober with test amounted. The Field Solution business continues to go well, actually was selling 4,000 units per year. And our installed base is growing to 69,000 units. Based on this background, our Field Solution business continues to go well. The TEL announced a partnership with BRIDG, not-for-profit, public-private alliance in Florida to develop SPEs and process technologies for automotive and industrial applications, which are expected to grow drastically in the future. We made this announcement in the SEMICON West. This BRIDG is mainly working on 200-millimeter wafer technologies, and this area is expected to grow furthermore through the partnership with BRIDG. We are going to promote the activities to meet the demands for automotive and industrial applications so that we can set our positioning and we are promoting market penetration in those areas.

For FPD, we expect to recognize sales for PICP for G10.5 in inkjet printing system for OLED panels within this fiscal year.

Fiscal year 2020 financial estimates. So though the WFE market is in the phase of adjustment in this fiscal year, it continues investment for growth to prepare for a recovery in the next fiscal year. And there have been no changes for the financial estimates from the previous meeting. This shows new equipment sales and its breakdown by application in SPE division, the actual for the first quarter and estimates for the second quarter and onward. The actual sales in the first quarter was in line with our plan, as Mr. Nunokawa said earlier. And the majority of new equipment planned to sell in the second quarter have been shipped. There are no changes in our sales forecast, both for the first half and second half of this year. But as I said earlier, the breakdown by application is changed from announcement of 3 months ago.

For the second half of this year, the combined sales of both foundry and logic and others are expected to account for about 60%. The sales for DRAM and nonvolatile memory will account for about 20% each.

I'm very sorry, but -- so customers are now recognized to some extent. So when we used to use orange and green color very clearly, that may expose the customers' investment plan, I'm afraid to say. So we have just used the pink color coding rather than the orange and green color coding this time. Really appreciate you understand this change.

Next, you can see R&D expenses and CapEx plan. There are no changes from the previous meeting. R&D expenses is JPY 120.0 billion. CapEx, JPY 56.0 billion. Depreciation is JPY 33.0 billion. We plan to continue upfront investment in an effort to achieve our mid-term management plan and to promote further growth.

Finally, I would like to talk about dividend focus for this year. Dividend per share is JPY 502, remaining unchanged from previous financial announcement if the ongoing share repurchase is not taken into account. We plan to announce the correction of dividend, along with the ongoing share repurchase in the financial announcement of the second quarter of this fiscal year.

Thank you very much for your kind attention.

[Koichi Yatsuda, executive]

Now I'd like to entertain questions from the floor up to until 6:30.

[Koichi Yatsuda, executive]

[Operator Instructions] And today's financial announcement will be uploaded to our website. So it will be highly appreciated if you could speak slowly and clearly. So if you have any questions, could you raise your hand, please?

Yes, the gentlemen in the front row, please?

[Tetsuya Wadaki, analyst]

I'm Wadaki from Nomura Securities. I have a question about the market trend. Actually, the fresh investment, which was expected in July to September has been gone, which is really disappointing. And it's not because of you and -- but we are a little bit disappointed. There are some good news, logic/foundry, China. But I think those good news cannot offset the negative story in terms of the size. So you said you have some forecast. Do you have any good news in the first quarter, if you may think it's too early to say anything? If you could share your idea with us, really appreciate that.

[Toshiki Kawai, executive]

So there are various things. Actually, there are quite a few good news. There are so many potentials in the market. But in one word, for logic and foundry is rather strong, and we can expect a lot in the future. And now you can see 5G-relevant applications coming out and investment plan is now getting more concrete. For memories, I have been talking with the top management of different customers in the SEMICON West and also they speak through various meeting with customers. But there are something in common among the comments made by top management of the customers, which is we need to wait for another quarter. There are various factors right now, but we need to wait for another quarter, then we will see some concrete investment plan. So I think we can expect what happens after the next quarter.

[Tetsuya Wadaki, analyst]

I have one follow-up question for memory. China, they are making investment a lot. But I don't think that size is rather limited, only 40,000 or 50,000, the size of the investment. Do you include those China investment in your expectation?

[Toshiki Kawai, executive]

I think we have included those China investment for next fiscal year plan, not this year.

[Koichi Yatsuda, executive]

Thank you very much for your question. Next question, please? Yes, the gentlemen just in the middle, please.

[Mikio Hirakawa, analyst]

I am Hirakawa from Merrill Lynch Japan Securities. I have one question about Field Solution. You said Field Solution business is going well, particular parts sales was very good. That's what you said earlier in your presentation for memory. Utilization is now going down, but you said parts business is going well. I want to understand the reason why the parts business goes well. That's my first question.

[Toshiki Kawai, executive]

There is no particular specific reason for that. But we should say, parts business doesn't drop too much. Maybe that's the correct way to describe the situation. When you look at the figures, as presented earlier, when you look at the sales compared with previous quarter, you can see slight decrease. This is the rather general trend. The odd quarter, first quarter, third quarter, you can see slight decrease from the previous quarter, second or fourth quarter. But when you compare this quarter with the third quarter of fiscal -- last fiscal year, there is slight decrease, which is rather unique for this fiscal year. That's what I have explained in my presentation when you look at the details. Let me just repeat the same thing once again. The sales of modification slightly dropped. That was the major reason. On the other hand, the parts sales didn't decrease drastically. So that's what I said in my presentation.

[Mikio Hirakawa, analyst]

So if that is the case, the second quarter, the parts business or Field Solutions sales as a whole, what sort of expectation do you have? When I look at the market trend, you compare the performance with the third quarter fiscal year. But Field Solution of the first quarter this year has increased by 10% from the first quarter of last fiscal year. So do you think you can see a good trend in the Field Solution the second quarter as well?

[Toshiki Kawai, executive]

I should answer the Field Solution business is progressing as planned. As I said earlier, we ship about 4,000 units every year. So you can see growing installed base year by year, and actually, the manufacturing line of the customers in operations. So you can see the steady increase of the demand for the Field Solution business.

[Koichi Yatsuda, executive]

Next question, please. Yes, the gentlemen in the second row, please.

[Takeo Miyamoto, analyst]

Thank you very much for your presentation. I'm Miyamoto from Mitsubishi UFJ Morgan Stanley Securities. I have a question on investment for memory customers. You said we should wait for another quarter. What will happen after one quarter? Is it getting clear that the investment is decreasing or investment is getting recovered? And the memory vendors said they are going to reduce CapEx drastically in 2020. Actually, Tier 2 memory vendors made such kind of announcement. So their comments are a bit different from what you said. You said after one quarter, you can see something clear. What will become clear, the investment will be decreasing or investment will recover? There are some difference between your comment and the comment made by the Tier 2 memory vendors. Could you just explain that?

[Toshiki Kawai, executive]

I just talked about our expectations. When we wait for another 3 months, then the investment plan become more concrete. That's what I wanted to say. For year 2020, the investment will recover. That means compared with 2019 and 2020, the CapEx for memory is increasing. Although the memory vendors, some memory vendors said they want to reduce the CapEx, but I think the memory investment will increase. We think we are in the bottom in the market. So in the future, we will see the increase.

[Takeo Miyamoto, analyst]

Do you think increasing orders or shipments? Are you talking about next year's expectation? So when you say you can see some increase, increase in shipment or orders?

[Toshiki Kawai, executive]

Both of them. We think we are going to see some increase both in shipment and order. The next -- so when you wait for one quarter, we will see more complete investment plan. Inventory has been decreasing considerably. And after one quarter, you will see more clear trend in inventory. And based on that trend of the inventory reduction, you will see more complete or concrete investment plan.

[Takeo Miyamoto, analyst]

One more follow-up question. Now you have pink color to combine logic and foundry, so there is no demarcation between the 2. But year 2020, what is the direction for the future, foundry and logic? What sort of expectation do you have for logic and foundry? Do you think increasing trend? Or do you see some plateau situation? Could you give us some comments, one for logic and one for foundry, please?

[Toshiki Kawai, executive]

Our view on the market, we think both of them, logic and foundry, will be increasing. What I meant, both will increase. For DRAM, gradually toward the second half of next year -- actually, the investment starts from next year, and we could see the enhanced investment in the second half of next year for DRAM. NAND, the very similar trend to DRAM is expected. For logic and foundry, very similarly very solid trend is expected. But again, in the second half of next year, you can see the considerable increase in investment.

[Takeo Miyamoto, analyst]

So logic and foundry, you can see rather high level. But next year, you can see further increase in investment, both for logic and foundry? Is that what you said?

[Toshiki Kawai, executive]

So for this issue, it's a bit too early for us to say something concrete. So when I look at the fluctuation of the investment plan, there should be no major difference.

[Hisashi Moriyama, analyst]

I am Moriyama from JP Morgan Securities Japan. So memory supply-demand situation is improving now. That's what you said in your presentation. So I want to understand the reasons why you think memory supply-demand situation is improving.

[Toshiki Kawai, executive]

There are several factors, I think. For example, over the time, the inventory will be reducing. That's one of the factors. In addition, on the supply side, if you look at the supply side as well, where now you can see the Japan/Korea trade issues about the export of the semiconductor materials. Also power outage in Yokkaichi factory of Toshiba Memory.

[Hisashi Moriyama, analyst]

So could you just elaborate the reason why you see some improvement in the memory supply-demand situation?

[Toshiki Kawai, executive]

So the -- in addition to the inventory adjustments, there are drivers, including data center and smartphone. In addition, I should say, for technologies, 5G, AI-related technologies are also part of the factors -- positive factors in the technical area. And data center and smartphones will be the major drivers. On the supply side, as I said earlier, the inventory will be reducing over the time. That's the only reason for that on the supply side.

So could you elaborate your question why there are more, please?

[Hisashi Moriyama, analyst]

So in Toshiba, there was power outage, and flash memory supply might be reducing because of that power outage. And also hydrogen fluoride, how the customers, from your viewpoint, how do your customers address the potential shortage of supply of hydrogen fluoride? Do you think that impact the future memory supply and demand? How much impact do those factors have on the market in 3 months from now?

[Toshiki Kawai, executive]

There are various factors. You talked of several factors. Regardless of those factors, my comment remained unchanged.

[Hideyuki Maekawa, analyst]

Maekawa from Credit Suisse Securities Japan. I have a question on the financial estimates. There are no changes on your financial estimates, but you have changed the sales mix by application. And I wonder what sort of impact does it have for the gross profit margin.

The sales for NAND was reduced by JPY 30 billion, and the sales for DRAM was also corrected downward by JPY 20 billion. And sales to logic was increased by JPY 50 billion. So for NAND, I think etching system, a lot of -- etching system is installed for the NAND. That means NAND business feature high-profit margin, but now you have increased a lot for the foundry. And are there any factors to offset the margin?

[Toshiki Kawai, executive]

About your question, so by application, I should say. So change in sales mix do not have any impact on the gross profit margin. I think that is your question. There is no major impact on gross profit margin.

[Hideyuki Maekawa, analyst]

So for logic and foundry, there is no big difference in the product mix or for foundry, now you have the high share, including etching system or EUV because of the truck installed and truck profit margin is rather high, there should be no problem. Is that what you mean?

[Toshiki Kawai, executive]

No. By application, there is no major difference. So even if there are any changes in application, that doesn't impact our gross profit margin. What is unique to our company is exposure is -- remain unchanged regardless of application. Even if some application increases or some application decreases, that doesn't impact our group profit margin.

[Hideyuki Maekawa, analyst]

So market share, for example, the etching -- etch investment is reduced, but your share target doesn't change. Is that what you mean? But etch itself.

[Toshiki Kawai, executive]

For logic, our share of etch is rather high and memory investment is rather high. But when you just look at the share, the -- our share in etching and logic is higher.

[Hideyuki Maekawa, analyst]

So when you look at the sales plan by product, even if there are some changes in sales mix by device, there is no change in sales mix by product. Is that what you mean?

[Toshiki Kawai, executive]

Yes. That's correct.

[Unknown Analyst]

I am [ Aritomi ] from Point72. During your presentation, you talked about inventories. In the first half of this year, do you -- I think this is the positive factors toward the first half of this year. My question is about the customer advances in the balance sheet. About 35% increased of customer advances are shown in the balance sheet, how can we understand this?

So now you can see the orders increased drastically now? Or customer mixes has been drastically changed? Or just increasing customer advances towards second half of this year, just like inventories. Do you think this increase in customer advances could be translated as a positive factor for the second half of this year?

[Toshiki Kawai, executive]

Which slide are you talking about?

[Unknown Analyst]

The balance sheet. I have a question on customer advances in the balance sheet. 35% increase in customer advances in the balance sheet.

[Toshiki Kawai, executive]

So inventories -- so inventory increased from the previous quarter.

[Unknown Analyst]

No. I don't ask about the inventory. I have a question on the liabilities. Customer advances, JPY 77.3 billion is increased to JPY 104.7 billion.

[Toshiki Kawai, executive]

So it's not about PowerPoint or slide, it's in the presentation. Okay. I understand your question. As for our business -- so customer advances, as you said, so it depends on timing. In some cases, we receive money a bit earlier than usual. And now we can see increase of customer advances because we've got money payment a bit earlier than usual. So in our business practices, our company's sales is recognized when -- after the completion of the start-up and testing. But in some cases, we receive money from the customer from that criteria. In such a case, we just handle that money as customer advances. In this particular quarter, we can see some increase in customer advances. That is the major factor. So when we ship or deliver our product to overseas countries by boat, the payment term or conditions are very good in the case of the overseas customers. In some cases -- so we get money during delivery or during start-up. That sort of thing sometimes happen. Ultimately, 10% of the total payment is received during the completion of the start-up and testing, but 90% is handled as the customer advances. For this particular quarter, we received customer advances that are a lot compared with the other quarters. Thank you very much for your question.

[Satoru Ogawa, analyst]

Thank you very much for your presentation. I am Ogawa from Goldman Sachs Japan. On Page 17, you talked about PORs, and I want to understand more details about those PORs for etching from deposition and cleaning. You've got the PORs for each of those 3. I want to understand the POR and the timing that those sales are recognized. Could you make some comment on that issue, please?

[Toshiki Kawai, executive]

Next fiscal year, memory investment is expected. That's what I said. For 3D NAND slit processes, for example, and DRAM batch processes. For those areas, actually, ALD are used. ALD is used for both of them, the slit of 3D NAND and DRAM batch process. So the PORs is linked to the investment plan, and we have no idea yet. But the critical processes, the 3 PORs of ALD. So this is the high value-added area. So we expect a lot in this area.

[Satoru Ogawa, analyst]

For example, let's assume the reference starts up of 10,000, based on that assumption, could you make some comment? Or for etching system, when you win one POR, the sales amount is rather big. But for film deposition, you won multiple PORs. Maybe you can give us some relative amount of sales compared with etching system, for example?

[Toshiki Kawai, executive]

I'm sorry, I cannot make any comment as of today.

[Hiroto Segawa, analyst]

I am Segawa from Morgan Stanley Securities. I have a question on FPD forecast. Could you give us some explanation, please?

The final demand is not so strong, but your focus for the future is not so bad. And you are expecting some recovery from the second half of this year. Could you give us the reasons why you have such kind of positive forecast for the future?

[Toshiki Kawai, executive]

So in the second half of this year, there are several drivers, including G10.5, mobile, small- and medium-sized panels, OLED investment. This kind of investment will be improving or recovering in the second half of this year.

[Hiroto Segawa, analyst]

Over the past 3 months, your focus hasn't been changed. Is that correct?

[Toshiki Kawai, executive]

That's correct.

[Kenji Yasui, analyst]

I am Yasui from UBS Securities Japan. I have a question on the upward revision of logic investment. I know the Taiwanese big customer increased their CapEx. But structurally, do you expect a further increase of logic investment? What sort of factors do you take account when you upward revise your logic investment forecast, for example, in Korea? So Korean customer won orders in the leading-edge technology. That's what I heard. And 5G, the design is increasingly complex. AI chip will use combination neutral network. So design is getting more and more complex. The manufacturing process will becoming more complex. So next year I wonder logic investment really increases, so 2 to 3 months, are there any changes?

So the demand is rather weak. And do you think logic investment demands will be increasing in the future?

[Toshiki Kawai, executive]

You talked about -- you mentioned some keywords. So those -- the demand of those items are now increasing. Specifically 5G-related demand is now emerging. Mobile devices, AI devices, the demands for mobile devices and AI devices are also increasing, which contribute to the investment plan.

[Kenji Yasui, analyst]

Is it correct when I understand there is no change in your outlook of the market?

[Toshiki Kawai, executive]

That's correct. Our outlook of the market hasn't changed.

[Kenji Yasui, analyst]

I have one follow-up question on M&A, merger and acquisition. The Applied announced an acquisition, and I heard about some reorganization in Hitachi Group. And how do you view M&A in terms of size? And there are also the U.S.-China trade frictions. How do you view the M&A policy?

[Toshiki Kawai, executive]

When it comes to M&A, that's the question I was asked in many places. But about the M&A, we do not deny the possibility of merger and acquisition, if M&A has positive impacts on our stakeholders and shareholders, if it has positive impacts on the corporate value improvement and if we can provide some benefits to our tech -- customers in technology terms and if we can get the good ROI, then we don't have any -- we do not deny the possibility of M&A in those cases. However, there are some other options. We need to make the decision whether M&A is the best solution. In some cases, JDP, Joint Development Project, the program could be better option to make the smoother or speedy development. We need to make the good decision for each case. In the future, to some extent, when you look at the top 4, 2 vendors, I think, top 4 or top 5, 2 vendors have the high market share. So those top 2 vendors may think about the possibility of the M&A little by little. When it comes to our viewpoint on M&A, we will think about M&A based on their positive impacts.

[Damian Thong, analyst]

I am Damian Thong from Macquarie Capital Securities. I have one question, the gross profit margin. Your gross profit margin is rather stable around 40%. When you look at the next fiscal year, you expect the increase in your sales. And the gross profit margin will be increasing or do you think gross profit margin remain unchanged? So you sell -- you got the POR for ALD and initial development costs might be generated for this fiscal year. Then next year, you can see some improvement in the profitability. Do you have any comment on that?

[Toshiki Kawai, executive]

We made announcement of mid-term management plan, and we announced we are going to increase gross profit margin. For mid-term and long term, we want to increase our gross profit margin, specifically, the -- we are going to provide the high value-added products. And top line will be increasing in the future when market recovers. And gradually, the gross profit margin will be increasing. And the third area is Field Solution. We are going to achieve the sales of JPY 380 billion in 5 years to come. And if the Field Solution proportion is increasing -- actually, Field Solution profitability is higher than the corporate average. If Field Solution proportion increases, we can increase our gross profit margin.

The fourth area is FPD. We already achieved FPD operating margin of 20%. Therefore, we have revised our mid-term management plan to increase the FPD operating margin to 30%, and there should be no difference between SPE and FPD in terms of margin.

[Shimamoto Takashi, analyst]

I am Shimamoto from Okasan Securities. I have a question on memory market. You said memory market is expected to recover in year 2020. In the past, you said that WFE market will recover next year to cancel the negative growth of this year. At present, how strong the market will recover in year 2020? Do you have any idea on that?

[Toshiki Kawai, executive]

There are various factors. So at this moment, it is too early for us to say something decisive on the factors. The WFE market might recover to the level of the previous fiscal year. But about the degree of recovery, we want to wait and see what will happen in the market.

[Shimamoto Takashi, analyst]

I have one follow-up question. On Page 20, I have a question on logic and foundry. So fiscal year TEL's sales is expected to increase by 50% to 60% on a year-on-year basis. But on calendar year, WFE market in application, it's 35% for logic and foundry. So your sales is outperforming the market. Is that just only because of the difference between fiscal year and calendar year? Or are there any unique factors to tell? Could you make some comment on that issue, please?

[Toshiki Kawai, executive]

Our sales outperforms the market growth. So the area that we are playing -- actually, the area that we are playing is outperforming WFE market as a whole. And when we have the advanced generations, critical processes will be increasing in proportion. That's the reason why we can outperform market growth.

[Masahiko Ishino, analyst]

I'm Ishino from Tokai Tokyo Research Center. Mr. Kawai, you said we are in the bottom right now in various meetings. But when you said bottom, what is the major inflection point which make you think we are just in the middle of the bottom? Are there any trend upward if you can see that, not for the shipment, maybe in terms of orders by application, which application will start recovering fast?

The logic, including logic and foundry? So as far as TEL is concerned, your company is concerned, you are selling various good process tools. But when you look at different applications, which application or which equipment do you expect the fast recovery area, for example, NAND or DRAM in the past? But to bottom out in terms of orders, which application start to bottom out first?

[Toshiki Kawai, executive]

So 50:50 is the ratio of the memory and logic in this fiscal year. That proportion will be changed to 40:60. That's what I said in my presentation. First of all, logic and foundry, the demands is rather solid and strong in logic and foundry.

Next year, the investment in memory will be increasing. But now -- in the past, we said NAND comes first, then DRAM followed. That's what we said in the past. But recently, our market situation is changing. Maybe the order between DRAM and NAND, there should be no big difference in seconds between DRAM and NAND. So both DRAM and NAND will start recovering at the same time.

[Masahiko Ishino, analyst]

So logic/foundry comes first, followed by DRAM and NAND. And there is no time lag between DRAM and NAND recovery. Is that correct?

[Toshiki Kawai, executive]

Yes. That's right.

[Masahiko Ishino, analyst]

I have one follow-up question. Field Solution, so for Field Solution, when it comes to the new equipment sales that is big up and down fluctuation. However, the Field Solution business remains at the high level, which supports the overall corporate business performance. When you look at the customer needs, so Field Solution, you said the sales targets of the Field Solution is JPY 380 billion. But in which area you can see increasing needs from the customer?

So you said you are selling 4,000 units per year, but in which area do you see the increase in needs in Field Solution from the customer? And where can you improve the value-added to support your business performance, although the market trend is rather sluggish?

[Toshiki Kawai, executive]

In terms of volume, now you can see the growing installed base, and you can see stable demand in the Field Solutions market. So the parts sales increases in line with the growing installed base. I think you understand that area and the future high value-added area. Our strengths are in the area of reliability of our products, product competitive edge. And also we're #1 serviceability capability. So these are the strength of our company.

Now technologies are getting more and more critical, and we need to achieve tool-to-tool matching or chamber-to-chamber matching. That will have a very big importance. So we need to improve uptime of equipment, and yield enhancement is another area. And uptime enhancement and yield enhancement are very important, more important than the price of the tool itself to support the customer to improve their profitability. So that's the area that we can focus on in terms of solution service. And in the future, we'll see the AI, artificial intelligence, and we can provide remote Field Solution services. So this is how we can enhance the value-added in the Field Solution services.

So this is kind of advanced field support. July 1, last year, we reorganized our organization to establish Corporate Innovation division. And in this Corporate Innovation division, we formed Digital Transformation team. And this is where we further increase the value-added by adding new service models.

[Masahiko Ishino, analyst]

So now 7-nanometer, 7-plus 6-nanometer or 5-nanometer, so there are some critical changes. That sort of critical changes play as the tailwind for the Field Solution business. Is that correct?

[Toshiki Kawai, executive]

Yes. That's correct.

[Yukihiro Aiba, analyst]

I am Aiba from Nomura Asset Management. The first question that I have, when I look at this financial announcement, it seems like the TEL try that you're best to squeeze your gross profit margin of 41.5% rather high of the gross profit margin. How do you view or evaluate this gross profit margin? If you could further reduce SG&A, that could be better, but now you maintain the 41.5% gross profit margin. What is the reasons why to maintain this high level of profit margin, gross profit margin?

[Toshiki Kawai, executive]

Now the sales -- net sales was declined, but the gross profit margin, as I said earlier, remains unchanged from the fourth quarter of last fiscal year. So we tried our best. And one of the reasons why is, on one hand, there is the increase of inventories to prepare for the sales increase in the second half -- second quarter of this year. And manufacturing cost and expenses are now turned into the inventories. Honestly speaking, that happens. So we do not necessarily squeeze out the gross profit margin. So it's a bit different from your understanding. Really appreciate if you understand in this way.

[Yukihiro Aiba, analyst]

So SG&A, I hope you could further reduce SG&A as well? That's my second question.

[Toshiki Kawai, executive]

The Applied Material and Kokusai Electric is going to obtain approvals from the authority about the merger. We are going to seek for the approval.

[Yukihiro Aiba, analyst]

This question might be very difficult for you to answer. You are a competitor, but for the film deposition area, 2 years or 3 years to come, the merged company will become your strong competitor. And you are -- you could take various countermeasures. Could you share your idea with us, please? What would you like to announce specifically? For example, this is just a layman's view, you might think in that way. So ASMI, so AMA wanted to acquire ASMI, but TEL could acquire ASMI. That could be one of the options you could take. How do you think about that?

[Toshiki Kawai, executive]

About the Applied Material announcements, so their announcement will not change our strategies. In principle, as far as our company is concerned, we are going to enhance our technology and process to performance. Batch, semi-batch and single-wafer processing, we do have those technologies already. So rather than thinking about merger, we should enhance our applications and also enhance the process performance and process tool performance. That's what we are supposed to do. So we do have a very good product portfolio. So in principle, we are going to follow existing strategies to enhance our technologies to provide high values to our customers.

Now we want to take one more question because we are running out of time. No more questions? May I say one thing about your question earlier? You talked about the reduction of SG&A expenses, as our President said many times before, when it comes to development expenses, that is our investment for further growth in the future. So even if the memory investment is going down, we haven't loosened or reduced our investment in our R&D because that is part of our strategies. So development, CapEx and evaluation tools, we haven't reduced our investment in those areas. That is the reason why we didn't reduce SG&A expenses so much. But I think that is very important strategies for last for long term and mid-term. We are supposed to go through very severe competitions in the market. We must not reduce our R&D investment. That's the reason why we just maintain the same level of the SG&A expenses. Although you may think we could reduce SG&A expenses furthermore, of course, we -- even if we suppress some other expenses, but we want to maintain the high level of investment to the R&D for development. I wanted to add this comment finally.

[Koichi Yatsuda, executive]

Thank you very much. This concludes today's financial announcement. Thank you very much for joining us despite your tight schedule.

[Toshiki Kawai, executive]

Thank you very much.