Tokyo Electron Ltd

TSE:8035

Earnings Call Transcript 2021-Q3

[Koichi Yatsuda, executive]

It's time for us to start Tokyo Electron financial announcement for the third quarter of the fiscal year ending in March 2021. Thank you very much for joining us today despite your very busy schedule. I am Yatsuda of IR department acting as a moderator in today's session.

Now let me introduce the attendees on our side. Mr. Tetsuo Tsuneishi, Corporate Director, Chairman of the Board.

[Tetsuo Tsuneishi, executive]

I am Tsuneishi. Nice to meet you, everybody.

[Koichi Yatsuda, executive]

Next is Mr. Toshiki Kawai, Representative Director, President and CEO.

[Toshiki Kawai, executive]

I am Kawai. Thank you very much for joining us.

[Koichi Yatsuda, executive]

Next, Mr. Yoshikazu Nunokawa, Corporate Director, Executive Vice President and General Manager, Global Business Platform Division Finance Unit.

[Yoshikazu Nunokawa, executive]

I am Nunokawa. Thank you very much for joining us.

[Koichi Yatsuda, executive]

Before starting the presentations, let me explain the flow of today's meeting. First of all, Mr. Nunokawa and Mr. Kawai will make presentations. After that, up until 7:00, we will have the question-and-answer session containing questions from the audience.

This financial announcement uses 2 channels on Webex, providing simultaneous interpretation between Japanese and English. [Operator Instructions]

Since this is a meeting for institutional investors and analysts, we would appreciate your understanding that we receive questions only from institutional investors and analysts as usual. We will upload the audio contents of this meeting both in Japanese and English later. It will be kind if you could also refer to them.

Now Mr. Nunokawa, Corporate Director, Executive Vice President and General Manager, will present the consolidated financial summary. Mr. Nunokawa, please?

[Yoshikazu Nunokawa, executive]

So I am Nunokawa, Finance Unit. Good afternoon. I'd like to present the consolidated financial summary of the third quarter of this fiscal year ending in March 2021. First of all, you can see the quarterly financial summary. The net sales for the third quarter was JPY 291.7 billion, 17.4% decline from the second quarter. Gross profit margin was high at 41.7% as our plant utilization rate increased. Operating margin was 21.6%, along with the rise of the gross profit margin.

This is the graphical representation of the financial summary. This shows segment information. For SPE, sales was JPY 264.3 billion, and segment profit margin was 25.7%. As I explained in the slide of financial summary, though the sales declined from the second quarter, the segment profit margin remained almost unchanged, thanks to the impacts of our plant utilization and customer mix. For FPD, as sales increased in the third quarter as well as in the second quarter, segment profit margin was improved to 17.9%. For the composition of net sales in the third quarter, the SPE sales accounted for 91%, while the FPD sales accounted for 9%.

This slide shows the SPE sales by region. The sales declined in almost all regions. Particularly, in -- the sales in Korea decreased primarily because of the drop of the sales to the memory device manufacturers. In China, just like in the second quarter, the sales proportion of the local customer showed an increase.

This shows SPE new equipment sales by application. From the bottom: logic and others accounted for 27%; logic/foundry was 28%; nonvolatile memory was 19%; and DRAM was 26%. As the sales in the other applications and foundry declined, the proportion of the sales to logic/foundry increased compared with the sales to memory device manufacturers.

This shows field solutions sales. In the third quarter, the sales of field solutions was JPY 93.5 billion. The proportion of the field solutions sales in the consolidated sales was 32%. The sales of modifications contributed most to the sales increase.

Next, this slide shows balance sheet. For assets, total assets were JPY 1,270.4 billion, and cash and cash equivalents were JPY 269.0 billion. The decline from the second quarter is mainly attributed to the increase of the inventories and payment of the dividends. The inventories increased from the previous quarter. To prepare for sales increase in the fourth quarter, the number of process tools undergoing startup is increasing now.

Liabilities were JPY 363.6 billion and net assets were JPY 906.7 billion. The equity ratio was 70.4%.

This shows the inventory turnover and accounts receivable turnover. The inventory turnover was 122 days, coming back to the previous level. The accounts receivable turnover was 39 days.

My last slide shows the cash flow. The cash flow from operating activities was minus JPY 18.6 billion, which is attributed to the increase of inventories. The cash flow from financing activities was minus JPY 56.4 billion, mainly because of the payment of dividends. The free cash flow was minus JPY 34.7 billion.

This concludes my presentation about consolidated financial summary. Next, Mr. Kawai, our CEO, will present business environment and financial estimates. So Mr. Kawai, please?

[Toshiki Kawai, executive]

Once again, I am Kawai. Thank you very much for joining us today. Let me talk about business environment and financial estimates. Let me start with the business environment. For the WFE market in CY 2021, in addition to strong logic/foundry investment exceeding the previous year, memory investment is expected to recover, driven by the spread of 5G and the increase of investment to data centers. I mean those circumstances, the WFE market in calendar year 2021 is gaining momentum to grow almost by 20% from the record high CY 2020 market size.

For the FPD fabrication equipment, TFT array process market, the investment to OLED for mobile applications will increase from the previous year, but investment to LCD for large-sized panels is expected to decrease. In the future, driven by the OLED investment, FPD equipment market is expected to grow in calendar 2021. However, due to the transition in large-sized panel investment from LCD to OLED, the FPD market is expected to decrease by about 30% on a year-on-year basis.

Next, this slide shows the WFE market outlook by application. For the logic/foundry, active investment will be further enhanced due to expanding applications driven by the ICT promotion. The logic/foundry is expected to drive the WFE market growth this year.

For DRAM, inventory adjustments are proceeding smoothly, along with increasing demand of -- for 5G mobiles, PCs and data centers. Some investment plans are pulled forward, and the investment started to recover from the beginning of this year.

For nonvolatile memory, as applications of SSD are expanding, strong investment is expected to continue just like the previous year.

This shows the business progress in the third quarter. Along with the transition to the data-driven society, the WFE market is now entering a new phase of growth. Amid such circumstances, in an attempt to maximize growth potential of our company, we implemented various measures in the third quarter as well. The first measure was release of new product and new platform. CELLESTA SCD, a new product for cleaning process, employs its supercritical dry technology to provide solutions to the issues in the cleaning and drying processes for leading-edge devices. CELLESTA SCD has already been introduced to high-volume DRAM manufacturing lines. For its future introduction to logic and 3D lines, some of the evaluations have started.

Episode UL, a new platform for etching systems, enables us -- our customers to select the number of chambers from 4 to 12 chambers flexibly to satisfy various customer needs. On top of that, it is equipped with our propriety smart tool to realize autonomous process control through big data analysis.

Next, I will talk about enhancement of our digital transformation activities. Our company has developed software in Sapporo office since 1991. In order to further enhance software development capability to promote digital transformation, we moved Sapporo office to a new place and reopened it as TEL Digital Design Square in November 2020. By combining digital transformation with our advanced technological capability, we will provide our customers with high value added and further improve our capital efficiency.

For our production capacity, operations started in the new production buildings in Tohoku and Yamanashi, both of which were completed in the second quarter of this fiscal year. As a result, capacity potential in Tohoku plant and Yamanashi plant has been raised by 2x and 1.5x, respectively. Accordingly, we are now ready in terms of production capacity for future increase of demand.

Another topic in the third quarter is our environmental initiative. As ICT, information communication technology, is to be implemented actively toward the future, our company will contribute to reduce power consumption in the following 3 aspects: firstly, we will support our customers in their technology development for low-power consumption semiconductor devices by using our [indiscernible] technology.

Secondly, as a tool vendor, we will raise productivity of our products and reduce energy consumption of our products during their usage. And thirdly, we will promote energy conservation in our own operations. Our corporate philosophy, we strive to contribute to the development of dreams, inspiring society through our leading-edge technology and reliable service and support. Fulfilling this philosophy will lead our company to contribute to sustainable development to society and also enhance our corporate value.

Based on such idea, we revised the midterm environmental goals for 2030 to make them more challenging. In the revised goals, for the target to reduce CO2 emissions per wafer processing TEL's product by 30%. The reference year was changed from 2013 to 2018. For the CO2 emissions in our sites, our company will raise the ratio of renewable energy to 100% in every site by 2030. And accordingly, we have raised the target to reduce the total CO2 emissions compared with the reference year of 2018 from by 20% to by 70%.

Next, I'd like to show the financial estimates. For the fiscal year ending in March 2021, we have revised the full year financial estimate upward, reflecting the demand increase. The POR we won in the recent years have now been introduced into the customers' high-volume production lines, by which we are able to take the full advantage of the customers' enhanced investment in our financial performance. We plan to increase the full year net sales by JPY 60 billion to achieve JPY 1,360 billion. Operating income is expected to increase by JPY 25 billion to achieve JPY 306 billion. The consolidated net sales in the fourth quarter is expected to hit record high of JPY 400 billion.

Next, this slide shows the sales forecast only for SPE new equipment in the fourth quarter. Due to the increasing investment of leading-edge logic/foundry and memory, the SPE new equipment sales is expected to be JPY 297 billion, which is record high quarterly net sales. The R&D expenses and CapEx plan in this fiscal year remain unchanged from the announcement on October 28, 2020.

As I said earlier, we raised production capacity in Tohoku plant and Yamanashi plant. In order to realize sound and steady growth in the future, we are implementing record high R&D investment and capital investment. We will continue proactive investment for further growth to achieve the targets of midterm management plan.

And finally, this shows dividend forecast. Along with upwards revision of the financial estimates, the year-end dividend per share will be JPY 380, increasing by JPY 65. We are planning to pay the full year dividend per share of JPY 740. Thank you very much for your kind attention. This concludes my presentation.

[Koichi Yatsuda, executive]

Now we will have a question-and-answer session until 7:00. We will receive questions both in Japanese and English. But as our attendees on the Japanese channel, please allow us to restrict verbally asked question to only in Japanese. [Operator Instructions] We cannot answer question if no name or affiliation is given.

On the Japanese channel, I will read out the question translated into Japanese, and our attendees will answer it in Japanese. While on the English channel, it will be simultaneously translated into English on the real-time basis. [Operator Instructions]

So now let's start the question-and-answer session. First question is from Mr. Yoshida of CLSA Securities Japan.

[Yu Yoshida, analyst]

I am Yoshida of CLSA Securities. My first question, for the forecast of WFE market, this year, CY 2021, 20% -- almost 20% increase is expected. That's what you said earlier. When you divide into first half and second half of the calendar year, so your competitor said the first half sales is higher. But according to your forecast, how do you view the forecast in the first and second half of this year?

[Unknown Executive]

At present, I think we do receive strong inquiries. So 20% -- we are very -- getting closer to 20%. There is some momentum, getting very close to 20%. On quarterly basis, we are now carrying out the scrutinization on the quarterly basis forecast. One thing we can say at this point is the strongest segment is logic/foundry, followed by DRAM and NAND. When you say 20 -- almost 20% growth, that is the proportion or composition in the market.

So your question, as you asked earlier, I think in each quarter, we do receive the strong inquiries for each quarter evenly -- almost evenly. So I think the condition for us is rather averaged. Of course, we must be careful about the timing of the customers' strategic investment, so we are now scrutinizing the customers' plan.

[Yu Yoshida, analyst]

I have one follow-up question. So now the -- you talked about the forecast by application. When you look at the fourth quarter, the nonvolatile NAND sales is expected to increase drastically. So by region, which region is stronger than the others in terms of the sales forecast for the fourth quarter?

[Unknown Executive]

By region, as of today, I'm sorry but we are not able to refer to the amount by region. Logic/foundry and memory -- but the proportion between the 2 for CY 2021, memory accounts for 40%, logic/foundry accounts for 60%. That's the rough figure I can give for the calendar year 2021. Thank you very much.

[Yu Yoshida, analyst]

What I want to ask is fourth quarter. According to your full year guidance, for the new sales, maybe the fourth quarter sales, I'm sorry, the fourth quarter. So NAND is rather strong. I want to understand the background. Which region now sales is stronger?

[Koichi Yatsuda, executive]

I am Yatsuda, let me answer to your question. So NAND flash, we have limited numbers of customers. So if we refer to the region, you may understand the name of the customer. Therefore, it's so difficult for us to give us the figures by application or region.

Thank you very much, Mr. Yoshida, for your question. Next question is from Mr. Nakamura of Goldman Sachs Japan.

[Shuhei Nakamura, analyst]

I am Nakamura of Goldman Sachs Japan. Thank you very much for your presentation. So I have a question on WFE market. So 2021, the 20% plus -- almost 20% increase, you talked of a very strong outlook for 2021. So your SPE business, the net sales is expected to increase by [ 20% ] What is the level of the increase of the net sales of the company when the market increases by 20% in the year ending in March 2022?

For the legacy nodes for the semiconductor -- automotive semiconductors, there are some shortage of the semiconductor for automotive vision. When you increase the shipment of the legacy nodes equipment, then you come up with the -- is it possible for you to realize your guidance?

[Unknown Executive]

From that viewpoint, POR winning activities are moving on very smoothly, and we do not miss any potential POR. Therefore, the WFE market is expected almost 20%, and we try to take full advantage of that market increase.

In addition, for legacy nodes, you asked about legacy nodes. For example, what is hot in topic is the automotive semiconductors are now running short. So that's what newspapers says day by day. But even for that, our company do have a strong presence in that area as well. And in the industry and in society, we can make big contribution in that area as well.

In principle, when semiconductors are in shortage, as for the process to vendor, there are no negative impacts on us. That provide us big business opportunity. So though we can increase the sales of the process tool, which is good for us, very good for us. And legacy tools, not only the new demand for legacy tools, but even for the leading-edge device, the customer purchase the leading-edge process tools for the leading-edge devices. And they can also make the best use of the existing process tool and also the upgrade or modifications to improve their functionality or to improve throughput of the existing process tools.

In that sense, not only new sales but also field solutions business, I think that market trend has a positive impact on our business. In the future, semiconductor market, in line with the Moore's Law, that will have the shrink, but at the same time, AI customization and also hyper mass production. So there are 3 different directions in the future: technology innovation and semiconductor mass production -- sorry, mass consumption. Those 2 are combined to each other to grow the semiconductor market.

For automotive semiconductors devices, in the near future, the EV will become the mainstream in the automotive industry. So we'll have the strong or deepened relationship with the automotive semiconductor device manufacturer. That will help give us the great opportunity for the future. So this trend in the market will give us the positive impact on our business performance in mid -- short-term, midterm and long-term basis. Did I answer to your question?

[Shuhei Nakamura, analyst]

Thank you very much for your detailed answer.

[Koichi Yatsuda, executive]

Mr. Nakamura, thank you very much. Next question is from Shibano -- Mr. Shibano of Citigroup.

[Masahiro Shibano, analyst]

I am Shibano from Citigroup Global Markets Japan. Earlier, you said WFE market is expected to grow by 20%, and you said Tokyo Electron could outperform the market growth. So when you look at the end result, maybe 20% sales increase, that should be JPY 1.5 trillion or JPY 1.6 trillion when I simply add 20%. So your target within 5 years, you have a financial model, JPY 1.5 trillion or JPY 1.7 trillion. So you are getting closer to the midterm management plan.

So next year, if you achieve JPY 1.5 trillion net sales and op margin, 26.5%, is it difficult for you to achieve that level of the operating profit margin? If it is so difficult yet, so how do you fill the gap? I understand you haven't calculated the net sales for next fiscal year, but maybe could be possible for you to achieve very close to the 20% increase in net sales next year. But margin target, now you have some gap between your target and current operating margin. How do you plan to fill the gap between your current operating profit margin and your target operating profit margin?

[Unknown Executive]

So about your question, so there are many ways, so AI, 5G, there are many applications. Those applications are increasing. Accordingly, WFE market is expanding. So our midterm management plan at present, we are now preparing the next fiscal year budget. And we are going to report it to you in the future. So if WFE market increases, we are not able to achieve the target right away. That's not the case.

So our target applications in those target applications of our company. So how we can provide value-added along with the generation transition? And that's how we can gain the profitability. So even if WFE market grows, that will help us or enable us to achieve the midterm management plan. That's not a case. But now you can see several generations. And Tokyo Electron is prepared to provide high value-added solutions for those generations.

So along with the time and along with the generation, we are going to achieve the midterm management plan. So WFE market size, there are many factors so we need to scrutinize those factors closely. But our activities will remain unchanged. So that's how we try to implement our plan for the future.

[Koichi Yatsuda, executive]

Thank you very much, Mr. Shibano, for your question. Next question is from Mr. Wadaki of Nomura Securities. Mr. Wadaki, please? Thank you very much.

[Tetsuya Wadaki, analyst]

So thank you very much for a very strong forecast for the future. For next year, I have some concern about China and United States and Europe. How do you see the risks in those regions?

[Unknown Executive]

For the America and China, as a company, I'm not in a position to answer to that question. On the other hand, our company bilateral negotiation, so we will take a close look at the bilateral negotiations between nations. One thing we can say now, actually, so far, for China, the local manufacturers in China, that accounted for 15% to 20% of the WFE market so far. And we need to closely look at the impacts on that market segment.

But ICT applications will be expanding definitely. Investment accordingly will be implemented somewhere in the world. Commodity applications, low-power consumption and leading-edge applications, technology innovation will be essential. Therefore, somewhere in the world, investment will be going on. Therefore, in order for us -- as long as we have the leading-edge technology capability, world-class technology capability, we are able to achieve our target. That's the position we have when we develop our strategy. So our strategy will not be affected.

One thing we can say is bilateral negotiation, we are going to closely look at the bilateral negotiation, and we'd like to be fair when we promote business activities.

[Tetsuya Wadaki, analyst]

One follow-up question. So China, Europe and America, the leading-edge package. I think you are the general provider, the Japan leading provider of the comprehensive package of the process tools. So as for the package -- but how do you see the market forecast, not only WFE but also the [indiscernible]

[Unknown Executive]

So I understand your question is about our 3DI business. China, I don't -- so 3DI, so we can provide the value-added [indiscernible] by providing our process tools. So our business opportunities in calendar year 2021 are business opportunities for etching, cleaning, film deposition, [indiscernible] and packaging. All those areas will help us to increase our business opportunities and business performance. It's not only for China market. I just talk about global market. So you do have the various diversified business opportunities.

[Koichi Yatsuda, executive]

Mr. Wadaki, thank you very much for your question. Next question is from Mr. Hirakawa of Bank of America.

[Mikio Hirakawa, analyst]

One question. I think my question is a kind of follow-up question of the previous question. Next year, China, so WFE, China accounts for 10% to 15% in WFE market. So when you compare 2020 and 2021, so now WFE market increases by almost 20% and China local players. So from 2020 to 2021, how the proportion of the local China players grows or decrease? For memory and nonmemory, could you divide it into memory and nonmemory, please, when you talk about proportion of the China local players.

[Unknown Executive]

15% to 20%. Based on the previous figures, the China players accounts for 15% to 20% in total WFE market. This year as well, there should be no major change in that proportion of the China local players. For logic and memory proportion, I'm sorry, I'm not able to give you any answer on that area.

[Mikio Hirakawa, analyst]

So in principle, along with the market growth, China local players will increase their investment. Is this correct understanding?

[Unknown Executive]

Yes. For high-end commodity in every type of fabrications, China players' investment are coupled with the global trend.

[Koichi Yatsuda, executive]

Thank you very much, Mr. Hirakawa, for your question. Next question is from Mr. Yamamoto of Mizuho Securities.

[Yoshitsugu Yamamoto, analyst]

I am Yamamoto of Mizuho Securities. I have some specific question about figures. So now you have revised your full year and JPY 60 billion increase and gross profit is expected to increase by JPY 26 billion. Then 43% should be the margin profit ratio when I calculate those figures. But fourth quarter, you have JPY 400 billion sales but 40.5% gross profit margin. So figures were -- so 43% marginal profit ratio, that's how we can calculate the figure.

Even if the sales increased to JPY 400 billion in the fourth quarter, it's difficult for you to increase the gross profit margin more than 41%. What sort of costs are generated? But what is the reason why the gross profit margin doesn't reach the level of the marginal profit ratio?

[Unknown Executive]

Mr. Yamamoto, thank you very much for your question. As you pointed out, the fourth quarter sales is JPY 400 billion, as you said. So when you do some calculation, as you said, the gross profit margin -- so 41.8% in the third quarter but 40.5% in the fourth quarter. This fiscal year -- when you look back this fiscal year, first quarter and second quarter, 40.8% in the first quarter and 38.6% in the second quarter.

Unfortunately, gross profit margin unfortunately is not -- was not steadily increasing. So we are now working on the half year budget. And we are now looking at half year-based calculation for the fixed costs. In this fiscal year, the third quarter, in particular, production activities, I mean, utilization rate increased. In other words, the third quarter, the inventories increased. Accordingly, the fixed costs which were not recognized in the third quarter, will be recognized in the fourth quarter as cost of goods in PL. So these are the factors as well.

So this is the reason why we came up with this forecast. So efficiency should be enhanced and margin profit ratio need to be improved furthermore so that we can increase gross profit margin. But we need to wait for a while before we can see the tangible impact on the increase of gross profit margin.

[Toshiki Kawai, executive]

I am Kawai. Let me just give the additional comments. As Nunokawa said earlier, at present, about 20% is growing ratio of the WFE market. At present, we do receive very strong inquiries. So we have increased our capacity potential, and we are now implementing a manufacturing plan aggressively. So fixed costs might be changed in the future.

Another thing I want to say right now. So in order for the growth, we do have the high potential for growth. So it's a bit different from other companies. So now we are investing large amount of money for the future growth. And as for R&D expenses and the cost of goods, that includes the investment for the future growth. That is simply say. Compared with other manufacturers, our performance or forecast are not the same as others. So when we find some business opportunity, we can move on to. Then as for the gross profit margin, might be affected to some extent in such case.

[Koichi Yatsuda, executive]

Mr. Yamamoto, thank you very much for your question. Next, we have Mr. Yasui of UBS Securities.

[Kenji Yasui, analyst]

I am Yasui of UBS Securities. Can you hear me?

[Unknown Executive]

Yes.

[Kenji Yasui, analyst]

I have 2 questions. The first question is last year, Mr. Kawai made some comment in the public. '21, you can see the growth, and 2022, we will see higher factor to increase the market size. I -- if my memory serves, that's what you said. By 2021, the Taiwanese foundry increased the investment drastically. So as for -- from the viewpoint of the stock exchange market, we have some concern that the growth will continue in the 2022 as well.

Now DRAM is recovering, and we can see stronger investment in DRAM in 2021. So what will happen in 2022 for further growth?

Second question is when you have the performance improved, so the gross profit margin is about 40%. And everyone thinks the gross profit margin should be higher than that. So when the sales increased, it's because of maybe 50 -- is it possible for you to increase the profit margin to 45% to 50%?

[Unknown Executive]

With high speed, you can see increasing with high rate. So one thing we can say is we are now facing big years. 2021 is a big year, and 2022 is another big year. And those prospect or forecast remain unchanged.

The calendar year base or quarterly base, there might be some shift in our forecast or trends. But maybe we will see very good 2 years, 2 consecutive big years. And our prospect for 2 years to come remain unchanged.

Needless to say, DRAM, NAND and nonvolatile applications -- I'm sorry, DRAM, NAND and foundry/logic. So you look at those different segments, and there are some difference among those segments. But when it comes to big years, prospects, from the end of last year, my view -- our view remain unchanged. And I think our prospect, the likelihood our prospect is getting more certain.

[Kenji Yasui, analyst]

So which is bigger, 2021 or 2022?

[Unknown Executive]

Actually, some investment plan has been pulled forward. We need to look at very closely. But actually both 2021 and '22, those 2 years will be big year, unprecedented big years. That's the first question.

About the gross profit margin question. So needless to say, in our midterm management plan, the value-added and also the marginal profit ratio of equipment and also gross profit margin, but all of them are supposed to increase in accordance with the midterm management plan. In our business model, which portion should earn how much? So to some extent, we do have some rough estimation, and we will see the steady increase of those figures. So gross profit margin, so we are implementing midterm management plan because we think we are sure that we can increase gross profit margin.

[Koichi Yatsuda, executive]

Thank you very much, Mr. Yasui, for your question. Next question is in text. Mr. Ishino of Tokai Tokyo Research Center. I want to understand the forecast for the EUV lithography.

So IR department will answer to the question. EUV lithography of 5-nanometer in foundry. So quite a few EUV lithography systems have been shipped for 5-nanometer. So when you look at the recent increase of the investment by the foundry, our targeting on the 5-nanometer or leading-edge technology node, so the size of the foundry investment is increasing year by year. The size of investment is expected to increase for the proportion of the leading-edge technology node from 5-nanometer to 3-nanometer.

For 3-nanometer node, I think the EUV lithography adoption will be accelerated further now for [ further ] develop our product. We do have 100% share for the high-volume production line. So the criticality of the cleaning equipment and etching equipment will be increasing, and that will give us great opportunity for us.

So EUV lithography investment, that's the frequently asked question for our company. The EUV lithography expansion will give us great business opportunity to us. After the introduction of EUV lithography to the customers' line, our sales has been improving. So that's how I would like you to understand the impact of the EUV lithography on our business.

So Mr. Ishino -- we received one follow-up question from Mr. Ishino. ASML revised their prospect downward. How do you look at that, the downward revision of the sales by ASML?

[Unknown Executive]

I think there might be some short-term adjustment. But I think the trend of adoption of EUV lithography will remain unchanged. So there is only -- there is 1 customer using the EUV lithography. But I think other companies also adopt the EUV lithography in the future. Therefore, the adoption or introduction of EUV lithography will be increasing.

For DRAM, the leading-edge customer is going to adopt it, EUV lithography. So we think the EUV lithography will be adopted for the DRAM. But actually, the number of the processes are not so many for EUV lithography for DRAM compared with foundry. So there, we will manufacture just a limited number of EUV lithographies.

[Koichi Yatsuda, executive]

Thank you very much for your question. Next question is Mr. Damian Thong of Macquarie Capital Securities.

[Damian Thong, analyst]

Can you hear me? Can you hear me?

[Unknown Executive]

Yes.

[Damian Thong, analyst]

In the third quarter, field solutions sales look very high, especially for SPE. And also in the fourth quarter, field solutions sales is expected to be very high. So could you give us some explanation?

So 200-millimeter or upgrade modification demands, there might be some demand for those. But in addition, are there any other things? And the forecast for next fiscal year, in particular, the number of the process tools to be shipped, how much level would you expect in next fiscal year?

[Koichi Yatsuda, executive]

So the IR department will answer to your question. So third quarter sales, so field solutions business increased a lot. At present, we are in the improving trend, especially parts, service, sales has been increasing steady. But third quarter, you saw the great increase because of the modification business. It's a kind of transient -- it's transient business. However, the modification business is -- does not steadily increase or maintain. The parts business is expected to grow steadily on the other hand.

And sometimes we see some modifications, inquiries for modification from time to time. For the legacy node modification, demand is increasing. So we think that is our business opportunity, and we try to capitalize on that trend in the market.

[Damian Thong, analyst]

I have one follow-up question. May I ask one follow-up question?

[Koichi Yatsuda, executive]

Yes, please.

[Damian Thong, analyst]

For modification, the sales of the modification, could you let me know the annual sales for modification business?

[Unknown Executive]

For modification only, we do not release the information. But parts and service accounts for 60%, and used equipment modification accounts for 40%. That is a rough proportion. But recently, parts, service because the customers' parts utilization rate is rather high, so parts business accounts for more than 60% of our total field solutions business.

[Koichi Yatsuda, executive]

Thank you very much, Mr. Thong, for your question. Next question is from Mr. Hanaya of SMBC Nikko Securities.

[Takeru Hanaya, analyst]

I am Hanaya of SMBC Nikko Securities. I have very basic question, I'm sorry, but just clarification. For the third quarter, actual for sales, I wonder your sales was less than your expectation for the third quarter. How do you view the sales in third quarter? Do you think the sales in the third quarter is just the same level of your expectation? Or are there some amount of sales which were put forth -- sorry, pushed out to the fourth quarter?

[Yoshikazu Nunokawa, executive]

For that, I'm Nunokawa. I want to answer to your question. For the third quarter sales compared to the second quarter sales, you can see the significant decrease in the sales in the third quarter from the second quarter. For one thing, the sales in the second quarter, because of the sales pulling forward from the third quarter to the second quarter, you can see the peaking sales in the second quarter. But actually, shipment itself, the end of the third quarter, the number of the process tools shipped is increasing, so the sales will be recognized in the fourth quarter. So there are no particular reasons in the third quarter.

[Toshiki Kawai, executive]

I am Kawai, I'd like to -- the question. Actually, our third quarter sales is just as planned. There's no major reasons, particular reason for the decrease in our sales.

[Koichi Yatsuda, executive]

Mr. Hanaya, thank you very much for your question. Next question is from Mr. Maekawa of Credit Suisse Securities Japan.

[Hideyuki Maekawa, analyst]

I am Maekawa of Credit Suisse Securities Japan. So I was impressed with your figures. So what changes over the past 6 months? So what's the driver to encourage your customers to increase the investment? What is your understanding? When you look at final demands compared with 6 months ago, there should be no major change or stronger final demands. And technology, the major change is TSMC. They got the order from Intel CPU. I think that is the kind of upward factor. But other than that, are there any other factors to increase the final demand or any technological factors to increase the investment of the customers?

[Toshiki Kawai, executive]

I am Kawai. So according to my understanding, the major change in our industry -- actually, in the past, PC-centric era and after that, PC and mobile-centric area, and now we are in the big data-centric era, having IoT, AI and 5G. So demand for the products -- the final products and semiconductors are required for that. But now semiconductors devices are required for some value provision. So we are now entering the new phase of growth.

And we are just in the middle of that new era, getting into the new era. So the supply/demand balance, there are some adjustment, needless to say. So there are some adjustment period in the future. But by and large, semiconductor device market exceed $1 trillion in year 2030 or 2031. I think that this market increase continues.

In principle, last year, last spring, the COVID-19 pandemic started and super large data center, because of the demands from them, there was some shortage of the DRAM, concern of the shortage of DRAM. So they purchased large amount of DRAM strategically in last spring. But now data-driven society, DRAM inventory is decreasing rapidly. So after the adjustment period is completed, now we are in the phase of another growth.

In that sense, demands for PC, increasing and 5G mobiles, 5G infrastructure, 5G smartphone market is growing and data center demand, also recovering. And in the future, the high-performance or high-speed CPU will be coming out. When you look at those market trends, and that's the reason why the customers' investment are getting more and more active now. There are different viewpoints and ideas. I'm sorry, my answer is rather abstractive. So data center, PCs and 5G mobiles and other applications, automotive semiconductor devices, so these are the drivers. So actually, everything is a kind of driver to increase the customer investment.

[Koichi Yatsuda, executive]

Thank you very much, Mr. Maekawa, for your question. We have one more question in text so let me read it out. Mr. Hasegawa of Mitsubishi UFJ Morgan Stanley Securities.

Post sales business profitability might be changed. The third quarter, you can see the reason -- what is the reason modification business increased in third quarter? And what sort of impact do you have from the increase of modification in the third quarter?

[Unknown Executive]

So the third quarter -- as for the third quarter modifications, because that is linked to the customer's plan, so IR department will answer to that question.

[Koichi Yatsuda, executive]

Yes. As for the modifications, each customer -- so we receive orders for modifications along with the customers' plan so it's so difficult for us to forecast the trend of modification in the beginning of the year. And by chance, we have many modification orders in the third quarter. So when we see the demand increase in the customer, then the customer purchase the process tool, but it takes time.

So the simplest way to address the increasing demand for the customer is introduce modification for their existing machines to enhance the productivity. So that's the reason why we do have very strong inquiries for the modifications. And by chance, those modification orders increased in the third quarter.

As for the changes in profitability, modifications do have the high profit margin in some cases. The field solutions business, so we do have the existing technologies, and we can use the existing technologies for our business opportunities. That's the reason why we can enjoy high profit margin for the field solutions business.

[Toshiki Kawai, executive]

I am Kawai, I want to add some comment. For midterm and long-term perspective, from the viewpoint of the profit margin, I think we can improve the profitability or profit margin furthermore. Year-by-year, process tool upgrade inquiries, request is increasing, for example. But once we deliver a process tool, for example, batch system, that each batch could be increased from 100 wafers to 150 wafers. That is order for modifications.

And machine learning, a batch on metrology, by using those advanced technologies, we can enhance uptime with the machine or maintenance should be improved to enhance the yield. So this is how we can provide added values to the customers.

And now you can see increasing level of wafer fabs. And we have shipped 4,000, 5,000 units. So in a moment, we should complete the diagnosis of the process tool and remote support. We need to have infrastructure to be built every year to provide remote support to the increasing installed base. For those reasons, field solutions business is expected to increase their profitability.

[Koichi Yatsuda, executive]

Mr. Hasegawa, thank you very much for your question. So now it's time for us to close today's financial announcement. Thank you very much for joining us despite your very busy schedule.

[Unknown Executive]

Thank you very much. Thank you very much.

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