Transcripts
Sumco Corporation (SUMCF) Q1 2023 Earnings Call Transcript
Operator
Next is Mr. Ikeda of Goldman Sachs.
Atsushi Ikeda
I would like to ask about the demand and capacity expansion forecast you show on slide 19, as you mentioned in the presentation, ultimately, what we have seen in the past is that average growth of procurement capacity over time reverts to PPP GDP growth rates. I understand your projections for a decline in demand in 2023. But if I look at the forecast for 2024 and beyond, it is still well below the PPP GDP-based forecast. Does your forecast reflect the weak near-term recovery from the inventory corrections we are currently seeing? If I look at slide 14, both DRAM and NAND are expected to show growth based on bit growth or scaling and the start of the ramp of 3D NAND stacking of peripheral circuity at Kioxia [ph]. Given this, your forecast appears to be slightly conservative. Have you newly factored in geopolitical or other risk into your forecast? Also, this forecast would suggest that supply/demand will be very tough. Are you comfortable that such tough conditions will not lead to renegotiations of the LTAs?
Mayuki Hashimoto
On our forecast, I am generally confident in the 2023 and 2024 levels. However, there have been times in the past where we have seen a rapid rebound, so it’s hard to say for 2025. It is true that we have factored in geopolitical risks, which have depressed our outlook simply because we don’t know how things will play out. Our management plans are based on this outlook.
If your question is, will 2025 really be this low, I do think that the new capacity expected to come online will be running at close to full capacity. However, in talking about the future, what we show here is simply a forecast as of this point in time. If you look back at historical trends, getting to full capacity utilization in 2025 implies a very rapid ramp-up. That said, I do think we will eventually catch up to the dotted blue line, which means a rapid ramp-up, but there are also some challenges. This forecast is the result of intensive internal discussion. So you may be right, we may be taking a conservative view.
Atsushi Ikeda
I have one follow-up. With regard to the correlation to the increase in the number of wafers, there are emerging technologies like 3D NAND, what impact will such technology have on demand?
Mayuki Hashimoto
I believe that carriers and interposers will definitely increase at some point, but we are not there yet. Everyone is in the red and struggling at the moment, particularly the memory players. We are still at the R&D stage. I would expect interposers to start to increase from 2025 or beyond. It’s possible that this could be a driver that steepens the slope for demand in the future. This is why players in the process of expanding capacity cannot just simply stop investing now. They remain focused on continuing to grow capacity steadily. As well, our balance sheet is relatively robust, so I believe we will be able to weather the storm.
Atsushi Ikeda
Thank you for the detailed explanation.
Takayuki Komori
Next is Mr. Nishiyama of Citi Group.
Yuta Nishiyama
If we look at slide 16, it appears that inventory levels are peaking. The largest memory player only announced significant production cuts of 20% in April. Given their estimated global share of production capacity of around 40%, this implies a 10% decline in wafer inputs for the overall memory industry. But if we look at wafer procurement volumes, the largest wafer player, which is known to have strengths in memory appears to expect shipments will recover slightly in the June quarter. If we take into account procurement volumes versus wafer input volumes, is it possible that we could see memory customer wafer inventory levels start to rise again?
Mayuki Hashimoto
Frankly speaking, I think wafer procurements will decline in the second half of 2023. A very large customer has already started to adjust its procurement. This customer had not adjusted its procurement much up to this point. I expect they will follow through on their announced plans.
Typically, the magnitude of the reduction in procurement is larger than the scale of production cuts. So I think second half of 2023 will be very tough. I would be very surprised to see a peer talking about a recovery in second half 2023 that would drive higher sales of wafers.
Yuta Nishiyama
So when should we expect customer wafer inventory levels will peak? If possible, could you comment on logic use epi wafers?
Mayuki Hashimoto
I think now is the peak. In the second half of the year, I would expect to see significant production cuts from customers and would expect the magnitude of cuts to procurement volumes to be larger than production cuts. So I think we are at the peak now. There is a difference between when the market is peaking and the timing of the peak for customer inventory. Inventory is up significantly because the market is weak. To address inventory levels, customers need to cut production, which will depress the market.
Yuta Nishiyama
Understood. Thank you.
Takayuki Komori
Next is Mr. Yoshida of CLSA Securities.
Yu Yoshida
Mr. Yoshida, I would like to ask about slide 19 and the supply-demand forecast. If I look at this chart from the previous results briefing, Sumco has adjusted down its forecast for both demand and supply. At the same time, you also said that the investment plans for capacity expansion are unchanged.
Mayuki Hashimoto
Perhaps there was a misunderstanding. Sumco will maintain its domestic investment plan as the focus is on leading-edge epi. However, the investment plan at FST is likely to be slightly slower as the main focus is PW.
Yu Yoshida
I see the graph shows capacity flat year-on-year for 2026. Is this because you have visibility into the industry as a whole, slowing down capacity expansion?
Mayuki Hashimoto
So there is no point in making product that you can’t sell no matter how much effort you put in. The current correction in PW is very big. I think it is unlikely that our peers will continue to expand PW capacity at the same pace.
Yu Yoshida
And you can confirm this through trends at equipment makers, for instance?
Mayuki Hashimoto
I guess that is fair.
Yu Yoshida
Understood. Thank you.
Mayuki Hashimoto
I haven’t seen others plan, so I can’t say for sure, but that would be my view. I think my peers would have a similar view.
Yu Yoshida
Understood. Thank you.
Takayuki Komori
Next is Mr. Miyamoto of SMBC Nikko.
Go Miyamoto
I have a question related to Slide 19 and the expected drop in demand in 2023 for a demand supply of 86%. This is a level that the market has not seen for 10 years and the lowest level since 2013. With demand supply easing to this level, are you expecting prices on non-LTA 300-millimeter wafers to decline? The chart does not show analysis of demand supply for 200-millimeter, but do you expect price drops for 200-millimeter, particularly given that the percentage of LTAs is not that high.
Mayuki Hashimoto
200-millimeter is relatively healthy, with automotive use demand doubling. The range of applications for 200-millimeter is very broad. Leading edge applications continue to be able to achieve higher prices. So I wouldn’t expect the 200-millimeter market to deteriorate dramatically. Also, no one in the industry is increasing 200-millimeter wafer production capacity. As a result, I think prices should remain relatively stable.
On 300-millimeter spot prices, Sumco’s domestic business in 300-millimeter is all on LTA, so I don’t have much information on spot conditions. What I have heard related to test wafers is that spot prices are down significantly.
That said, although it is test wafers, they are also on LTAs. So spot for us is tiny. However, what we are seeing is that while our customers are pushing out delivery timing for volume, they are not buying in the spot market. So there aren’t many customers that are buying wafers in the spot market because prices are cheaper now.
Go Miyamoto
On a consolidated basis, I understand that there is slightly more spot business that you do through FST, what are the current trends?
Mayuki Hashimoto
For Taiwan, although, FST does have spot business, in fact, much of the business is done with long-standing customers, so prices are not off that much. The reason for this is if you lower spot prices significantly, that has negative implications for LTA customers. Also, there isn’t that much volume available in the spot market, although, we do some spot business, although, it’s very challenging.
Go Miyamoto
I see. So basically, although, demand supply is eased, is it fair to say the limited availability of spot product has meant the price competition hasn’t really intensified.
Mayuki Hashimoto
Yes. If you think about it, s sense for them to be buying in the spot market. The spot market is also very thin.
Go Miyamoto
Thank you.
Takayuki Komori
Next is Mr. Okazaki of Nomura Securities.
Shigeki Okazaki
Mr. Okazaki I would like to ask about whether you expect depreciation to change. Three months ago, you indicated you expected to invest $200 billion for domestic capacity expansion and invest $100 billion for Taiwan in 2023 and with depreciation likely to rise £15 billion to £20 billion year-on-year. If you delay the completion of greenfield investment, expected to complete in 2024. Does that mean that the timing of depreciation will also get pushed out?
Mayuki Hashimoto
For the domestic investments, we are maintaining our planned schedule as the focus is on expanding capacity for leading-edge logic use, epi wafers. If the market recovers, we will be well positioned to respond to rising demand by doing so.
Also, as discussed earlier, if demand picks up, customers will buy wafers immediately. For Taiwan and PW, however, we will ramp up new capacity in line with the demand recovery — although we have already bought the equipment, so there may be limits to how much we can slow things down.
Generally speaking, I don’t expect a major divergence in terms of depreciation.
Michiharu Takii
There isn’t much change from our previous comments on depreciation. For this fiscal year, Q1 depreciation was $14 billion. We are guiding for £17 billion in depreciation for Q2. In Q3, we expect a further increase of £5 billion in depreciation and Q4 is likely to rise another £5 billion.
Shigeki Okazaki
So basically, for Epi, even if demand weakens, you will continue with your plans as scheduled to ramp up greenfield capacity from 2024?
Mayuki Hashimoto
The plan continues to be to ramp up epi production toward the end of second half 2024, so likely to be Q4.
Shigeki Okazaki
Takayuki Komori
Next is Mr. Watanabe of MUFG Securities.
Ryoichi Watanabe
I have a question about slide 18 and PW. If the correction continues until mid-2024 and demand remains weak, would you still expect LTA prices to rise in keeping with the terms of the contracts.
In this instance, volume could be significantly lower than initially expected. If that happens, would it be possible to raise prices further to mitigate the impact? What is your view at this time?
Mayuki Hashimoto
You are suggesting asking for further price increases in order to drive a recovery in profit if volumes fall off, that would be very tough to negotiate. However, it is unlikely that PW will see a rapid recovery.
There are many different types of products tends to be locked in to flat prices over long periods of time. So prices generally don’t rise gradually overtime. I can’t speak for other companies, but generally, customers tend to commit for long periods of time for a, with prices generally remaining steady.
Ryoichi Watanabe
From that perspective, it sounds like the only area of concern would then be a decline in volumes. Is that fair?
Mayuki Hashimoto
There’s no point in hiding volume declines. With customers making large-scale production adjustments, there’s no way there won’t be an impact. I don’t know who it is in the industry that has suggested a recovery in the second half of 2023, but that doesn’t seem realistic.
Ryoichi Watanabe
Understood. Thank you.
Takayuki Komori
Our final question is from Mr. Yamada of Mizuho Securities.
Mikiya Yamada
I was looking at the gray lines on Pages 17 and 18 and was encouraged to see that both went up in Q1. If we look at the graph on Page 16, inventory levels look very high. However, if we look at Pages 17 and 18, although inventory is intersecting with demand, it doesn’t appear to be that high from a historical perspective. Based on these charts and if we assume that there will be a recovery in epi wafers in late 2023, there doesn’t appear to be a need to be overly pessimistic about Sumco’s earnings in 2024. Can you provide a qualitative view on this?
Mayuki Hashimoto
At Samco, Epi wafers account for close to half. This is different than our peers where epi wafers generally account for around 25%. And Sumco has the highest proportion of epi wafers within the industry, which is supportive in thinking about 2024. Also, Sumco has strength in IGBT and automotive use 300-millimeter wafers. Technologically, it is a very challenging and specialized product. Our share in this is also very high. So relatively speaking, this is supportive for our PW business. Although we are not talking about volumes in the hundreds of thousands here, volumes are relatively solid. Even now for this product, customers are asking for more volume for 2024. Given this, I don’t see the need to be overly pessimistic about 2024 earnings. 2023 will be tough, but 2024 should be better. We don’t disclose long-term forecast, but that would be my sense.
Mikiya Yamada
If we only look at the graph on Pages 19 and 16, it seems to suggest that conditions will continue to be tough. But if you look at Pages 17 and 18, I think it suggests that conditions aren’t actually that bad.
Mayuki Hashimoto
Slide 19 represents the overall market, but Sumco sales composition is slightly different than the overall industry average. Current conditions appear to favor a relatively earlier recovery for Sumco. Although the PW business is attractive when prices are rising, there is a lagging trend. Trying to navigate the volatility of this market segment is very challenging.
In contrast, epi is a leading-edge differentiated product where the number of players is limited. In addition, there is no lag because it is a made-to-order product and the product it is used for are also made to order. So, sales rise immediately on the back of an upturn in demand and vice versa. It is a product, where it is relatively easy to read the market environment. In the PW wafer market, even if you track market trends, it doesn’t necessarily give you insight into customer behavior because of the lag.
For instance, in 2014, while the number of customers was rising strongly, inventory levels were also rising as well up to 2016. This is because customers were buying more than they needed, and we’re letting inventory climb. This kind of behavior does not typically happen in the epi market. Mr. Yamada, I think that for PW, in addition to power semi apples, we are likely to see an increase in made-to-order products in GAA and other areas. I have high expectations for Sumco. Thank you.
Hiroshi Itoh
Mr. Komori. Thank you, everyone, for joining the Q1 2023 results briefing. We are grateful for your participation today. We will end the meeting here. Chairman, Hashimoto; and CFO, Takii, thank you.