Q&A on Second Quarter Results for the Fiscal Year Ending March 2011

Why did sales of semiconductor production equipment (SPE) in the first half fall approximately 10 billion yen below the initial forecast to 240.2 billion yen?

A portion of planned sales was pushed back, and as a result we did not achieve the forecast, but we expect to make those sales in the second half.

What is the outlook for orders in the October-December period of 2010?

Orders for SPE will decline approximately 15%, and orders for flat panel display/photovoltaic cell (FPD/PV) production equipment will be in the range of 10 billion yen to 15 billion yen.

What is the outlook for the January to March 2011 quarter and beyond?

Customers have not changed their new fab establishment plans. Therefore, even if orders decline temporarily in the October to December quarter, we believe they will subsequently increase. We expect investment in wafer fab equipment to grow approximately 10% year-on-year in CY 2011.

What is the current status of your efforts to reinforce etch systems and cleaning systems?

We are focusing considerable efforts on etch systems and cleaning systems in a bid to increase our market share, but it will take a minimum of one to two years before any tangible results are produced. Our products are currently being evaluated by customers.

Capital investment for this fiscal year has been revised up by 10 billion yen to 45 billion yen; what are the factors of increase?

The main factor of the increase is the acquisition of evaluation equipment for use in R&D. Some of the increase is because of the expected early completion of the new Miyagi Plant.

Sales have been increasing, but are fixed costs also rising?

This fiscal year, R&D expenses will increase 4 billion yen to 71 billion yen. We aim to build the foundations for future growth by sparing any necessary development expenses. As the employees have overcome the difficulties of the past two years, the Company decided to increase performance-based bonuses (payroll costs) for this fiscal year.
We are working to limit increases in fixed costs as much as possible, but we are also working to recruit outstanding engineers.

You recently increased the target payout ratio from around 20% to around 35%; why 35%?

The 35% figure was not determined by a formula. We determined that with a 35% payout ratio target, we will be able to secure adequate funds to invest for future business expansion, including M&A. There is no change to our policy of active investment in R&D, facilities, and human resources.

What is your stance on share buy-backs?

We believe that the effects of share buy-backs are difficult to see in industries susceptible to extreme fluctuations such as our industry. We may consider a share buy-back if share prices were to drop to an extremely low level, but at this time we have no plans to actively implement a share buy-back.

TEL has been making the operating margin a performance target, but do you have any plans to have benchmarks related to balance sheet management such as ROE or ROIC in accordance with the changes to the dividend policy?

We are aware that ROE is also an extremely important indicator, but we place the greatest emphasis on developing products that are technologically differentiated from other products and on raising the operating margin.

Why is TEL's share price performance relatively low compared to American SPE manufacturers?

TEL has an extremely high percentage of foreign shareholders, and there has been some impact from the shift away from Japanese shares by foreign investors. In addition, it appears that investors have avoided semiconductor-related shares, which are subject to extreme fluctuations. We will continue to raise our profit ratio and increase corporate value by developing and selling highly-competitive products.

What impact is the continued increase in the value of the yen having?

Our export sales are generally yen-denominated transactions, and as a result, the direct impact is minimal, but if the rate continues in the 80 yen per dollar range, we will be at a disadvantage when competing against American manufacturers of etch systems and other products. We will look into and implement measures to raise our cost competitiveness such as increasing the percentage of procurement from overseas.