Renesas Electronics Corp

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Thank you very much for joining us for Renata's Electronics 2021 Q3 result presentation session, despite your busy schedule. And today, this session will be simultaneously interpreted. Please click the channel at the bottom of this screen. In attendance today are Representative Director and CEO Hidetoshi Shibata, Executive Officer and CFO Shuhei Shinkai, executive officer and head of automotive solution business, Takeshi Kataoka, plus other staffs. CEO Shibata will say a few words of greetings in a minute, and then CFO Shinkai will explain Q3 results, which will be followed by a Q&A. In total, we will have 60 minutes. Presentation materials used today are the same as the ones uploaded on our website. Shibata-san, please turn on your microphone.

Hello everyone, this is Shibata, CEO.

This time, There's a bit of a news that I'd like to introduce at the outset first. In August, we were able to close the dialogue acquisition, and so that is now consolidated. And so therefore, it may be difficult for you to really see the continuity of the numbers. And so this is something we'd like to explain during the presentation. And if you have any further questions, please do rate so. Second, Maybe you have already seen our slides, but then there's an increase in channel inventory this time. I do believe some of you would want to know more about that. And so, therefore, we do have a slide to explain more about the channel inventory. Now, as a conclusion, there is nothing for you to worry about. Then there is an area where we do want to pay attention to. And so that is also something that We hope to be able to offer explanations so that you'll be able to have more understanding. But at any rate, it is not something that you would have to worry so much. And also, we also do have a slide of order backlog. This is sort of related to the channel inventory, but the numbers coming from dialogue, we still do not have the full set of numbers at this point. And so, We do have the order backlog numbers from Dialog, but then when it comes to the programs to secure the orders for Renaissance, this is something that is to be completed in November when it comes to the numbers with Dialog. And so the numbers that we have for order backlog, some of them is still under analysis. And so you would have to be careful. Now, dialogue, there's a lot of engineering culture, and this is something that I have shared with the analysts. But then perhaps on the other hand, when it comes to sales and supply chain, I think I would say perhaps Renaissance do have a bit of a lead in that sense. But then now that we have been able to integrate the company, we hope to be able to better the integrated company. And also, We do have towards the end of the presentation deck. At this time, we have also acquired an Israel company. We have also made an announcement of this acquisition. This is something that I have been saying for the past, but when it comes to connectivity devices, there are a little more that we'd like to add to the portfolio. So I have been saying that, and the acquisition of Celeno does supplement our initiatives in that sense. And so that concludes my introduction. And so with all that in mind, the details will be introduced from Mr. Shinkai. So with that, I'd like to ask Mr. Shinkai.

Mr. Shinkai, I am the CFO of the company. I would like to give a presentation about Q3 results using the materials. First of all, page 4, this includes dialogue numbers. In the middle, a dark blue column, please look at. revenue was 258.4 billion, and the gross margin 55.2%, OP margin 83.9%, and the profit and loss attributable to owners of a parent 62.9, and EBIT 103.6 billion yen.

Next page, please.

This shows the numbers excluding a dialogue contribution in the month of September from the top revenue, 244 billion, and the gross margin 55.6%, and the operating profit 80.2 billion, and the profit attributable to owners of a parent, 60.2 billion, and EBIT 99.4%. And the change from July, the revenue up by 1.4% and gross margin, it's above by 2.6 points and operating profit 10.6 billion yen up, which is 3.9 percentage points up. Next page, please. Regarding the revenue, I would like to explain about the quarterly trends. Year-on-year, 44.6% up, and Q-on-Q, 18.6% up. And the excluding dialogue contribution in Q3, the year-on-year, The 12% and industrial and infrastructure IoT fair dialogue has a major impact, excluding that year-on-year 22% and Q&Q 11%. Next page, please. The Q3 gross margin and so on and so forth. In the top right, you can see the projection, the gross margin, 3.5 percentage points up. First of all, revenue, dialogue contribution in absolute term, 18.4 billion, of which 15.1 billion from dialogue and For a dialogue, the one-third is from Forex impact, and then the automotive miners, industrial and infrastructure plus, and the revenue. Okay. The gross margin, the upside, and a dialogue, a negative 0.3%. And other than that, product mix improvement and improvement in the production cost effectiveness. And the manufacturing costs. We had conservative assumptions, but... Actually, the manufacturing cost is more or less in line with the plan, and the sales expenses went up because of the consolidation of dialogue, but in other areas, the expenses went down. Other than dialogue, centering around SG&M, the numbers declined. Next page, please. Inventory, as Shibata said at the outset, combining our inventory and the in-channel inventory, I will explain about the reasons behind the decline and the increase using another slide. And our inventory as of end of Q3 increased for both automotive and infrastructure IoT. And as shown in green, here, it includes inventory evaluation increase. Next page, please. Next page, please. Page 10, please.

Previous one.

Go back by one page. Yes, this is it. So sales channel inventory and WOI, regarding WOI, both automotive and infrastructure, industrial infrastructure, both went up. And the channel inventory does not include dialogue. And in the first half of next year, this exercise shall be completed. Next page, please. On the left-hand side, you can see the runitas inventory. On the right, you can see in-channel inventory. And the left one, dialogue portion, which was consolidated in Q3 and in Q4, Because of the seasonality, shipment will progress, but in absolute amount, it will decline. And advance purchase orders have been made, and therefore, this is a reason for increase in Q3, and the trend is likely to continue into Q4. And the work in progress in Q3. Responding to increase in demand, input has been increased, and also due to the improvement in production costs at Naka plant, it increased as well. But some semi-finished products, which are in chip form, increased because of slow-moving parts. And in the backend process, this is likely to continue to some extent, and therefore, work in progress is likely to remain virtually the same going forward. And the finished products in Q3, due to the logistics and the supply chain problems, there is a stagnation, but the EOL products, have an increasing and a Q4. We assume that supply chain issues will continue to some extent, and therefore it is likely to be at the same level. On the right-hand side, you can see channel inventory. And if I may start explaining about the industrial infrastructure IoT, it increased significantly queue-on-queue, and there are several factors. The first one is increased demand and responding to such increased demand. So we have shipped goods in advance in order to respond to increase the demand. MCU, SOC, and memory interface type of products. And then a change in distribution. This is a technical factor. From direct sale to channel sale, distribution has been changed. And the third point is postponed shipment. So the consumption timing, which was scheduled at the end of the quarter, has been postponed to the next one.

And the fourth point is mismatch of a product.

Unless a bomb is prepared, the products cannot be finished and therefore cannot be consumed by end users. Take, for example, the shortage in CPU. Power management ICU cannot be shipped or consumed. And various countermeasures have been implemented in order to counter this problem. For example, what is... in short, have been shipped given a higher priority. So we are taking a rather conservative and cautious view towards this. So the first one, the first point is the regular increased demand, and the second one is the change in distribution, and the fourth one is the fact that we are taking a conservative and cautious view. On the right-hand side, in Q4, we will continue to act on increased demand, and therefore absolute amount is likely to increase. But WOI will be decreasing in Q4. And the bottom-half automotive in Q3 and Q4, It seems to be increasing in Q4 from Tier 1, the pool. The consumption of inventory had an effect. And just like industrial and infrastructure, some product shipment have been postponed. On the right-hand side in Q4, OEM production recovery is anticipated. Therefore, absolute amount will increase. However, in terms of WOI, it will decrease because of increased demand. Moving on to the next page. The front-end process wave input basis, Q3, 12 inches, the NACA plant recovery had a positive impact. And the 8-inch is leveled off on the high level, 85% or slightly above 85%, which is in line with our assumption. Next page, please. EBITDA and cash flow in Q3 EBITDA was 103.6 billion and 256 billion for three quarters and on the right hand side the gap cash flow was 75.6 billion in Q3 EBITDA yield. The reason why the cash flow yield is low is because of payment of tax and the bonuses. And if you look at the gray portion in Q3 onwards, the machinery and equipment procured to respond to the fire which took place in Naka plant and it's $6.5 billion.

So here, allow me to touch more about, for example, for automotive business. On Q1Q, there's an improvement of 5.4 percentage points. Now, again, this comes from the NACA factory improvement. And so, therefore, there's a 2 percentage points amount of improvement in the production. And otherwise, impacts come from, for example, production cost decline as well as better efficiency. So that's the automotive business. But then going to industrial business, So there's a 0.2 percentage points improvement. And so there's a dialogue that comes in here. Excluding dialogue, it is a 1.9 percentage points of improvement. And moving on to the next slide. So here we look at Q4 and full year forecast. So if you look at the middle blue line, so for revenue from the midpoint forecast, that's $298 billion, which is a Q1Q forecast. 15.3% increase. And gross margin, 53%, which is a Q1QY's minus 2.2 percentage points. And operating profit margin, that's a 28%. Q1Q, that's a decline by 4.5 points. First of all, for the gross margin, we have the dialogue impact and also the product mixed impact. And compared to the previous quarter, it's been declined. There's also the variable cost part. And for the operating profit margin... Because of dialogue integration, OPEX is now going to concentrate more to happen towards the year end. For the full year, we also have the figures on the far right. But please, we'll just move on to the next slide. So now here we look into the sell-in and the sell-through for the demand. And so here we look at the Q4 forecast. First of all, let's look at the sell-in. And so, again, for total, that's 15.3%, like we introduced earlier. And so for automotive, late single-digit. And then for IIBU, 27% double-digit. But then when it comes to sell-through, we are seeing a double-digit percent increase for all. Moving on. So here we look at the order situation and order backlog, and it goes back to what Mr. Shibata was saying at the outset. So on the top right, you see what's in green. So this is about some of the initiatives for long-term outlook. And so we still have not been able to include all the dialogue figures. And so at the moment, it is still an ongoing process in obtaining all the numbers. Now, this is just a reference slide. Here we look at dialogue revenue and breakdown per quarter. So on this gray part, which is about licensed PMIC, In 2018 October, that was the time when Dialog was able to sign a license contract with a major customer. And so that is how the numbers have been trending from very well. So here, based on that license, we are able to keep track of the business size. Now you can see that in Q4, that gray bar pretty much disappears. And so this is cleaned off in next year. Now I'd like to jump into a few slides in appendix starting from slide 21. So here we look at the balance sheet. With dialogue acquisition, we have 530 billion yen in goodwill. PPA, we are going through the process and so from Q1, we should be able to collect all the numbers. And moving on to slide 23. So here we have the GAAP versus non-GAAP reconciliation. And so into three operating profit that was on non-GAAP, that was 83.9. And then in GAAP, that's 53.8. And so there is like a 30 billion yen amount of reconciliation. And out of that, there's part of the PPA, 8 billion. And then there's also the NACA cost. And there's also a 9 billion yen amount coming from dialogue adjustment. Please also turn to slide 26 now. And this is about capex strength. Again, there has been a procurement of equipment after the fire. And so in Q3, so the decision has been made to complete that by Q3. And so in Q4, this is really about some of the capex required to enhance the resilience of the factories. I'm turning to page 28 now. Now, this is, again, something that Mr. Shibata did mention at the outset. So as of today, we have been able to put forth this announcement of the technology tuck-in. And, again, this is about Celino, a startup company in Israel. So that concludes my presentation. Thank you very much. So thank you very much.

Let us now begin the Q&A and allow me to explain how to ask questions. If you have a question, please click the raise hand button on the screen. So I will call your name and your company name. And when your name is announced, then you will be able to speak. So please unmute yourself and ask a question. For the interest of time, please ask up to two questions at a time. Let us begin a Q&A. If you have a question, please raise your hand.

First of all, Mr. Sugiura of Daiwa Shoken.

So Mr. Sugiura from Daiwa Securities, please unmute yourself and speak. This is Sugiura from Daiwa Securities. Thank you for this opportunity. My first question is about the guidance of Q4. First of all, excluding the effects of dialogue consultation, revenue, gross margin, and operating profit, Q1Q, how it is likely to evolve. And also, only the revenue numbers of dialogue has been disclosed. So I would think that it is flattish from Q3 to Q4. And would you elaborate on that, including IPO situation, so on and so forth? I think I would like to respond to that question. So the revenue impact, excluding a dialogue, Q&Q, 6% up is anticipated. Excluding dialogue. and ABU and IIBU. ABU, the higher end of the single digit, and IIBU, double digit, slightly above double digit, or in the middle of a double digit. So it's like a 5% or 6% overall growth. So what about gross margin and operating profit? Gross margin, excluding dialogue, 1.8% percentage point, and operating margin 3.4%. Q and Q. My second question is for Shibata-san. And sorry, I may be asking the same question over and over again. So demand a forecast for the next half a year or one year. So the customers' patterns of placing orders has been changing, you said, in the past, and there seem to be some sweet spots, but it seems to be changing. So in the next half a year as well as one year, what is your demand forecast? yeah, up till the first half of next year, the forecast remains more or less the same. And overall, it will be solid. As of today, I maintain that view. The only concern is not the demand side, but the supply side and logistics. Compared with the beginning of the year, I am somewhat more confident to somehow manage the situation, but supply and management, we are having a tough time. Without that demand, at least up until the first half of next year, it's likely to grow steadily. That is the picture we have in our mind. As you rightly pointed out, the TI results we are looking at and the laptop or PC-related will be the focal point. Like Chromebook is slowing down recently, and desktop terminals have been rampant. And it seems to be slowing down recently. And note, name-round platform generation change is one factor, and Windows 11 has been introduced, so it continues to be robust. But The strong ones and the not so strong or weakening ones, the situation is very mixed, as Shinkai said. Unless the product mix is optimal, we will not be able to sell enough products, and the inventory will build up like a TI. Customers are becoming selective. In the past, customers wanted to buy anything that was available, but now they are changing their behaviors. Unless things are packaged in a set, they don't want to buy. And the mid-term inventory of finished goods seems to be increasing on the customer side. And therefore, we are taking a very cautious view because we don't want to increase inventory without any justifiable reason. And the name brand seems to be robust, but we must be agile to respond to the future movements. Otherwise, inventories will further build up, so we will remain cautious. And our exposure, smartphone and laptops, are not so huge, and therefore, overall, The automotive, industrial, and IoT in a broader sense are doing quite well. And those being the drivers, up to the first half of next year, it'll be quite robust. Thank you very much for easy to understand the response.

Thank you very much. Next, Hijiwara-san from Seagroup. Please unmute yourself. This is Fujiwara from Citigroup. I hope you can hear me. Yes, we can. Thank you. Yes, thank you very much. I also have two questions. First, you just talked about PCs, but then can I go back to sales channel inventory? So WOI has been able to see the execution going up. And now when you look towards the year end and also to the beginning of next year, and I guess it is going to, WOI is going to start to decrease. But then what about the tunnel inventory? Do you think it is going to increase from here off? Is that how you see it? Or do you think it's going to be flattish or is it going to decline? And at the same time, you just talked about PC and you said there's a lot of inventory there. But then this finished product or interim products for PC, that's what's behind this inventory. But is there anything else, like FM or for home appliances? For example, perhaps there is a restraint, constraint to the production because of component. There's not enough components. But do you think in the end it is going to be very much a similar feature with PC inventory? Yes. Yes, so allow me to answer that. So for the channel inventory, on the actual value, we do expect it is going to increase. So that's something that we did illustrate in page 10. And so, for example, if you'd be able to look at where the arrow is going, this indicates our expectation as for what could happen from now on. And so for IoT... So it's going to be flattish on absolute value, but then for automotive, WOI, absolute value itself is going to increase. And this is something that I did mention earlier, but then from Q4 and onwards, we expect that there is going to be a healthy demand. And so we have to cope with that. And that means we have to make sure that we will have a good inventory amount even in this channel side, because we need to respond to the increasing demand. Now, would what we're finding in PC happen in other areas? I think that's your concern. Now, of course, quality-wise, maybe we will see something very similar. But then, for example, I think the same thing could be said with decreased production by OEMs here for the auto side. And you don't have all the bombs, you don't have all the parts, and so therefore you cannot complete the products. And I think this is going to be the same story elsewhere as well. But FA, healthcare, auto, compared to PC, I do believe the unit price for the finished product is much higher. And so the consumers or the clients... they probably would just not want to finish to the extent they have without having the full product because that is going to be too much of a burden capital-wise. So we do have to be careful how things would develop. But then what's going on in the PC, that lumpy situation in PC, like sometimes you'd be accelerating, sometimes you'd be stopping. I don't think that would happen in other areas like auto. And so for the time being, we do believe that it is going to be important that we keep up with the robust demand and be able to increase our shipment. So that's my response. Thank you very much. And my second question, you also introduced about the order trend. In total, company-wise, that's 1.2 trillion yen size now. And I take that is going to be there. That is the amount of order that will last till 2022. Now, this 1.2 trillion yen worth order If you look at on quarter-to-quarter trend, within that 1.2 trillion yen, I have to be sticky in asking this. Does this include some tentative order, not a complete official order, but then does it include some of the tentative order? Yes, in terms of the capacity, I do believe we've been able to secure the necessary capacity, and I think this is the best way to answer. As you know, when it comes to the components or parts or the wafer for foundries, it's difficult to really attain a full commitment into the future. And we do believe that, well, there is a level that we have been able to come to an agreement. But then there's also some stretched amount that we have included within the yearly plan. Now, if we look back the previous trend, it seems like as we go down the road, we should be able to see the actual numbers, and we cope with that, and that's something that we have been doing. And of course, So we do not believe that all the numbers will be filled if we don't really make any proactive movements. But then we have Mr. Katawaka, I have Shinkai, and I myself, we all do communicate with the suppliers on a day-to-day, day-by-day basis, and so that we'd be able to secure enough supplies that we need. Double ordering or phantom order. How much of that would be in here? That was your question. That's a million-dollar question. That is something that we always talk about internally. For example, some of the non-cancellable, non-returnable order that we obtain from the client, if we include that, the bar here should have been much higher. And we decided to sort of make our own judgment in introducing this number, because sometimes we'd find some inflated order. And so we did a lot of haircutting. And after that, we have been able to build up the number, and that is exactly what you find on slide 16. Of course, there will be some inflated order. Some of that still might be here, but we did try to make sure we do enough hair trimming. We did make our own decision in seeing that this is a more probable number. Now, maybe we could have been too conservative, and in that case, we'd have to keep on making sure we have enough supply, but then maybe there still could be a bit of a phantom order remaining here. Maybe that could be the case. We will have to see. But we did do a lot of robust haircutting before we introduced this number, so I am pretty comfortable with what we have here. Thank you very much. I got that. Thank you. Thank you, Mr. Fujiwara.

So can the secretary make a correction?

So slide nine. Mr. Fujiwara said that, talked about the channel inventory. For auto business, there are, if you look at the gray line, I have you. on nine weeks, and for ABU, that's seven weeks in total. Eight weeks strong. And the dotted line is like 11. To give a follow-up.

Nikkei BP no Kojima-sama.

Next, Kojima-san from Nikkei BP. Please unmute yourself and ask a question. This is Kojima from Nikkei BP. Thank you very much. I have two questions as well. Naka plant had fire and I think you made hard efforts to ensure the replacement products or the production. So what is the current situation? That is my first question. and also this Israeli company that you have bought. That company in Israel and Dialogue, I'm wondering, there may be some overlapping products. So I would like to respond to the second question. And regarding your first question, I would like to invite Kataoka-san to the microphone because he did work marvelously for this deal. And Celano's products are not overlapping with Dialog's products. Wi-Fi advanced version. Here it says 660, but inclusive of G5. Sereno is a tiny company that focuses on Wi-Fi with 150 employees. So it focuses on Wi-Fi. uh... product on the other hand that dialogue uh... me up to generation four of the life i and it's a little power uh... focus uh... uh... products in addition and i a lot of the blue to solo energy inclusive of that other activities dialogue also of us so what was lacking in that dialogue The newer generation of Wi-Fi will be covered by this company. And Celeno, obviously. So there has been progress in the client side, technology development and access point. These are tiny companies that need to earn money by working on access points, but now IoT and client products are becoming more enriched. And therefore, I thought it would be a good timing and also a minimator way for If millimeter wave development become prevalent, then the last one mile Wi-Fi capability will be very much needed. So this will be an excellent combination. And Kataoka-san will respond to your first question. this is kataoka so the alternative production there were several of them first of all the wafers were produced at other factories and the mature products were produced at the other plants of renaissance and in 300 tesla c ts mc and because of that For example, something which was only internally produced is now made at the TSMC as well. So sustainability has been enhanced. And we would like to capitalize on that benefit going forward. And we can have a dual FAB system, so to speak. We can choose either we want to make it at NACA or TSMC, so on and so forth. And also... The growth, the bump process, the special process like that, we only handled internally, but certain overseas manufacturers made those things for us. The company has been very supportive. TSMC was very supportive, but this other overseas company was very supportive as well. So production flexibility has been dramatically increased, and with that company in overseas, we would like to continue our transaction in order to ensure flexibility going forward. That is the current situation. I see. So because of that fire, you came up with these improvements. Yes. I mean, in a way, it may seem odd, but we have been able to reduce the cost of production eventually. Thank you.

Mr. Takayama, please unmute yourself. Yes, thank you very much. Can I go back to Q4 gross margin and OPM? I think you were saying that it's going to decline, and SG&A and expense is going to increase towards the year end. I think you said that. But then, for example, as you increase revenue, I felt like, for example, the OPEX, et cetera, seems to be more. Or do you think Q3 was too high? And is there any reason behind explaining Q4? I think that's something Shinkai-san should answer. Mr. Shinkai, please. Certainly. In Q3, I don't know. Was it too high? Maybe. About gross margin line? In Q3... there was the auto side product mix, which worked well. And on the other hand, in Q4, there was a, on the other hand, Q4 seems to have dropped or worsened. Now, when it comes to variable cost, for example, be it ingredients or some of the procurement from the foundry, we're seeing the price increase there. That is also impacting. That is something that we have included in the forecast. Now for the OPEX, in Q3, there has been a conservative spending. And on the other hand, Q4 would be increasing. And there's also that year-end concentration of expenses. And so that is why OPEC margin Q1Q is going to decline. And that is what we expect. So that's my explanation. Oh, if I may add, gross margin dropping One third of that comes from dialogue and another one third comes from, again, the product mix change. Or not one third, a quarter is from dialogue and quarter from product mix. And then the remaining half, again, comes from the price increase for the raw materials and also other production cost increase. So in that sense, If you look at Q1 next year or first half, depending on the product mix and depending on the cost, we don't know. We should still have to see how things would go. But, for example, of course, we don't know the timing of when the raw material cost will start increasing. Do you think you should be able to start to find better gross margin as you try to be able to level off the materials cost? Because I'm not exactly sure if Q4 is higher or lower than the normal level. Well, that is a good question. Thank you. At the moment, when it comes to raw material, it is very unstable at the moment. It's very difficult to define what is normal level now. So the numbers that you are seeing here, I guess we should be trending a bit higher. That's what I hope. Thank you. And also, my second question is, So again, the actuals for Q3 for auto and non-auto. What is the growth rate excluding dialogue? I think Mr. Shinkai did touch upon that. But then can I hear again, ABU versus non-ABU? Yes, Mr. Shinkai, please. So can I go back to page... So auto, excluding dialogue, that's 51.8 year-on-year, and 13.8 Q1Q. And IIBU, excluding dialogue, that's 22.2 Q1Q, 10.5%. Thank you, got that. Thank you very much.

Thank you very much. Next. Mr. Eguchi from Manike. Please unmute yourself and ask a question. So this is Eguchi from Japan Economic Journal. Can you hear me? Yes, we can. Thank you very much. So sourcing of materials, I would like to ask you a question. So in the past, you touched upon the electricity-related issues in China. And in Q3, material costs increased and risks pertaining to the sourcing. And overall, do you think that the risk related to the sourcing is rather high? So how should I respond to this one? So Nikkei and the media, I think this has been making headlines already. Major suppliers price increase impact. That is probably the largest impact on us. The size of the price increase

Yeah.

The materials used for our products in some cases have doubled. However, in terms of the impact of the price increase, the major foundry rose its prices, increased its prices, and it's very difficult for us to cope with. Thank you. And another point is this company you acquired This Israeli company that you vote, so tech driven acquisition, this is, I would assume, so this may not have an immediate impact on the business performance, but in terms of synergy, to what extent do you anticipate the synergy and how is it likely to be realized? This is a small company which is growing rapidly compared with Dialogue. How should I say? We think it's very promising, but whether it is convincing or not, I do not know. But taking a conservative view, in 2022, at the non-consolidated number is likely to grow rapidly. I don't know about 2022, but 2023 and 2024 combo chip and others. well actually it's rather embarrassing but we haven't had many wi-fi related expertise but connectivity wi-fi bluetooth combo chip is becoming a common place so if we can produce things like that entirely in our company The synergy can be huge. So compared with Sereno revenue now, compared with that, it will be much bigger. In a not-so-distant future, we should be able to come up with a very impressive number. Thank you. Thank you.

Thank you very much.

Next, from Wall Street Journal, Mr. Tsuneyoka, please unmute yourself. Thank you. Can you hear me? Now, earlier you talked about anything for auto for next year. you are saying that there should be a robust trend all the way to first half next year. But then, for example, supplying MCU for auto purpose, what is your short-term forecast and perhaps a little more mid to long-term forecast into like a couple of years, three years? Yes. Yes. That's exactly why we have Mr. Kataoka here. So, Mr. Kataoka, please answer that question. Yes, so first of all, we know there's strong demand, and I'm sure you know the OEMs, especially during July all the way to September. There was this reduction in production because of what's going on in Malaysia. And, of course, if we try to look into the end of fiscal year all the way to March, They're hoping to be able to increase their production now historically, back to like historical high. And so that's what the OEMs are trying to do. When we look at the inventory level of OEM, it's really historically low. So it's going to be important that they start building up their inventory. And that is why we're expecting a very robust demand. That's exactly what Mr. Shibata was saying. Now, we will be increasing the production capacity for NakaFab. We will be investing for that. And also our works with TSMC do understand what we're trying to do. So our share in TSMC will be increasing. And so as we try to go into 2021, 2022, for example, 40nano, the production level is going to be increasing. Now, as we look into the long-term perspective, as you know, a unit of production volume of cars is going to increase. And nowadays we're seeing that it's going to be at least 5 or 10% CAGR in terms of volume growth. But then also, if we look at the semiconductor, how much chips will be included within cars, this is going to increase because there's more electrification. and certification, it also has to do with a lot of not just the control units, but then, for example, sunroof. I don't think we see so much in Japan except for the real high-end vehicles, but then outside Japan, you see a lot of sunroof vehicles. And this is exactly where analog power, SOC, MCU, a lot of them are used. And so from that perspective, in the mid to long range, there's a lot of expectation we'd be able to hold here. So again, here we basically offer 40 nano, but then there is also 28 nano that is already being offered. So how much more can we go into this space is also very interesting, but that's something that I'd be able to say. Well, thank you. There's also one more follow-up question. The Chiba earthquake and eruption of Aso Mountain, are these impacting production to you? Well, those natural disasters that happened recently, no, there is no impact. I think I'm correct in saying so. But again, Japan is prone to natural disasters, as you know. So it is important that we be prepared, we do that, and so even if something happens, we do not believe that we'd be late in coping with what happens. But then, of course, depending on the size of the natural disaster, there might be some of the fluctuation in production levels. And it's something that we have to live with. I don't know if this is the right way to say this, but it's probably similar to COVID. We have to live with these natural disasters. But then in terms of human resource, I do believe we have enough talent or experience with these natural disasters. So even if in the event of some disasters, I'm sure we'll be able to cope with that. Thank you very much.

Thank you.

So the next will be the last question as we are running out of time. From Morgan Stanley Securities, Yoshikawa-san, please unmute yourself and ask a question. This is Yoshikawa from Morgan Stanley. Thank you for this opportunity. So Q3 gross margin, I would like to ask you about. So Q3 gross margin was good because of good product mix. Actually, it may have been too good that you said, I think. So our car grew. Am I right in understanding it that way? If that is the case, at Investor Day, Shibata-san, said that you don't have to do anything and still the automotive business would grow, centering around our car, if that is the case. It may go down a little bit in Q4, but next year, the gross margin target, probably, I can expect that you will be achieving the upper end of the gross margin target range. Well, In terms of the directionality, that may be the case, or I hope that is the case. But there are two things we need to keep in our mind. S.O.C., it's entirely outsourced. And wafer prices have been increasing, as I said previously. And SOC, packaging materials, the material prices are increasing very rapidly. Regarding price increase, we have been trying to pass on the price increase to customers to some extent. However, unit by unit, SOC is likely to have the largest impact from price increase, and the pressure on gross margin from that is probably quite strong. If SLC grows like it did in 2003, then the gross margin may grow rapidly. Once again, you may think, but it's not likely to happen. But it is true that SOC is growing so rapidly. Understood. But as you said just now, so if the cost is rising, the first round or second round of price increase might have already happened. But the third round and fourth round, am I right in understanding that you will be requesting a customer to accept the price increase? Yes. Regarding automotive business, in various sense, long-term stability is important, and we have no intention of changing prices frequently. But at the same time, we would like to pass on the price increase to customers to some extent. So more or less, once every half a year, we are requesting our customers to make adjustments. I see. Thank you very much. If I may supplement, in Q3, automotive mix improved because of SOC and MCU. As Kataoka said, the 40 nanometer product increased. That had an impact as well. I see. Thank you.

Thank you very much. I know more people do want to ask questions, but it is now time, so we'd like to close the Q&A session. Now, before we close, can we ask Mr. Shibata to give a closing remark? Mr. Shibata, please. Yes. So allow me to summarize once again what we announced today. So within our portfolio, for example, PC portion compared to the past is not really going that lucratively. So we do have to keep an eye on how things develop. But then fortunately, as a result of the previous strategies, the end market exposure, I do believe we have been able to diversify to quite an extent. And so from that perspective, I think it does give us reasons to have a very strong outlook into the future. And so for the demand side, our view has not really changed. But then on the other hand, supply side, it's always tough. Every day, All the executive members are working all together to really make sure that we'd be able to have enough supply, and still we're at this point. And so it's exactly where we really have to work hard on so that we will secure enough supply. But please do understand that we're really working hard so that we'd be able to secure the supplies that we need. And maybe some of you still would have some concerns, but then at the end of Q4, even for the channel inventory, I'm sure we'd be able to show some evidence that everything was okay. And that's exactly how we need to keep our operations going. So I hope we'll be able to obtain your understanding. But once again, thank you very much for joining. Thank you very much. So with that, we will end our Q3 results announcement for year 2021. Once again, thank you very much for your participation. Thank you.