Renesas Electronics Corp

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Thank you for taking part in Renaissance Electronics Corporation 2022 Q1 earnings call. Today, we have simultaneous interpreting available. Please select your preferred language from the globe mark at the bottom of your screen. Please make sure that the speakers turn your video on and let us see you. Thank you very much. The attendees today are Representative Director, President and CEO, Hidetoshi Shibata, Senior Vice President and CFO, Shuhei Shinkai, Senior Vice President, General Manager of Automotive Solution Business Unit, Takeshi Kataoka, We also are being attended by other IR members. Our CEO, Mr. Shibata, will give an opening remark followed by overview of our first quarter result by our CFO, Mr. Shinkai. We then will open the floor for questions. The entire session is expected to last for 60 minutes. The presentation material we will use today can also be found in the IR page of our website. With that, Mr. Shibata, please turn your mic on The floor is yours.

Ladies and gentlemen, hello, my name is Shibuta.

For this time around for results, we have quite a lot of information to communicate. As much as possible, we would like to ensure that you correctly understand where we are standing. Q1 sales. was exceeding, exceeded our guidance. On the other hand, one of your concerns may be about inventory, whether it be in-house inventory or channel inventory, which have both gone up somewhat. But when you look at the actual details, of course, to a certain extent, volume has been going up, but there were other factors such as currency rates, as well as price fluctuation. and shipping debit. Due to the way we do the transactions and the changes we've made, there is some impact from there. So in order to run you through the details, we have prepared a slide. So I hope I can give detailed explanations as much as possible. Another area of your interest may be utilization rates at our factories. And there was an earthquake in March this year, as you may remember. And because of that, we experienced blackouts. The impact on production. There was an impact on production. And from the second half of March, we have inputted more wafers. Therefore, when it comes to utilization rates, they are extremely high on the surface. However, the losses associated with the earthquakes are not accounted for in the utilization rates. Therefore, it doesn't mean that the high utilization rates are going to directly translate into higher revenue going forward. And we have also shown you a chart regarding the build-up of backlog. But this time around, we haven't included it in the presentation, reason being some analysts have been asking us about this before. But for the rest of the year, as well as as we head towards next year. Like last year, we have been engaging in an upgraded exercise like we've been doing from last year. So for this year's backlog, we would like to go through a refresh. So the current numbers, if we show it to you, you'll basically see that it has built up and. And we might. give you expectations that may be misleading. That's why we have decided not to include that page in the presentation. With a backlog refresh as well as for next year's order intake. So far, as of the end of July, we would like to conclude this process and we are working on that right now as we speak. So if the timing works out well, In the next results meeting, we will be able to provide more information. So apologies that we haven't included that slide this time around. And also from this time around, as PPA of dialogue has been concluded, the gap numbers include these numbers now. And for capex levels, on analyst day, Mr. Shinkai, the CFO, has explained about this, but when you look at the appendix, capex continues to be at high levels. Compared to sales, it's close to 10% of total sales. That's how high capex continues to be. So this is also noteworthy. Finally, shares buyback has been announced, which is a considerable size which we have announced for the first time. So this concludes my opening comments and the CFO, Mr. Shinkai, will give you the details now. Over to you.

Yes, thank you. This is Shinkai, CFO. So allow me to go over with you the first quarter 2022 result using my presentation materials. So let us jump to slide number three. So first of all, it's a disclaimer. And you did hear from Mr. Shibata. We are now going to be reflecting PPA of dialogue. And so that's exactly what you heard from Mr. Shibata. So here now we look at the first quarter result. And please look at the dark blue column. So revenue, that's 346.7 billion with a gross margin of 58.4 percent. Operating profit is 135.5 billion with a margin of 39.1 percent. Profit of attributable owners apparent, that's 90.1, with EBITDA, 155.2 billion. As for currency, you can see the rate here versus dollar, that's 115 yen, and versus euro, that's 130 yen. Now, if you look at the far right, you'll be able to see the change from the forecast. And this is something that I'd like to go over with you in the following page. So please take us to page five now. So here we look at quarterly revenue trends. So in Q1, you can see the bar on the far right. So overall... that's year-on-year 70.2% growth, and Q1Q, that's 10.3% growth for the total revenue. Now, excluding dialogue, it's 47.7, and on Q1Q, that's 14.5. For automotive and industrial infrastructure IoT, you can see the details on the slide, but you can see that with dialogue for automotive year-on-year, that's 47.9%, and Q1Q, that's 17.0%. And likewise, for IoT, Year-on-year, that's 50.2% increase. Q1Q, that's 12.5%. Please move on to the next slide, page six. So here we look at the revenue and the gross operating margin for Q1. First, the total figure is something I would like to highlight. So versus forecast, so you can see that the details on the far right box. So first of all, as for the revenue, it has increased by 3.2% versus forecast. That's 10.7 billion. And of course, there is a currency impact, which is 40% of the total of the difference. But then otherwise, be it automotive, industrial, infrastructure, IoT, for automotive, there's a 20%. And for industry, that's about 40% improvement. Now, what are the reasons behind the improvement? So we have been able to see shorter lead time for what we produce internally. And then also, we have been able to do better in terms of the outsourcing as well. Next, for the gross margin, we have been able to do better by 2.8 percentage points versus forecast. And out of that, the better product mix has been able to contribute 70% of this improvement. In other words, most comes from better product mix. As for the production recovery, it was a slight increase versus forecast, but then because there was a stoppage of production and because of the earthquake, I mean, the result, it was very fraughtish. Operating profit, that's a decline by 37.4, 3.7 billion. And so that is why we have ended with an increase by 4.6%. Now, I would also like to highlight the Q1Q transition, again, for the revenue, that's 37.2%. a billion increase, and out of that, 20% comes from currency, and otherwise automotive would have like 60% industry, would have like 20% contribution each. As for the gross margin, that's a 4.2 percentage points or so improvement, but most of that comes again from the product mix. As for the operating expense, because of seasonal reasons, Q1, you can see the trend has gone down. And so that is why we have been able to see an improvement on 7.7 percentage points on Q1Q. Now for a segment, you can see this more in the middle, but this time there is no highlight. So I would like to just go further to slide seven. Here we look at the inventory. First of all, starting with the in-house inventory. And of course, there's also the channel, sales channel inventory, but I'd like to talk about some of the trends as well as what kind of forecast we have. So first of all, let us look at the overall inventory. So if you look at the far right, the company total, you can see the DOI figure. Q1Q, it has increased. And if you look at this per business unit, you can see the automotive has gone a bit down, but it is increasing on the industrial infrastructure IoT. Moving on to slide eight. Here we look at the inventory for sales channel. And so again, from this time, we have included dialogue And so for 2021 Q3 and onwards, you can see the figures including dialogue now. So again, total Q1Q, it has been increasing. And if you look at the automotive or industrial infrastructure IoT, they're both increasing Q1Q basis. Moving on to slide nine. So when we try to look at the reasons of this change of in-house inventory and sales channel inventory, the summary is here. And we also do have some of our outlook from Q2 and onwards. So first of all, starting with the in-house inventory on the left, what is really common is around the inventory valuation. In other words, increase in COGS, as well as the force impact, currently the yen is weaker. And so that is really accounting for half of the Q1Q change. And so this inventory valuation is something that we expect to continue to happen from Q2 and onwards as well. As for the materials, the supply, especially some of the materials that is really short in supply, there is a lot of advanced order. And that is really accounting for 10% of this Q1-Q transition. And this is something that we also expect to happen on Q2, especially because there is going to be this more advanced type of order making for some of the more supply-tight type of materials. Now, also, When it comes to the demand, it is basically something that we try to outsource. And also for the front, for some of the chip nowadays, MCBJ substrate or testers, that always becomes a bottleneck, which is something that is always becoming an issue. But then the impact from the earthquake, some of the... work in progress has been scrapped. And so that amount of Q1Q change is accounting for 20%. But then from Q2 and onwards, we still do have to make sure we be able to keep up with the increased demand at the same time, especially for some of the production risks. We do expect that it is still going to continue, especially for the post-processing part. And also for the finished products, there has been some impact from the Shanghai lockdown And so that is why we have seen an increase in the finished goods, which is accounting for 20% of this increase in the finished goods. Now, logistics risk is something that we expect to still linger in Q2. And so again, the finished goods, we expect that the level pretty much would be the same, would be kept the same from Q1 and into Q2 and onwards. But then also there's also some of the trends behind the sales channel inventory. First, with the industrial infrastructure IoT. Now, ever since Q4 to Q1, some of the increased Q1Q on an absolute value base and WOI, we are seeing some reasons behind that, which can be summarized into three bullet points. First is really about trying to keep with the increased demand. In other words, trying to make some advanced sending or shipment. And especially in Q4, there were some high demand demand, seeing in some of the key items, which we are now seeing a decline now. And this transition is accounting for 70% of the Q1Q change. But then also at the same time, we're also seeing some impact of adoption of shipping debit, which is also increasing value-wise of the inventory, which is accounting for 30% of the change. From Q2 and onwards, we still do expect that we will have to keep up with the continuous increase in demand. within the channel, we have to make sure that we always be able to offer the optimal product mix. And so WOI, we expect there is going to be a decline. As for the automotive space, again, there has been some advanced shipments due to increased demand and also decreased production of OEMs is also another factor that we are finding. And in Q1-Q, we have been seeing an increase For Q2 and onwards, we still expect that there is still going to be some continuous increase in demand. And just like an industrial infrastructure IO2, we always have to make sure that we be able to keep a good inventory product mix. Moving on to slide 10.

So next is utilization rates. On a wafer input basis, we show the trends here. As Mr. Shibata explained at the beginning, on a wafer input basis, we show the trends. So this is not on an output basis. And also for Q1, For Yamaguchi and 6-inch lines, it has been taken out of the denominator, and that is why it is higher. So on a wafer input basis, it was more than 85% utilization. For Q1, the number of operating days was less, so 8-inch Q1Q decline was seen. And for 12-inch lines, like mentioned earlier, we were inputting more for recovery purposes. Next, please turn to page 11, where we talk about EBTA and cash flow. It was 155.2 billion in Q1, and operating cash flow was 89.6 billion. Free cash flow was 64.4 billion for the first quarter. For operating cash flow in Q1 and Q1Q, decline is due to seasonality. And also, the cash out for CapEx was 25.2 billion in Q1. For this fiscal year, we believe that the trends are going to be about the same throughout the year. Please turn to page 12. Here's the Q2 forecast. If you look at the navy part in the middle, for revenue, the midpoint forecast is $375 billion on a Q1Q basis. If you look at two columns to the right, we're expecting plus 8.2%. For gross margin, we are expecting 57.5%. which will be minus 0.9 points on a Q1Q basis. For operating margins, our forecast is 36.5% or minus 2.6 points on a Q1Q basis. For currency rates, we are expecting 124 yen against the dollar and 134 yen against the euro. Let me also simply briefly talk about the details. For revenue, FX impact is accounted for quite considerably. If you exclude that, close to 2% Q1Q revenue growth is expected. For gross margins, for production, number of operating days as well as earthquake recovery is expected to be positive, but due to mixed deterioration as well as raw material prices going up, we're expecting a net negative impact. For operating margins, for operating expenses, due to seasonality, Q1 was low, but we're expecting a bounce back and then higher Therefore, we're expecting margins to decline. Please turn to page 13. So on March 16th, the earthquake occurred, and here we summarize the impact. In Q1 and Q2, you could see the details of the impact on the slide in the chart. So let's move on to page 14. So this is about share buybacks. First of all, for the summary, about 8.65% of total number of issued shares or 168 million shares of common stock will be bought back. And we have also entered into the tender agreement with INCJ for the equivalent amount. We will be buying at 1,190 yen a share, which is a 12.44% discount to the closing price of yesterday, April the 26th. the maximum total acquisition price will be 200 billion yen in total. So we will be able to improve the free float ratio, as you can see on the right-hand side, and also resolve the overhang concern. And non-GAAP EPS accretion is going to be 9.5%. And for the leverage ratio, compared to end of March, we will see an deterioration of 0.4 times. So moving on to the appendix, I would like to pick up some slides. First of all, let me talk about page 18, which is about the balance sheet. PPA impact related to dialogue has been retrospectively accounted for from this time around. Next is page 20. For PPA impact, we show the analysis here. So compared to the past two acquisitions, For Dialogues business and the product life cycle, it's relatively shorter. So the allocation to intangible assets is smaller, and the amortization period is shorter. For the bridge, if you look at the right-hand side, due to the conclusion of the PPA in Q1, it was 27.5 billion, which will be the run rate going forward. Please turn to page 22 next. Here is CAPEX trends. On a decided basis, about 35 billion yen or less will be the CAPEX. The majority of it will be for production increases, but we will also be investing into offices as well as future investments will be made as well. That concludes my presentation. Thank you very much for your kind attention.

Thank you very much. So now we'd like to open the floor for question. We're going to have Mr. Shibata and Mr. Nakataoka also join in. Allow me to go over with you how you are to ask your question. So the moderator will ask if you have any question. And if you do, please select the raise hand icon on your screen. And we will select call your name and company name in the order for you to ask your question. And so when your name is called, then that is a cue for you to be able to speak up, so please make sure you unmute yourself in asking your question. Now, due to constraint, please make sure that you will ask a maximum of two questions each. So if you have any questions, please raise your hand.

From Daiwa Securities.

Mr. Sugiura, please unmute yourself and you can ask your question. Thank you very much. This is Sugiura from Daiwa Securities. Thank you very much for taking my question. My first question is about your forecast for your revenue. In Q2, you're expecting some of the negative factors, for example, some of the products that had been disposed, it's not going to be shipped because of the earthquake. And also, there was a TI comment, but then in China, there was the Shanghai lockdown. And so there is some expectation that you will have to suffer some impact. But then at the same time, at your place, on a Q2, on Q1Q basis, you expect that there is going to be a 10% increase in your revenue internally. And so Now, how do you mean to offset some of the negative factors that I've mentioned? And if you'd be able to illustrate that for me per application, that would be helpful. Now, we know that we are finding a lot of dampening economic sentiment. And so that could cause, for example, some demand trend. If you feel anything as such, can you also share that with us? And also, what do you expect to happen in the second half? So that's my first question in regards to the revenue trend. Yes. Yes. So the announcement coming from TI, yes, I understand that what is happening in China, it is fact that it is difficult to foresee. But then I think there was someone who commented this in their report. Now, compared to TI, I believe that we only have to suffer smaller impact from China due to our portfolio. So we don't expect such a large impact as TI would be expecting. Now, of course, places like airports, we know there's a lot of congestions behind logistics. And at the same time, it's okay. But when we look at our own plants, especially post-processing site, what could be the future impact? That is something that we have to say that it's a fact that we really don't know how to foresee this clearly. And of course, we have less visibility in terms of demand in that sense. So I don't mean to deny risks. I don't mean to deny any chance of going behind our forecast, but I do believe the risk is still within the level that we'd be able to absorb elsewhere if something goes negatively against our expectation. Now, of course, there was the earthquake in March, and there was the blackout after that. We lost power, but That impact has all been included in the guidance that we're showing you today. Now, of course, there was a certain impact from the earthquake. However, we do find capacity to make some internal recovery. And at the same time, our production partner that we've been working with since last year, they have been able to really take a deep step support. And even amongst our customer, there has been a lot of supports. And so we through this geology or Trinity, if you will, the impacts from scraps, I think we have been able to control this pretty well. Of course, it's not that we've been able to nullify all the impact. But still, I think we have been able to manage the impact to a good extent. So with all that, I think I can say that, yes, this guidance has already factored in all the risk factors that we foresee. Now, of course, you said per application, which is not easy. But especially a smartphone, especially in China, it's weak. And Chromebook has become weaker since last year. But laptop PCs... anything from the consumer space personally speaking i am a bit doubtful now the numbers that we can see within our system and what information we hear from the customers if we try to just put the data points we still are finding good good trend strong trends so far however i still do feel we have to be careful i do have some doubts Especially in these areas, there's always a mismatch of products. And it's something that we've been seeing since latter half of last year. And in Q1, there still had been some impact of that. And that is why we have been seeing an increase in channel inventory, sales channel inventory. Now, we are going to be optimizing that from Q2. That means we will be sort of controlling the top line to some extent for that, but we are trying to just make sure we'd be able to reduce control all the sales channel inventory. So excluding FX, it's going to be a growth of, a moderate growth of close to 2%. So, What we expect in the annual terms hasn't really changed from what I mentioned in our previous session. But at the moment, what we are seeing at the moment seems to suggest a very good healthy trend. But again, as you all know, a lot of them just surprising change can always happen. And so I think I would like to make my comment, stop my comment to that point. So thank you very much. My second point is about the gross margin outlook that you would have. So within the second quarter guidance, you talked about the impacts of product mix, some of the impacts coming from materials cost. And so sequentially, you're expecting the gross margin to go down. On the other hand, when it comes to revenue, it is growing at this level. So I was feeling a bit confused. I felt like you perhaps are having quite a conservative view. But again, what kind of product mix do you expect to see? How much is that going to impact? And what is going to be the material cost to change? And for example, this product mix, is this going to be a tentative trend? In other words, from Q3, there is going to be a rebound. So if you'd be able to share a little more on that. Yes, thank you very much. I think Mr. Shinkai can answer your second question. Yes, so let me try. Now, first of all, in terms of the worsening product mix, what's behind that? Now, compared to Q1, what is... we're basically talking about automotive where the shipment is going out which is going to be relatively speaking going to lower the mix and depending on which quarter of course it is going to be a bit volatile there will be some fluctuation now when it comes to the raw material cost from q2 and onwards i do believe we are going to be seeing more effect from q2 and it's probably going to stay at a relatively higher range or high cost and at the same time you mentioned about the revenue and yes i understand it does seem to be high but then it is just going to be like a plus two percent uh growth excluding that um effects and uh so i think uh we do believe we do believe everything is aligned in that sense so thank you very much a follow-up question so on the material cost when you try to procure the raw material you're going to be procuring from foundry and the cost is going to start to impacting from this quarter? Or are you talking about some of the raw material costs that you're seeing in your internal fabs? Both, all. So foundry, OSAT and our internal factories, all materials, all the items, components that we need, as well as electricity. And related to that, in other words, the fuel cost, the surcharge is all going to kick in from Q2 and 1. And so what is going to be your strategy action for that, if I also be able to ask that from you? Well, one thing is, first of all, try to work on cost reduction so that and also to make sure we be able to work to reduce the raw material cost. But of course, In a short time period, we need to make sure we procure ourselves. So we're not going to expect the raw material cost to start dropping that immediately. But then also at the same time, we want to make sure we be able to transfer some to the price. Thank you very much. Thank you for, sorry for taking time. Thank you very much.

I know gross margin, it's going to be a bit of a challenge anyway.

So it's not that we expect that there's going to be a real healthy growth. So don't expect that because there's going to be the raw material cost. The raw material cost increase, the magnitude of that is really intensive. And perhaps sometimes there will be some items that the price is just going to go up by 10 times, so we're not going to be optimistic here. Thank you. Thank you very much.

Thank you.

The next person is from Citigroup Securities, Mr. Fujiwara. Please unmute and ask your question. Hello, I'm Fujiwara from Citigroup. Can you hear me? Yes, we can. Thank you for taking my question. I have two questions too. The first one is for in-house inventory and sales channel inventory, you gave us the details, but for the customer inventory that's beyond sales channel inventory, how do you view it? Especially for automotive, why or why? revenue has gone up by 70%. But when you look at the channel, we have been seeing a slight increase. So as automotive is not fully recovered, you may think that customer inventories are building up. Do you view it that way? And what do you think about the continuity of the current trends? So Mr. Kataoka will take your question as he is here with us. This is Kataoka speaking. As you rightly pointed out, OEMs originally were planning an increase in production. However, they are not able to secure sufficient materials, and also there is impact in China as well. And the impact for us is not that large, but we have the war happening in Ukraine as well. So for OEMs, against their existing plan, they are reducing production. So this is an impact. that is coming through, but from our point of view, when you look at tier one customers and their inventory levels, it has been increasing as a fact. However, it is not at a dangerous level yet. That's how we view it. And ballpark figure wise, one or two months worth is what we're assuming for tier one, that is. But of course, it differs by product as well as by customer. But we are in the process of optimizing. So with the customers, we are closely communicating for products where inventory is building up. We will not allocate it to that specific customer. We will give it to customers that are asking for that product. So we are taking those types of actions. And also, Therefore, we are not only optimizing just for automotive, but on a renaissance-wide basis. For 47 nano, we have it for automotive. And for 16-bit microcomputers, we have it for automotive. But if we think that it's growing for automotive, we will allocate it for laptops. And we are trying to optimize overall by taking these types of actions. That's all from me. For key customers and our product inventory levels, actually, we have a good idea of the details because we share the information with our customers. So as Mr. Kataoka explained, although it was a little bit vague, for which product and how many are at the customer side and what kind of way it's being used, we are aware of how it's being used and how high the inventory levels are as we trace the inventory levels. So overall, although there is buildups in partial areas, we don't think it's fishy overall. We do believe we are still in a firm situation. Thank you very much. So my second question is the following. You announced a share buyback worth 200 billion yen, which is quite considerable. So regarding your way of thinking for share buybacks, regarding shareholder return, is it going to stop here, or are you going to consider additional opportunities, whether it be for share buybacks or for increased dividends? Well, I can't really speak to the future, but at this point in time, for this year, I think this is enough when it comes to share buybacks.

That's all from me.

Thank you very much. That's all from me. Thank you.

Thank you very much.

Next, from BOA Securities, I'd like to ask Mr. Hirakawa. So please unmute yourself. Yes, this is Hirakawa from BOA Securities. Thank you very much for taking my question. My first question is, again, about inventory. So I know you've been able to give a lot of details behind the inventory, but then I was listening to that. but then non-auto versus IoT. So it is already exceeding your target. And whatever I hear, even at the end of Q2, it seems like that situation is not really going to change. That was my understanding so far. So I know what your intentions behind this, but when do you think you'd be able to come back to the more optimal target level? And so can you share that with us? So That's my first question. So Mr. Shinkai, would you go for the first question? Yes. So for the IOT for Q1. Now, I did mention that there's the FX impact and also the evaluation difference, which is included. And that is what I said, which is in regards to the total company level. But then also from specific customers, there is this business. And there's been some, for example, some delays, the timing, and that did impact the DOI. In other words, at the end of Q1, there has been an increase in inventory. However, when it comes to sales, it's something that, for example, happened back in Q4. So if you look at Q1Q, that seems to have declined the revenue. And so if you try to do some division, division, it does makes the figure seem to go down. But then if you try to level it down, you'd be able to find that I expect that we should be able to come to the more normalized level soon. That's my response. In other words, from Q2, for example, in the industry infrastructure IoT, the DOI is jumping up. But then we can expect it's going to go behind that normal line level. Well, there's, of course, other factors. So it doesn't mean that it would clearly just go down below that range level. There are still some uncertainties before I'd be able to say that, but then this tentative spike, we're not that worried. I see. So this is really going to be more or less the level that you're finding. There might be some ups and downs throughout this year. Is that the correct? Well, we're expecting basically it is going to go below the spike that we just observed. Thank you very much. And also for the revenue for Q2, For FX, excluding FX, you said that it is going to be increasing by approximately 2%. But on a volume base, and if you try to look at this per product, the product mix, what is going to be contributing to the revenue growth? Mr. Shinkai, please. So you talked about the volume as well as the product mix and how that contributes to the revenue. Now, I believe basically the contribution is coming from volume increase. I didn't mention the breakdown, but the gross margin, when I talked about the gross margin, but the mix is going to deteriorate Q on Q. In other words, what is going to contribute to the revenue is going to be the volume growth. In other words, it's not really the price hike, it's the volume. That's correct. Thank you very much. And that's all for my question.

Thank you.

The next person is from Nikkei, Mr. Eguchi. Please unmute and go ahead with your question. This is Eguchi from the Nikkei. Can you hear me? Yes, we can. Thank you for taking my question. Regarding the supply chain and upstream in procuring materials and also for downstream regarding your products. First of all, for upstream, and material prices increasing. For gas procurement, apart from Ukraine, there has been impact from Belgium as well. So do you expect that pricing pressure is going to become stronger? Secondly, for production volume, are you concerned about any supply constraints that may have a negative impact on production volume? in upstream. For downstream and the backend process, there are some volume constraints due to some bottlenecks. I think you mentioned that earlier. So for logistics and so forth, are there any risks that you will not be able to ship as much as you've expected downstream? So that's my question. for logistics and shipment risks i think that's a constant it's nothing new and you for example back in process in malaysia last year due to covid was affected and there were there were some disruptions so we believe these kinds of trends are going to be ongoing So it's a new normal that we're facing. For upstream, I think it was in the previous results call or in the analyst day call, we think we're going to be OK for the time being. However, compared to the first half of March, the impact from Ukraine has been changing in nature, seems that the situation is going to be prolonged. And based off that assumption, we are conducting a review. So just to repeat, this impact is not going to be specific to us. So whether it be foundries or on industry-wide basis, We are having discussions around what kind of measures should be implemented, and we are starting to implement the measures where we can. So although there are uncertainties, we will be fine for the time being. Thank you. My follow up question is for material prices and pricing pressure with the increase. Do you think the pressure is going to grow stronger? I do believe so. Because inflation is still ongoing, And for energy, I believe that supply is going to become tighter. So pricing pressure is probably going to stay strong. Thank you. My second question is regarding automotive. Compared to the first half of last year, it seems that the supply situation is becoming better. But for IGBTs, as well as power and microcomputers that you supply, When you look at it by product, is there any difference regarding demand and supply? And are you able to respond to all of the inquiries made? Are there any differences? Then Mr. Kataoka will take your question. This is Kataoka speaking. For XEV, it is growing, as you know. So demand related to that, especially from China, where XEV is growing, continues to be strong. Even if we're able to ship, other semiconductor manufacturers are not able to supply in some cases. And that leads to a decline in demand as well. But we don't want to speak about other companies. So it happens on a case-by-case basis. Like I explained before, for the new products, like our car, and RHA 5.0, new products are currently ramping up. Therefore, demand is extremely strong in this space, and we haven't been able to ship sufficiently in that regard. That's where we are right now.

Thank you. Thank you very much.

Next, from Goldman Sachs. we'll ask Mr. Takayama. Please unmute yourself. Thank you very much. Can you hear me? Yes. Now, I was listening to all the discussions so far. And margin management and top line management, I'd like to ask those two points. So at the moment, margin management so far It seems like Q2, you're going to slip. But after that, of course, you've started with a very high point. So what do you think is the optimal direction for you? Now, listening to you, I hear a lot of things about, for example, some of the non-auto area seems like the growth is going to dampen. And there's also some discussions about cost increase pressure, including raw materials. Are you able to offset that with product mix or a price hike? Do you think you'd be able to come back to that, for example, Q1 level for a gross margin? So when you looked at Q1, you mentioned that we're not supposed to expect even a step higher level. So I think that you're saying that we should not be surprised if the number starts to slide down. But then the margin level for Q3 and onwards, what is your view? That's what I wanted to hear a little more. Well, on a short-term perspective, especially on quarter by quarter, there will be some ups and downs, of course. But I myself, I don't want to just suddenly say we're going to aim for 60%. I don't want to be that simple. But then if it's going to be on a small ups and downs, and if we'd be able to talk about a range, I would feel comfortable, for example, if we're in the range of like 55 to 60%. We will be making future investment. We want to accelerate growth. And so that's what I would like to use. For example, I would like to invest with that. And so for example, like 58 or 57, 56, of course, if it just keeps on sliding down, it would not be good. But then it doesn't mean that just because we're on, we're now looking at 57%, do we now have to jump back again to 58 or 59? Do we have to push ourselves? I don't feel so. Thank you. So what about the top line management? In 2023, I do believe it is quite difficult for you to speak on this, but then looking at the order backlog, if you'd be able to take revenues from that, and you're talking about trying to freshen the backlog, what is the action that you're taking at the moment? And what will be your further action? What kind of assumptions or discussions do you have inside the company? And if you want to generate revenue, what is your top focus at the moment? I'm sure you'd be able to, for example, take advance orders so that you'd be able to fix the type of numbers you'd be able to expect. But what kind of actions are you taking so that you'd be able to secure good revenue next year? Thank you. I think this is something that we did discuss in the previous discussions that we've had. But there's this... Concern that perhaps this trend that we're observing right now would turn otherwise. But then if you just try to trace the backlog, it seems like it's always growing steadily in our case. And we always have to ask ourselves, is this genuine? Is this really linked to the genuine and demand? I always feel a bit uncomfortable when I look at the trend. so this exercise that we've had from been doing from last year would this suffice as we try to look into next year we have to think about that but then at the same time we have to look at this high order but we always we also do have to discuss do you need this much and we actually are starting that type of discussion and honestly speaking maybe the level of order may not have to be that high if, for example, we'd be able to guarantee what we offer. So that's the type of discussions that we might be able to have in the end. So by doing that, we do believe we'd be able to sort of level off. So that's how we expect for the backlog level to start to decline and to also have a more new, fresh backlog for the next year. And that's what we're trying to do in starting this round of talks with our customers. We have to really look at the order. If we look at the non-cancellable, non-returnable type of order, we have to discuss with the customers, is this really the amount that you really need? And we're starting that type of dialogue. and depending on the application or sector, the level of visibility is pretty different. However, if it's an area where you can have good visibility, well, of course, backlog, it's not always linked to everything, but then this cloud data center, or if it's for automotive, we can expect some strong momentum that's the feelings that we get. And of course, that doesn't exactly link to what numbers we'd be able to expect. So we want to take the next three months or so, so that we'd be able to have better visibility of what numbers we'd be able to expect. To add, so in the negotiations that you're having, I'm sure you'd be talking about the supply, the tight supply. And in other words, There are a lot of discussions I'm sure you've had. For example, it's going to be tied to throughout the year, or perhaps things might be better from the latter half of this year. What is the discussion that you have? Well, the discussion really hasn't changed. And from the latter half of this year, there might be some level of normalization. That's my personal feeling. However, when we see strong end demand, then from that particular sector, Some people are wondering that they may not be able to prepare enough parts. So we do need to separate what kind of discussions we're having. We're not saying that all, we're not talking about all parts because that's too early to come to a conclusion. But then when it comes to the products that we're providing, if we're finding that our clients are not able to suffice, all their parts. We have to discuss how much we'd be able to provide, but we do believe we'd be able to strike the right balance of what we'd be able to offer on our front. And for example, in the past, and it's something that still is going, but every day, there was a day when we were just looking around, everyone was just really surprised that and just shouting about what kind of supplies they'd be able to secure. But I think that situation is pretty becoming better now. Well, thank you very much for that comment.

Thank you. So next, from UBS Securities. Mr. Yasui, please unmute and ask your question. This is Yasui from UBS. Thank you for taking my question. The first question is regarding page 8 in the presentation. where you talk about sales channel inventory. The intention of my question is, when you think about the current shipment levels, how much of that is customer or sales channel inventory increases? What is your estimate? How much of it is contributing to sales channel For example, for industrial infrastructure and IoT, it was two weeks higher. So you could say that about 50%, 1.5% is contributing to sales channel inventory increases. So can you give us your sense on that? My second question is regarding share buybacks. This time around, it's from April 20th until the end of May. Why do you have a period when it's just with INCJ? Because it's not a share buyback from the market. And then when you think about your next share buyback, is it also going to be from INCJ? If you have any thoughts around that, please share that with us. So I will take the first question. And if there's any comments that people would like to make on our side, Shinkai-san will take that question. And the second question will be responded to by Mr. Shinkai. So just to repeat, once again, this is not on a unit basis. This is on a value amount basis that you see on this slide. So the base price has been changing, and that has had a large impact. So you need to understand that. and take that into account when you look at the numbers, when you look at it on a volume or unit basis. We can only estimate because we don't have the exact number, but I don't think it's 15%. I think it's only about 2% for non-automotive.

That's the amount of revenue that was

for build-up of inventory. I do believe for automotive, it is leading to end demand, so we're not that concerned. But for industrial infrastructure IoT, I talked about earlier mobile PC computing areas in particular, or revenue that led to just to build up an inventory, like I was explaining earlier. Mr. Shinkai, do you have anything to add? Well, it's not something to add, but this page shows sales channel inventory, but our total revenue, we have revenue that we sell direct and revenue that we sell through channels. And for channel sales, it's about 60% of that. So this is only about 60% of revenue. That's something you need to keep in mind when you look at these numbers. So next is about share buybacks. Yes. For share buybacks, it's going to be the TOB methodology. And for the tender offer period, it is the shortest period from a statutory basis. And we have concluded a tender agreement. So based off that, we will be tendering the shares. And because it's a TOB, It is public basically until May the 31st. That's all for me. How about the next round of share buybacks? That was my other question. Is it going to be from INCJ? I thought I didn't have to answer that question and I thought we were done with this question. I really don't know. We haven't thought about that yet, so. It's a matter of doing this this time around first. We'll look at the results. We'll look at the reaction from the market to think about next steps. That's our thought process right now. Thank you very much.

Thank you very much.

Now, I know there are a lot of other hands being raised, but it is now time to close. So we'd like to end the Q&A session. So with that, Mr. Shibata, would you like to make a closing remark, please? Yes. So I think we have discussed all our points already. But again, there's a lot of supply chain confusion, which is happening still on a daily basis. So we want to make sure we'd be able to cope with that. And that was exactly something that we had in mind in giving our results for Q1 and also giving our guidance. Now, also in terms of the fundamentals, this is not just about supply chain, but there's also impacts from the inflation. So what kind of impact would there be to the end demand and how can we supplement if necessary? And what kind of action would we be able to take? It's going to be our focus from here. especially when it comes to shipment, controlling the inventory. This is something that we have to think of. So internally, we're trying to control this on a unit volume base, not value base. And if there's anything funny going on, especially, well, for example, for a second quarter, like I mentioned, it is going to be around PC. We're going to be controlling, we're going to be coordinating some of the inventory. And also, perhaps at the point of first half result or perhaps later, we do want to address some of the data that at the moment we find a lot of noise. We want to make sure that we'd be able to have more clearer data we'd be able to show you by that time. But thank you very much for joining our session in spite of your busy schedule. I hope for your further support. Thank you. Yes, thank you very much. And so with that, we'd like to and our FY22 Q1 earnings result call. Thank you very much for your attendance.