Renesas Electronics Corp

Hello.

If you would like to hear this session in English, please click the globe icon on the bottom and select English channel. Welcome to Runesos Electronics second quarter 2022 results presentation. We thank you very much for your participation indeed. For today, simultaneous translation is available. please select the earth icon at the bottom of the screen and select your preferred language. Now, the speakers, you are requested to turn on your video. Today's session is attended by our representative director and CEO, Mr. Hidetoshi Shibata, our senior vice president and CFO, Mr. Shuhei Shinkai, and our Senior Vice President and General Manager of Automotive Solution Business Unit, Mr. Takeshi Kataoka, and also some other staff are present. First of all, we would like to have Mr. Shibata say a few words of greetings, and then Mr. Shinkai will explain the second quarter results, followed by a Q&A session. We expect to finish the entire session in about 60 minutes. The materials to be used for today's session is the same one as those presented and posted on the IR site of our homepage. Now, Mr. Shibata, please begin your remarks. Good afternoon, everyone. This is Shibata. The second quarter of this year, as you can see, these results are already available. There were so many uncertainties, such as natural disasters and the longer than expected, the lockdown in Shanghai, China. There were many events, but we were able to finish the quarter with the results coming in higher than expected, slightly higher than expected. Still, the outlook is still uncertain. Therefore, for now, because the China inventory has continued come down to a good level. So the third quarter shipment will be subdued, but the dive bank will be expanded and there are products that are being ramped up over the longer term. So we will like to continue sourcing from the foundries earlier than expected than usual so that we can respond to any upsides in the demand so that we can respond agilely both ways, upside and downside, depending on the situation. So if you can look at page four of the presentation compared to before, we have added one line in the presentation of the results, which is the profit attributable to owners of the parent. I'm sorry that this may sound like the preaching to Buddha, but there are so much volatility and the risks of the foreign exchange. So these are elements that are not affected by the actual operations. Depending on the volatility of the exchange rate, the profit attributable to the owners or parent could be affected significantly. So we decided to reflect numbers that exclude the foreign exchange impacts. so you could see the actual state of the operation. So that one line was added this time around. So we have been able to achieve favorable results up until the second quarter, but since the future is still uncertain, so we wanted to be prudent here for the future outlook. So, Mr. Vidat, I would like to hand over to Mr. Shinkai. This is Shinkai, CFO of the company. I would like to begin to present the results for the second quarter of the fiscal year ending December 2022 using the presentation materials. If you can go straight to page three. Disclaimers. From the first quarter, the dialogue acquisition is reflected, and from the second quarter onwards, the PPA impact of Celino was also added. Next page, this is the results of the financial results. The Second quarter results, if you look at the dark blue columns in the middle, the revenue was $377.1 billion. Our gross margin was 58.6%. Operating profit, $145.3 billion. Profit attributable to the shareholders of the company, $81.4 billion. And the profit attributable to the parent. 120.4 billion, excluding foreign exchange impact, EBITDA was 165.2, and the exchange rate was 124 yen to the dollar and 134 yen to the euro. And if you look at the first half results, look at the right-hand side, the dark blue columns on the right-hand side. As Mr. Shibata mentioned at the outset, the net profit excluding exchange impact is also added here. I would like to add some comments here. Within our group, we are conducting cash pooling inside the group, so the non-consolidated company at the headquarters, we have intercompany loan at the headquarters, and depending on the valuation changes of these headquarters cash, the changes in exchange rate is affected by the financial income on the PEL. So if the yen goes cheap or weaker, this loan will increase and therefore it will have a loss on the PEL. But if it goes to the other side, it will have a positive impact on the PEL. And this exchange impact is so large. So in order for us to show the impact of the profit net income, we have decided to indicate the profit level without including the exchange rate impact. And this is the revenue trends on a quarterly basis. If you look at the far right, you see the second quarter results. On quarter to quarter, this was an 8.8% increase, and year on year, this is 73.1% increase. If you exclude the impact of dialogue, this was 50.8% and 9.2% respectively. And the breakdown of automotive business and industrial and the IoT business is listed up, as you can see from the numbers here. and year-on-year automotive 58.3%, then Q&Q 6.4% for IoT and industrial, year-on-year 96.8% and Q&Q 10.8% increase. Now, next page, this is the second quarter revenue and gross and operating profit margin. The total company, if you look at the total company, if you look at the margin versus the forecast revenue, was higher than by 0.6% compared to the forecast, and partly half by the foreign exchange impact and half by other elements. For the IoT, there was a slight delay. And in terms of the e-growth margin, plus 1.1% compared to forecast, and the factors behind this include, as you can see, the product mix improvement as well as the improvement of production costs. Those were the positive elements affecting the gross margin. And operating expenses came down due to the R&D, and therefore the expenses landed at 0.2% lower compared to the forecast. And as for the operating margin, there was an increase of 30.4%, and this is 70% due to the foreign exchange impact. And the remaining came from the improvement of operations. The gross margin improved by 0.2% quarter on quarter. And this was due mainly to the production recovery and also which was partly offset by the reduction of production costs. And operating margin, there were some seasonality elements and which resulted in an increase of margin. And next, next page, please. This is the inventory, the in-house inventory. If you include in-house inventory and the channel inventory, there's a separate slide explaining the inventory trends, but let me first talk about the inventory in-house. If you look at the total company at the far right, DOI has been increasing on a Q and UQ basis. By segment, automotive, flat, and industrial and IoT are recording an increase. However, for the industry on IoT, there was an impact from foreign exchange, quite significant impact from the foreign exchange. And the inventory value and also from the cost element, if we just exclude all the foreign exchange impact for both automotive and IoT, DOI has increased by approximately three days on a Q&Q basis. Next page, please.

Well, next, we'd like to talk about sales channel inventory as well as WOY. So WOY overall has declined Q1Q. And on the other hand, if we try to look at per segment, automotive saw the increase, whereas industrial infrastructure IoT saw a decline. Now, here, it does not include any FX impact. So this is just based on the management accounting basis. So please move on to the next page. So here, we look into some of the inventory analysis. And so if you look at... So if you look into the inventory analysis, so the majority of this has to do with the Forex impact. But then once again, if we try to exclude Forex impact, again, still we did see a three days worth of increase in the OI. And so when it comes to inventory valuation, it does reflect the cost of goods increase. But then this is something that we did observe back into Q, but we expect that it is going to continue in Q3 as well. Also, for the raw material, so BCM response, we looked into some of the materials that could hold some risks, and we wanted to make sure that we procure enough. And we also did see an impact from the price hike of some of the materials, and that is why we saw this increase. We saw the increase value-wise. And Q3 onwards, we do believe we still will have to continue this BCM response. In other words, any materials that we need, we will make sure that we be able to procure. Also, work in progress. So there's a lot of outsourced items. And including the advanced purchase order for 2023, we wanted to make this advanced purchase ordering. And so that is the main cause behind this. And the foundry capacity is pretty tight. And so we know that it's going to happen from second half and onwards. So we want to make sure that an ample advanced purchase And automotive SOC would be one of the main items here. And we expect that from Q3 and onwards, there is going to be advanced purchase stuff for the foundry part. Again, automotive SOC is going to be the main part, but then also for MPCs, if this is something that we'd be able to do in that front, we'd like to do so. Also, Daibank, we do want to expand this. the increase in internal manufacturing capacity so that we'd be able to support the overall activity. Also for the finished goods, in Q2, we are doing production to be prepared for Q3. So this is like a seasonal factor. So the former dialogue, anything for smartphone are the products that we'd be talking about. In other words, that's the product that finished goods that saw an increase. And for Q3, especially for the post-processing activities, we do believe that that part of the production is going to decline in Q4. And so we want to make sure that we'd be able to offset that through advanced production planning to be done in Q3 to be ready for Q4. Looking into the sales channel inventory, again, for industrial infrastructure IoT in Q2, we did find that Q1Q increased in the end demand, and so WOI decreased. But then the actual value is increasing, and there are some reasons behind that. So first of all, we wanted to respond to the increased demand, but also we wanted to adjust to the product mismatch, which really accounts for two-thirds of the impact here. But then also the unit price impact. Again, this is partly due to a shift in debit adoption. And so again, this is really what is causing the two-thirds of the increase in Q2. Now, as we look into the Q3, we still do want to make sure that we'd be able to act accordingly to the demand. And so, WOI, we basically expect that this is going to just see a flattish growth in Q2 to Q3. Also, for the automotive, here we write this inventory expansion. But in Q2, we have already been able to expand the inventory. And so, I think we do already have this fulfilling amount of inventory. So therefore, in Q3, we do want to cope with the end demand. In other words, we expect that this inventory level is going to be decreased in Q3. So WOI in Q3 will also decline. Moving to the next page. So now here we look into the wafer input basis front end utilization. Now, the Q2, that was like 90% plus. However, this 12-inch line, which is in purple, there's an increase there. And this was due to the recovery operation ever since the Fukushima plant stalled back in March. And so this is just a tentative type of move. Please move on. The EBITDA and free cash flow. So Q2 EBITDA, that's 165.2 billion yen. And if you look at the right-hand cash flows, the operating cash flow was 138.7 billion and free cash flow was 114.2 billion. If you look below, you see the gray bars. This is a cash out from investing activities. In Q2, that was 24.6 billion. And we expect this is going to increase as we go down the road. Please move to the next page. Right here, we look at our forecast for Q3. So if you'd be able to look at the dark blue bar indicating Q3. So for revenue, compared to the midpoint forecast, we expect it is going to be, this is 384 billion, which is a 1.8% increase Q1Q. For the gross margin, we expect it's going to be 56.5%, which is going to be Q1Q negative 2.1 percentage points. For operating margin, that's 34.5%, which is going to be a decline by four percentage points, Q1Q. As for the currency, FX, we expect it's going to be 135 yen versus dollars and 138 yen versus euro. So if we'd be able to further move on, looking into some appendix pages, if I can just jump to slide 17 here, So here we look at GAAP versus non-GAAP adjustment or reconciliation. So some of the non-continued, non-recurring items, for example, Naka factory fight impact, and there's also the Fukushima revamping operation cost that's also included. And if we'd be able to jump to page 20, here we look into the CAPEX trend. In Q2, there was the Kofu factory CAPEX that was included, and so including that, that would be 90 billion yen. If we exclude that, for example, some of the increased capacity for the other existing plants have been decided. And so some of the major capacity increase is going to be completed with Q2. Moving on further to page 22. So here we talk about the impact of the earthquake in Fukushima and also instantaneous voltage drop at Kawashiri factory. Now for the Fukushima, we are able to do as we expected for Kawashiri side. Here we have some of our forecast figures. There was the wafer disposal and utilization decline. And this was the place where we did have some die-bang. And so But then the financial impact, we believe it is going to be small. So that concludes my explanation. Thank you very much. So with that, we'd like to now start Q&A session. So maybe ask Shibata-san and Kenkai-san to turn, Kataoka-san to turn your video on. So the moderator will ask if you have any question to the floor. And so if you have any question, please use the hand raising button. And when you see the icon for the hand, we will be calling out your name and your affiliation. So when we call you, that is a cue for you to speak up. Please unmute on your own and start your question. Due to time constraint, we will ask for you to keep your question to two. So with that, we'd like to start Q&A session. So if you have any questions, please. First? From Daiwa Securities, we'd like to ask Sugiyura-san. So Sugiyura-san, please unmute yourself. Oh, this is Sugiyura from Daiwa Securities. Thank you very much. My first question is about your revenue forecast and your observation. Now, we did hear your Q3 guidance, but if possible, For example, what would be the split between auto versus IIBU? And for example, if you'd be able to look into like IoT versus industrial, what kind of breakdown do you expect? And you did mention that there are uncertainties ahead, and I am aware of that. But then as you look into this October, December quarter, what is your view or what is your expectation? Well, thank you very much for the question. So excluding effects, so automotive, compared to Q2, we expect there is going to be a bit of a decline. And for industrial IoT, industrial infrastructure IoT, we expect flat, a flattish growth. That is how we created this forecast. And looking at the industrial infrastructure IoT, if we talk about how we categorize, so IoT, infrastructure, within what we call IoT, there'll be PCs and also some mobile phone related areas. And these are some of the more weaker segments at this moment, but then anything other than that, other areas, we do believe that it is relatively doing well at this moment.

And on the other hand,

It's not that we are seeing any major changes, but mainly for data centers, DDR5 transition is somewhat delayed. Therefore, the demand for DDR4 is becoming stronger, but still there's a tightness in supply in DDR4, so we haven't been able to supply products that meet the demand. So in terms of revenues, this is likely to weaken just slightly because there's a strong backlog for those products. Therefore, automotive, as I said overall, we will continue to wait and see and ship the products, looking at the channel inventory level and the consumption level. So that is the phase that we are currently in. And for other segments, we are seeing some slackening in the consumer and mobile. If you exclude those segments, I think, by and large, other areas are quite stable and firm. Of course, there are some ups and downs depending on some suppliers, but that's the background of the outlook for the third quarter. Of course, for the fourth quarter, there are still so many things that are not really clear. But what I can say at this moment is that, by and large, overall, automotive and industrial IoT, they are both expected to show flattish growth or a slight decrease. That is our basic assumption. And with that, based on that assumption, we will input the wafers and develop the shipment plants. But again, It's very difficult to foresee the future, so we have to establish a structure readiness so that we can respond no matter which direction the market goes. Okay, then second question is about the chip prices. In the last two years, the semiconductor industry has seen a very tight supply and demand situation, and I think the price has increased was accepted by many people in the market. But nowadays, I think the supply has become resumed and therefore this tight situation will unwind in the future. So should we consider that the pricing pressure will be heightened in the future? Or would you say that because the trade behavior has changed, do you think they will be more susceptible to price hikes in the future? So Your current view will be fine. So can you share your view with us? Right. But then on the other hand, as you can see from the press articles, the wafer procurement costs at the foundry level has been constantly increasing. And as you know very well, the energy prices, the energy costs are rising. So as a result of that, the electricity cost in our production has surged quite significantly. And as Mr. Shinkai mentioned, some of the raw materials, as we shared with you during the last earnings call, compared to before, it's like tenfold higher compared to before. Otherwise, we won't be able to get a hand on our raw materials. So the cost pressure remains to be very strong. Therefore, on that backdrop, we are not in a phase to reduce our prices. So we would like to continue to have a close communication with our customers so that we can gain their understanding. That's it. Thank you.

Thank you very much.

Mr. Yassi from UBS Securities. Thank you very much. This is Yassi from UBS Securities. Can you hear me? Yes, we can. So I have two questions. So my first question, so for automotive side, especially for the impact per die, so I know that it used to be like 100 billion yen type of a business scale, which seems like it is going to stabilize around in 160 billion at this month. So it is now increased by 1.6 times. And I do believe this is a great increase. And So the impact per unit has increased. And this is something that we've been observing ever since this COVID pandemic. But then what is your observation here? Because in the past, 5% to 8% range was something that we thought. But then at this moment, we're talking about much better mix. And so what is your assumption at the moment, if you'd be able to speak about that? That's my first question. And my second question is more simple. So currency sensitivity. So it's a very sensitive area, but then how do you look at this on a more annual basis, especially after the acquisition? What is your currency sensitivity? Thank you very much. So I'd like to answer your first question, but then we have Kataoka-san, so may I ask Kataoka-san to answer first of all? Yes, this is Kataoka. Thank you for your question. So The contents growth per unit is, I think, the point of your question. So yes, it is true that we have more new applications at the moment. And so I know there are a lot of numbers being told, but then at the moment it's like 14 to like 10%. That's the amount of the contents growth that is being usually expected, especially with XEV. Any power semiconductors are expected to grow. And so that is why we're seeing this very high growth at the moment. And even as we look from here, it's probably around this 10% range of contents growth. That's probably the amount that we should be able to expect. Now, the number of cars itself, I'm sure this is something that you feel, but it's not exactly growing. It doesn't seem like it's going to grow that massively. But then, So there will be some ups and downs, of course, but still, overall, it is going to just keep on gradually increasing, but it's going to be pretty stable in that sense. But then, of course, we have to look at the inventory at the moment. In other words, not enough inventory to keep the production going on. And so because there's not much of a car production going on, there's this buildup of inventory. So that is something that we are observing at the moment. That is how we look at it, but that's my response. Thank you very much. And also for the currency sensitivity. So I'm sure Mr. Shinkai will be able to make a follow-up comment if required. But I totally agree with your comment. But then at the moment, there's too much volatility. And it's never easy at the moment because we're seeing such an immense volatility. So compared to the past, it's important to take a step ahead and do some hedging. And so all the way to next year, we are actually doing the hedging all the way that would last for the entire next year. Now, as for the sensitivity for sales, it's not that it's going to really go down, even with this situation, but then anything below the operating profit line, or we're trying to control the currency sensitivity, that's how we're trying to adjust our operations. So there's this floor that we'd be, the ceiling that we'd be setting, so that this sensitivity would always fit in this certain bandwidth, if you will. So I hope that answers your question. Well, yes, so the content's growth, especially for this past two, three years, I feel like it is really growing. So can you tell me if that's the right understanding? And also, you talked about the currencies, the hedging. Of course, you can't do this forever, but So right now you have this 1.5 trillion of revenue. And with that, how do you, what kind of volatility do you expect? And what kind of sensitivity would you keep in mind? Well, again, to answer your first part of the question, well, it's never like a new story and it's probably something that we've always been finding. It's like this continuous trend. And in other words, First of all, there's this limit to how much cars OEMs will be able to make. And of course, that means there's more shift to more added value type of vehicles, especially US and European OEMs. They already say that to the public. In other words, cars with higher price point is going to be what people are going to be focusing on. And there's more semiconductors going into these vehicles. And as we see this high-end type of cars going, that means there's going to be more consumption of semiconductors. So that's one growth driver. And also the peers are also saying this, but there's more shift to EVs overall. And of course, power discrete, of course, this means there's going to be an increased demand to power discrete. But then if we look at how our clients are going, as more EVs come into the space, there are a lot of, it seems like this electronics, a lot of areas are getting more niche. And so that means we're not just talking about just power discreet. That's also going to mean the overall semiconductor consumption is going to increase. So I think this is a second type of trend that we find. And the third trend is something that has been continuing for a more longer time. So this entry-level vehicles, even with these entry-level vehicles, there's a lot of advanced technologies being used. And so with all these three elements compared to like a year or two years ago, there's more contents growth. And that is contributing to our revenue increase. And I think this is like a trend that we're seeing more intense nowadays. That is something that we actually do feel. Also for the currency sensitivity. So what are we feeling? So per dollar, like one yen fluctuation, that would change the revenue by like 8 billion or so. And in terms of operating profit, that would be like 3.5 billion on an annual basis. That's the level of the volatility or the sensitivity we'd find for US dollar. Euro, not that much of a change. So one yen fluctuation can change the revenue by 900 million. and operating profit by 700 million. So that's the sensitivity. Now, compared to the past, it does seem lower in terms of sensitivity.

That's all.

Thank you very much for your kind answer. That's all for myself. Thank you. Thank you. Now we'd like to move on to the next question, which is from City Securities. Fujiwara-san, please begin your question. Please unmute yourself and begin your question. Hello, this is Fujiwara from City Group Securities. Can you hear me? Yes, I hear you. Okay, I also have two questions, if I may. One, regarding your order receipt activities, this time last year, you said that you're going to finalize the orders for fiscal 2022. What is the order receiving activities this year? What is the status? Maybe... Will this lead to allocation or not? And also, with the orders that have been received so far, you said that you will not permit any cancelling, but have you seen any negotiations for potential cancel of the orders? That's my first question. And my second question is about the inventory. Automotive versus IIBU, can you separately answer for those different segments? For automotive, the channel inventory has been and has come up to a very sufficient level. So from both the customers and also for the channel, including BCP, have you been able to achieve the target level? So going forward, would you be starting shipping only for the sake of satisfying the end demand? That's my first question. And also the second question is about the DOI level being exceeded for the in-house inventory. So Can you just elaborate on the subcategory level, IIBU, industrial and IoT? Can you give us a breakdown of the inventory level in-house? Okay, I would like to answer the first part of the question, and the second question will be answered by Shinkai-san. Okay, so regarding the ordering activities, well, we find a little bit of difficulty because as we have been stating from before, we are continuing activities just like last year, However, maybe the timing was too fast for us. The numbers are still very strong and bullish. We are still seeing a lot of backlog. But when I think about it, this is unbelievable. So we would like to meticulously, spending the next two months or so, we would like to once again review because there are situations relating to our own selves. And of course, there are things that we have to approach the customers and we have to convince them that they don't have to rush and they don't have to be concerned so that the real true order working for next year is something that we would like to achieve spending the appropriate amount of time. Of course, it would have been better if we were able to show you some numbers during this earnings call today. But I believe the order level is too strong at the moment right now compared to the third quarter forecast that we have. The order booking level is too far detached compared to what we see for the third quarter. So we would like to properly make an adjustment and see what happens. Okay, then, Shinkai-san, can you continue with the second question? Regarding the question regarding the sell-in to the automotive sales channel, your observation is correct. So going forward, we would like to match and make an adjustment with the selling, looking at the end-user demands. That is the operation that we are contemplating for the future. And also for the in-house inventory for the industrial and IoT business, by segment, as Shibata-san mentioned, it's very similar to the outlook that we have for infrastructure and IoT. The inventory level has slightly increased. But for IoT... PCs and those mobile related demands, these segments are also included in under IoT. So there is a slight sense of excessiveness, excessive inventory level. And on the infrastructure, because of the mismatch of the components, we have not been able to ship them and they are stagnant. So they are what we're seeing right now. So for those are the two major elements. And of course, this is just a one-time thing, but in the area of IoT business, due to technical reasons, we have not been able to ship some of the products. So that is also affecting the DOI as we speak today. That's it for myself. Thank you. Thank you very much.

Thank you very much.

Thank you very much. The next question will come from Yamamoto-san from Mizuho Securities. Please unmute yourself. This is Yamamoto from Mizuho Securities. Thank you very much. I only have one question. But for the auto side, you said, I do believe I heard something like you're going to control the amount of shipment from the automotive side. Now, oftentimes this happens when due to some external factors, in other words, what the customers would be saying. And it's not exactly something that you'd be able to take the initiative in controlling or increasing the shipment. But then I think you have always been saying that you try to communicate well with the clients. But then, have you been able to do that enough so that you know that there is going to be a decline in the amount of the order or the demand? And that is why you are able to think that you'd be able to control your shipment. Is that the way to take that? Because then, it is just responding to what you find the clients to be doing. Well, thank you very much. That's a good question. So, for IB, we do have these channel partners. And at the same time, we're also able to know the end users would be doing. And we actually are able to make this very good communication between these parties. And even for this year, ever since January, when I look back, I realize that what kind of communications that we've been doing, we'd be able to really speak using data about what we've been doing. And then we'd also be able to communicate, so what should we do from here? And so that is where we'd be able to sort of come to an agreement that, yes, let us sort of control down the amount of outputs from here, the amount of shipments from here. So it is a bit different from what we've been doing in the past. The view that we'd be able to see has better resolution, if I may. And in addition to that, This is something that I have perhaps said before, but if we are able to really capture the end demand, then we'd be able to know how much our output would be. And of course, this is something that we have intentionally tried to do. So in that sense, you also did mention that perhaps you went into capturing, catching the orders at a too fast pace. But then because you've been able to do that, you are able to have this very good communication with the customers. And so even if there would be some change in how the customers are reacting, you have a better visibility to be able to respond to that. Is that the way to understand this? Yes. It does depend on which client we're talking about. Because there are some clients that we have better visibility, some that we don't. And when it comes to like next year, how much orders we'd be able to catch, there are some clients that'd be able to share with us their view, but then there are some clients that would just keep their very bullish numbers. And so again, so it really depends on which client we'd be talking with. And it would be better if we'd be able to sort of coordinate everything so that we'd be able to have good communication and better understanding with all the clients. But that is something that we're trying to do. Well, thank you very much. That ends my question. Thank you. Thank you.

All right. Now we'd like to move on to the next question. This is from Eguchi-san from Nihon Keizai Shimbun. Please unmute yourself and begin your question. Hello, this is Eguchi from Nihon Keizai Shimbun. Can you hear me? I'm Nikkei newspaper. All right. So my first question regarding procurement and the other question is about production. The first question relating to procurement. You are making advanced ordering and also for BCM related orderings. That is increasing, especially for raw materials. Those materials that potential has a risk, you are ordering in advance, well in advance. Does this relate to gas from Russia? What are the actual products that you are ordering? And has this led to cash outflows earlier than expected? And what are your views regarding the price movements of those materials? And my second question is about production. Inventory adjustment will be... happening in the future. So if you are going to advance the ordering production for the back end products in the third quarter, if you are going to front load the production in the third quarter, does it mean that in the fourth quarter, you are going to put the brake on the production level in the fourth quarter? Is that what is likely to happen from the third quarters to the fourth quarter? Can you comment on that? All right. Depending on the country, there are differences in the timing, but roughly speaking, there are three things, front end and back end. If I mix together, there are three major elements here. One is that the die bank, because now we're having a die bank, that means the back end loading will have to come down. So that's a simple production adjustment. And also another thing is that the This is a very internal discussion, but in the last two years, especially after the disaster last year, the operation was really 24 by 7. We were very squeezed, and therefore, we wanted to give a holiday to our employees, consecutive holidays to our employees. So that's another thing. And also the third element is about the front end, as we've been discussing from before. The resilience of the factories, we are taking measures to improve the resilience, and that has to suspend the operation of the factories. So in order to do this, we would like to secure a good amount of time to do this during the year and holiday season. So those are the three elements. So towards the end of the year, we would like to reduce the operation of the factories, so therefore we have to produce beforehand. ahead of the schedule. So that's the one thing that I wanted to share with you. And also regarding the way for advanced ordering and also for the raw materials, that will entail cash outflow earlier than usual. We are safe to say that. And also regarding the raw materials, the most typical ones are relating to the invasion by Russia into Ukraine. And other than those elements, the raw materials, there are some materials that continue to be quite tight in terms of supply, so we would like to get a hold on these materials in advance, and also for the work in progress, the wafer advance orderings. Again, for the overall semiconductor business, I think the supply and demand has largely matched, but for specific foundries and specific functions, their very strong tightness still continues, depending on some products. So some process nodes, some special factories are providing these to us, and these are continuously surging in terms of shipment. Our car, Generation 3, for example, and 40 nanomicron RH850, and also 28 nano RH850 nano, So the 40 nano is the biggest one here in terms of quantity. So they continue to be tight in terms of supply. So whenever you have a little bit of leeway, we would like to secure the wafers in advance because definitely this is likely to definitely grow in the years ahead. So we would like to secure a wafer even by one slice as much as possible. Thank you. That's all. Thank you. I understood very well. Thank you. Thank you very much.

From Toyo Keizai, may we have Sasaki-san ask your question. So Mr. Sasaki, please unmute yourself. Thank you for the presentation. This is Sasaki from Toyo Keizai. I have two questions. My first question is about the re-operation of the Kofu plant. Now, I know there was the METI subsidy, but then Are you trying to increase the internal manufacturing here? And also, I know this is about power semiconductor, but then I think this is something that you have expected that there's going to be an increase in demand, but is this going to be triggered and driven by EVs? Thank you. As for increasing the internal manufacturing, well, value-wise, you probably would not see that much of an increase there. Why? it is because we'd be focusing into more advanced node logic and MCUs. And that's something that we'd be procuring from foundries. And that part is going to certainly increase. And so if you try to look at the value-wise proportion, internal manufacturing proportion probably will decline. But with that said, we can't just, of course, just group everything into one. So when we talk about power discreet, basically we're going to be manufacturing on our own and that is our clear policy that we have and so for there we will um of course make uh have no hesitance in increasing the capacity if that's going to be required and that's where you'd be seeing more internal manufacturing i hope that answers your question yes thank you very much so that power semiconductor In other words, this is something that is going to see an increase in applications or in EVs or non-EVs. Well, I think you can see EVs and non-EVs. And of course, volume-wise, you probably see more going into EVs. But then even for application other than EVs, as people try to decrease their carbon footprint, a lot of things are going to be electrified. Electrification is really the trend. And so power discrete, I'm sure. would be very popular even outside the EV space. Thank you very much for your answer. And my second question is about your partnership with Tata. And so you have already acquired your entities in the U.S. or in the Western countries. And so I think this is really going to mark your footsteps into other markets, including India. But can you speak a little more about this? Well, I think this is something that we'd like to have Kataoka-san respond first of all, and I will follow up if necessary, but Kataoka-san, please. Yes, this is Kataoka. So India, as you know, it is a very large population country. We know the population is just going to continue to increase. And so it's really the future market that we want to focus. And of course, when it comes to two, it's more about two wheel motors than four wheels. And in this space, we want to work with tier one OEMs, OEM tier ones from now. And that's exactly what, that's really the partnership that we'd like to create. And especially India, you have to look at, for example, air pollution and how you'd be able to control. And so that is why there's more demand for EV motorcycles. So that's one trend that we are observing. And so the partnership with Tata, well, of course, Tata, There's Tata Adepsi and their system solution entity within the Tata group. And so if you wanted to increase your footprint presence in India, it is going to be important that you be able to work with the local company there so that you be there to be able to support the OEM tier ones in the India market. And so that's really the focus with this partnership. And also, of course, being able to work with Tata Group is also very significant in itself, but that's my response to your question. Well, thank you. And also, if I may add, India overall, we know this is a market where, I mean, we have to admit that we were behind others in really going into this market. But then even in terms of revenue and even in terms of our R&D activities, we want to accelerate our exposure to India. And if we focus on application, of course, we'd like to go into communication infrastructure, these non-auto areas. This is also something that we'd be interested in going together with Tata Group companies. We are trying to accelerate these activities together. And also, even into the software development. As you know, in India, there's really talented IT engineers And so we would like to leverage their help so that we'd be able to accelerate our work here. And of course, otherwise, there might be some other bits and pieces of news that we'd be ready to announce. So I hope you'd be able to look forward to what more we'd be able to tell you on this front. So thank you very much. So in that sense, so this is Tata. So this is really, you're talking about ABU, but as you try to do this R&D activities, do you think there is a potential for partnership with the IIBU side? Yes, we'll be doing for both ABU and IIBU. Thank you very much.

Thank you. Now we'd like to move on to the next question, which is from Micah Sun from Credit Suisse Securities. Please unmute and begin your question. This is Micah from Credit Suisse Securities. I have two questions. The first question, It's about the semiconductor demand for automotives. Maybe I have a misunderstanding, but let me confirm anyway. Previously, traditionally, OEM tier ones and BCPA inventories have been built up, and that was a major trend in the past, according to my understanding. But this time around, according to your explanation, you understand that the demand level at the customer level is quite very sufficient, so you are going to ship your products in line with the actual demand in the future. So maybe it might happen to be so that you just conducted a survey and realized that the customer's inventory level is sufficient to start the case. And also when you look at the sales trend between other regions, are there any differences in the sales pattern between China, United States, and Japan maybe? And my second question relates to the China market. Of course, the smartphones and PCs, those demands might be weaker, and that's understandable. But when you look at the mass market in China, I think those markets account for a good bulk of your sales in China. So what do you think about the inventory level and the sales trends for those demands in China? Well, as you rightly pointed out, in China, the consumer mobile market has been quite weak in the recent months. Of course, the industrial demand continues to be strong on the other hand. And as you know very well, China was the fastest in the transition to EVs, and therefore the inquiries for automotive demand has been quite strong, especially for the short term, for the near term. So, of course, the situation is mixed, but electrification and also other industry sector that is related to the electrification, we are seeing a very strong demand from those sectors. But when you look at the overall China market, because the consumer demand is still very strong, so the demand, the high demand that we have seen in the past is not likely to continue for extended periods. So in terms of regions, Europe and Japan for the next six months or so will continue to show strong demand. China is expected to slow down a little bit. That is the overall view that we have. For automotives, maybe Kataoka-san can supplement with additional comments later because he's available here. But this relates closely to the trend of electrification. But Europe and China, relatively strong in demand for automotive, automobiles, and Japan, relatively speaking, is somewhat soft, I believe. That is my impression that I have. But maybe, Kataoka-san, if you could supplement. This is Kataoka, okay. As you know very well, in the beginning of the year, the 85 million or 90 million units was the projected car manufacturing level for the year, and that's based on the historical trend. But due to COVID-19 and also the difficulty of getting access to components, the annual production is coming down from somewhere between 80 to 85 million units. In that environment, China alone, getting over the COVID-19 outbreak and also They're also promoting this tax reduction policy, and also the local OEM market share in China has increased to a level over 50%. So, especially in the XEV-related OEM demand, we are seeing a very strong growth, so China continues to be very strong. On the other hand, Japan, as we have been continuing to increase the production, there was a the demand that the car manufacturers were not able to meet. So the inventory level has been increasing. So therefore, we are closely watching the inventory level at the channel and also the tier ones. So we are expecting that there will be some adjustments for the inventory in the coming months in Japan. That's all for myself. Thank you. Thank you very much. Thank you.

Thank you very much. It is almost time to end the session, so the next question will be the final question. So, Yamazaki-san from Kyoto, please unmute yourself before asking your question. Yes, this is Yamazaki from Kyoto. I hope you can hear me. Yes, we do.

I'd like to ask about your business environment.

You talked about less visibility, uncertainties down the road. And can you explain that a little more about what you are observing at the moment? And also, how do you forecast, how do you foresee the future for the semiconductor industry? For example, we talk about semiconductor shortage, and when do you think this is going to be resolved in the end, if we'd be able to hear your view? Yes, thank you. uncertainties around the macroeconomy, of course, this is something that we all feel. And everyone who's taking part today, as you work, this is probably the first time we all experience a world like this. There's this large war going on. It's been going on for quite a long time. And this is causing an increase in energy cost, and we're seeing the implication to the food now. And at the moment, there's this immensely high inflation, and this is being observed in various advanced nations. And also what is very unique, now in the past, we've always been talking about the impact of COVID. And there were people we didn't really have much time to, much place to spend money on. And so, in other words, a lot of people will now want to spend more on what better experience they'd be able to enjoy, for example, eating out or traveling. And so the uncertainties to how we see On the electronic side of the market, there is more uncertainties of how things could develop here. But at the same time, this move towards non-carbon energy, and at the same time, there's more intelligent equipment. We're not just talking about EVs, but to this all, it's going to just continuously keep on increasing the demand to semiconductors. And so that's what we're observing in this macro economy. And this increase in this demand is probably going to, in the end, offset this lot of other unknown things that's happening in the world. And is it really going to be all this increased new demands that's going to prevail, or is it going to be this macro bad uncertainties that's going to prevail? This is something that we yet would have to see. But if we look back on the one to two years, and of course, this is something that we, probably be a say, but whenever we can't secure a product, for example, it's not just semiconductors, people want to secure ample inventory. And probably there's probably going to be this rebound from that momentum somewhere in the six months or 12 months time. And so it is something that we will have to pay our attention to, to see how things are going to develop, but to make sure that you don't misunderstand the, I will say what I do know. With all that said, we still have this very large backlog, order backlog. And I oftentimes think that, yes, I want to go out and buy a car. But we know that a lot of cars, you can't really access to it because a lot of these orders, you can't place an order right now. And so there's a lot of unmatch of what people want to do and what people can do. And so which vendor, which product is going to keep on growing from here? I mean, with all these, it's just even more unclear. But then we're not trying to be pessimistic here. We will be careful because there still is a good chance that we might be able to outperform our expectation, but it is going to be important that we be able to endure the current situation. That's how I see things. I hope that answers your question. But then again, the overall supply-demand balance of semiconductor, if we try to aggregate everything on a macro, I think a lot of things are already being supplemented and built. But then, when you talk about a specific production capacity, like a product that absolutely needs a certain product, that's exactly where there's a lot of a lot of increased demand. And it unfortunately happens to be some area where we can't really expect for a capacity increase. So the tightness is really being intensely seen in specific items. But then you can't complete an entire product set just because you are missing one semiconductor. And so there are a lot of cries around that. We hear that. And we hope that the overall trend would move so that the overall demand and supply would balance out. And hopefully, we'd also be able to help contribute in increasing the capacity, especially where it's needed. But then, of course, it's not something you'll be able to do overnight. But hopefully by next year, I'm hoping that we'd be able to see a better room to breathe across the industry. Thank you very much.

Thank you very much. Okay, thank you. Now we would like to finish the Q&A section at this juncture. Finally, Mr. Shibata has the final remarks. Mr. Shibata, the floor is yours. All right. So again, at the risk of repeating myself, to be candid with you, to be frank with you, we're not saying that the situation is going to worsen. The things are just unclear. So we have to be ready. so that we can respond whichever the market direction goes. And if we need to increase the inventory, we'll do so. And in areas that we have to be prudent, we will be prudent. So we will be quite a different approach as necessary. In September, the semi-annual long-term strategy update is planned to be held in September. And unlike the last time, We do not have a major strategic agenda this time around. So we will downsize the scale this time around. We'll have a compact session. Only myself and Shinpai-san, we are not going to invite the product heads this time around. So please be advised that that will be the case for this year. In the beginning of this year, we are going to hold a full-fledged meeting with the full team available. so that we can make a comprehensive presentation. So we would like to differentiate our approach as adequate. So thank you very much, ladies and gentlemen, for bearing with us for such a long time, and we look forward to your continued patronage. Thank you.