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.