Renesas Electronics Corp

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Ladies and gentlemen, thank you very much for attending Runes Electronics earnings call for the third quarter of fiscal 2022 despite your busy schedule. We thank you very much indeed. Simultaneous translation is available today. Please click the globe icon at the bottom and select your preferred language. Speakers, you are requested to turn your video on. Today's session is attended by our CEO, Mr. Hidetoshi Shibata, our Senior Vice President and CFO, Mr. Shuhei Shinkai, and Senior Vice President and General Manager of Automotive Solutions Business Unit, Mr. Takeshi Kataoka, as well as some other staff. Mr. Shibata will first make an opening statement and then Mr. Shinkai will explain the third quarter results followed by a Q&A session. We expect to finish the entire session in about 16 minutes. The materials to be used for today's presentation is the same as the one posted on the IR website of Renesas Electronics. Mr. Shibata, please turn your microphone on and begin your statement. Hello, good afternoon, everyone. This is Shibata. This time around, the results this time, because this is a third quarter, so there's nothing so much noteworthy that we should highlight so much. Details will be provided by Mr. Shinkai later. As far as the third quarter results are concerned, overall, I think I would say the results were in line with our expectation. The end demand for automotive was slightly higher than expected, so towards the fourth quarter, the channel inventory for automotive will have to be replenished to some extent. So that's something, because we believe the demand is quite firm. Other than automotive, from third quarter to the fourth quarter, we have seen an apparent change in the market conditions. So PC, mobile, all the weakness in the middle point are now expanding to the peripheral parts. Peripheral meaning that the printers and also rather than the PC per se, smartphones, especially in China, the inexpensive range and also some high-end, some things that we are very concerned about. So therefore, we have provided a sequential guidance this time around. Compared to usual, the guidance numbers this time around are to some extent, worrisome to me. And we still presented these numbers with some concerns in our mind. That's the frank and the candid opinion that I have. But the details will be provided by Mr. Shinkai from here onwards. So I will give the microphone to Mr. Shinkai now.

Yes, this is Shinkai, CFO. Thank you very much. Allow me to go over with you the Q3 presentation based on the materials we have provided. So please move to the next page. So here we have the financial outline for Q3, and if you'd be able to look at the dark blue column. So revenue, that's $387.6 billion. Gross margin, that's 57.0%. Operating profit, that's $142.8 billion, meaning the margin is 36.8%. And profit attributable to owners of parent, that's $96.4 billion. Now, if we exclude foreign exchange impact, then the profit attributable to owners of power will be 115.4 billion. EBITDA, that's 163.4 billion. And as for the currency assumption, that's 135 yen versus U.S. dollars and 139 yen versus euro. And we have the comparison, the numbers of comparison versus forecast in the three following columns, which I'd like to go explain afterwards. But then we also have into the next blue column, the nine months year-to-date figures. Now, again, we have shown the net profit excluding for its impact. And this is because we wanted to show the more normal steady profit level. And at the same time, this is something that we went over in the previous session, but then there's this group cash pooling. And because of this purpose, we have intercompany loans in dollars. And so this intercompany loans, depending on its valuation can recognize and gains or losses from forex on the consolidated financial expense. And so if we have weekly yen NPL, that means we see more loss. Now, of course, we're trying to work to reduce our exposure to foreign exchange. And this is specifically about revisiting how we pull cash. And we hope to be able to accomplish that during this year. And so this currency loss, it will still find this until our Q4, but then from next year, we are trying to minimize our exposure to forex in this form. Now in Q4, we still do believe there is going to be an impact, but then we know that one yen fluctuation can bring approximately 3 billion yen impact. And so weaker yen causes loss and stronger yen causes gains. Moving on to the next page. So here, now we look at quarterly revenue trend, and Q3 is shown on the far right. Overall, on year-on-year, we have seen an increase by 50%, and Q1Q, that's a 2.8% increase. Breakdown, as you can see, so Q1Q for the automotive side, that's minus 3.7%, whereas industrial infrastructure IoT, that's plus 7.8%, Q1Q. Next page, please. So now, here we look at the revenue and growth operating margin for Q3. And so starting from the total now versus the forecast, so if you'd be able to look at the top right, so as for the revenue, again, we have been able to find from the midpoint an increase by 0.9%, which is a 3.6 million yen upshot. And there has been a forex impact by third, and the remaining two-thirds will be excluding the forecast. And so This mainly comes from the industry infrastructure IoT. This margin compared to the forecast, we have been able to surpass this by 0.5 percentage points. And there has been some slight positive coming from currency here. Now, we are trying to prepare for any yen appreciation risk. And so we're trying to make sure that we'd be able to do a currency hedge so that we'd be able to have this very stronger floor for dollar versus yen. And so that means recovery and upside is going to be limited in that sense. Now, as for the product mix, we have seen a positive plus, like positive, mainly coming from industry IOT. And for the production recovery and production cost, it was pretty much in line with our forecast. Operating expense, we have seen a decline by 6.4 billion, and we have seen a decline of R&D and SG&A. And so therefore, OP margin, we have been able to see this increase by 2.3 percentage points. Now, Q1Q is also shown on the bottom right. And for the OP margin, on Q1Q basis, we have seen a decline by 1.7 percentage points. Now, as for the revenue, there has been a positive currency impact. But then if we exclude a currency impact, we have seen a negative trend. And we have seen positive growth. in IoT. And for the gross margin, we are seeing minus 1.6 points, which has some slight positive impact coming from currency. And the product mix, this is something that we've been able to see some slight positive due to IoT. And as for the production recovery, due to post-process mainly, we have seen a decline. And so therefore, gross margin, Q1Q, we have seen a decline by 1.6 percentage points. But then R&D, this also has increased by 2.5 billion yen. Next, we look at this upper segment, if you'd be able to look at the left-hand side. So gross margin and operating margin, you can see that there is a bit of a difference between the segments on Q1Q. So for a gross margin, the production recovery, automotive has more internal production. And so that is why we're seeing a contribution more on this automotive side. But then from Q3, in other words, from the second half, we are going to be revisiting how we calculate the notice of provisioning. And in other words, this was something that we did, allocated the same rule for the entire company, but now we're going to be looking at this per business segment. And so that means that this is going to have a positive impact to the margin for the IIoT, but not so for the automotive. But then if you look at this on a total company basis, the impact is neutral. Our next page is about the inventory. And later on, I will be talking about the Q1Q change as well as the future forecast. But then at the moment, here we look at the in-house inventory. Now, the total DOI has increased by Q1Q. It increased at automotive, but then for IoT, it has declined. So the increase we're seeing on the automotive side is because we have this advanced purchase for Dibank, for Dibank. work in progress, but then for finished products, this is because we're doing advanced production, which I would like to go on, explain later on. The next is about the inventory and the sales channel side. And again, on the bar right, we have the total figure. And you can see that WOI on Q1 basis has been out on decline. Now we're seeing a decline in automotive, some slight increase in industrial infrastructure IoT. Moving on to the next slide, here we look at the analysis So first of all, starting with the left-hand side, this is about the house inventory. So we have been seeing an increase in Q2 to Q3, and 30% about what's coming from currency, and 10% was through the valuation, inventory valuation change. If we look at the details, for example, the raw materials, we wanted to make sure we have a good BCM response. In other words, if we know there's a material at risk, we wanted to make sure advance purchase, for example, wafer or substrate or maintenance parts. So these are some of the items that we decided to make some advance purchasing. And this is something that we will continue doing in Q4, so there will be a slight increase here. Next is the work in process. In Q3, there was advance purchase order as well as increase in dieback inventory. Now, as for the advance purchase, this is something that we did touch in our previous session, but we are trying to do some ramp up production. And so we wanted to make sure we'd be prepared. We're basically talking about automotive SOC. And for die bank, again, we wanted to have good BCM response, especially for products that we are internally manufacturing. And so that is why we're building up our die bank inventory. And so this is something that we are able to do well for the legacy type of products. But then when it comes to some of the growth products, we do not believe we have ample inventory yet. And for the work in process, likewise in Q4, we are going to be increasing building the die bank inventory, especially for some of the products that we need to supply more, which means that work in process, especially for the automotive side, will keep on increasing. On the other hand, for industry infrastructure IoT, we will be looking at the demand trend to lower down the wafer start, but then we do have to look at some of the lead time. And so that means we will still see a tentative increase in inventory in Q4, but then from there on, from Q1 next year onwards, we'd like to make sure we optimize the inventory level. Now for the finished goods for Q3, we wanted to prepare for anything that we will be decreasing the utilization date for Q4, especially run post-process. And that is something that we did in Q3. And Q4, for the automotive side, we are going to be increasing the advanced production for automotive side. And also for the sales channel side inventory. Now, what we can see for both automotive and IIoT is that we are going to be responding to the end demand In other words, we do not want to eat or consume too much of the future demand at an early stage. And for that perspective, again, this is something that we did touch upon in the previous session, but in Q3, we have decided to hold down the inventory for ABU automotive site and IABU in Q4. Now for the IABU in Q3, we have implemented measures for the final demand. In other words, we know the end demand there on Q1Q is flat and inventory level has also remained flat. And Q4, we are again going to be responding to the demand level. Now, for the end demand, we expect it is going to go down Q1Q. So in other words, that means WLY is going to slightly increase. For the automotive side, the replenishing of the inventory, we do believe we have been able to accomplish that at the point of Q2. And so we have decided to hold down the sell-in amount at Q3, looking at the end demand. And there still was this strong trend in the end demand, and that is why WOI has declined. And Q4, we do want to be careful as we foresee how the end demand would go. But then Q3, we did sort of decline the inventory amount. And so we hope we'll be able to build up again in Q4. And so Q1Q, we expect the ROI to increase here. Moving on to the next page. Here we look into the utilization rate. Now here in Q3, the input basis was 85%. And in Q4, we expect there is going to be a slight decline towards the year end. there is going to be the regular maintenance at each of the fabs or factories. And so that is why the operation or utilization date will be declining. And so that is why we expect the utilization rate in Q4 is going to go down. Please move on to the next page. Now here, there is not much points that I would like to highlight, but Q3 EBITDA was under 63.4 billion, operating cash flow 144.9, free cash flow was under 28.3. So that's the highlight here. Moving on to the next page.

This is the forecast for the fourth quarter. If you look at the dark blue portion in the middle of this table, revenue at the midpoint is estimated to be 385 billion yen. And Q1Q, two columns down to the right, down 0.7%. For the growth margin, 54.0% is projected on a Q and Q basis. This represents a decline of 0.3.0%. For the OP margin, 30.5%. On a Q and Q basis, this is a negative 3.6 percentage point. The current currency rate, we are sending 144 yen to the dollar and 142 yen to the euro. If I can add some more comments regarding the details here, for the operating revenues, If you exclude the currency impact, the foreign exchange impact, the automotive almost flat and IIoT negative growth is projected here. And for the gross margin, product mix, IIoT is going to decline. Therefore, we are projecting a deterioration of product mix for production recovery, as I mentioned earlier. in the area in the new year period, there's a regular maintenance plan. So the utilization operation day is going to come down and therefore the production recovery is going to come down. For the production cost, we are expecting a Q and Q increase because of the power cost increase and also the startup costs for the Kofu factory and also the regular maintenance costs are also included in here. The next page, please. If you can go to page 17. This is the non-gap and gap reconciliation bridge. In the third quarter, of course, for the primary non-recurring items, the Yamaguchi plant's equipment sales, approximately 8 billion yen, were recorded. And the next. This is CapEx, the status of CapEx. Up until the second quarter, the big-ticket items production increase investments have been completed. In the third quarter and fourth quarter, the mid single digit is decided for the capital expenditures. So that's all for myself. Thank you very much for your attention. Thank you very much. Now we would like to move on to the Q&A session. Shibata-san, Kataoka-san, please turn your video on. Now, let me explain the way to raise your question. If you have a question, the moderator will ask you to raise your hand. So if you are asked to raise your hand, please push the raise hand button. We will call your name and company name in the order of the hands raised. When your name is called by the moderator, you'll be able to use the microphone function. Please unmute your microphone before asking your question. Due to time restrictions, we may have to ask you to limit the number of questions to two questions per one questioner. Now we would like to move on to the Q&A session. If you have a question, please indicate by the raise hand button. Now from Daiwa Security, Sugiura-san, please unmute yourself and begin your question. This is Sugiura from Daiwa Securities. Thank you very much for this opportunity. I have two questions. One is about the Q4 guidance for revenue, your assumptions used for that. I would like to ask some supplementary questions. For automotive, It's flat, excluding the foreign exchange impact, according to your explanation. The finished cars production status, how are you projecting this? What's your assumption for the production of finished cars? And for IoT, you are expecting a decline on a Q&Q basis. I think there are some seasonality and there are some decrease for the sales to some customers. But does the projection this time around include something larger than that in the direct decrease? So can you divide by industrial and infrastructure and IoT for the projected numbers of sales for those different sub-segments? For automotive, a flattish growth is projected by and large. And on the other hand, Our direct customers in many cases are the tier one suppliers and those tier one suppliers. Inventory level, we have to keep a very close eye on the inventory level of those tier ones. And although the automotive market is expected to be flattish, but the device consumption at the tier one level compared to the third quarter is expected to slow down in the fourth quarter. Maybe slow down is slightly different in terms of the nuance. But we have made advanced orders in the third quarter. So we are going to go through adjustment period in the fourth quarter. I think that is a more accurate description. So the selling of our devices, if that remains flat, the channel inventory will increase. That's how we look at it at this point of time. For the IIoT business, industrial. This applies to many different companies, but I think industrial encompasses many different components. Hardcore or factory automations, if I limit that conversation to that segment only, I think the growth is still continuing and solid numbers are expected for that segment. On the other hand, when it comes to printer-related, that I said at the outset, and also PC peripherals, In the third quarter, we are expecting a significant drop compared to the third quarter in the fourth quarter. So for many other things, low teen, when foreign exchange is flat, a low teen level of decline is projected. And for the IoT portion, broad-based, long-tail customers, many of them are included here. I would say maybe some demand decline is anticipated. But rather than that, I think inventory adjustment is something that we see more strongly. So in terms of device consumption from Renaissance, a 10% or so decline is projected if the foreign exchange is assumed to be flat. So cloud and data center, that will continue to remain solid. Firm growth is expected there. So that's the overall picture that I am anticipating. Thank you very much. Then my second question is about your profit margin. This is a question relating to your profit margin. Shinkai-san mentioned and gave us some qualitative comments during his presentation. So once again, let me ask this question. The third quarter actual, For automotive and the semiconductor, gross margin has come down quite a bit. So what is the major factor behind this? And also for the guidance for the profit margin for the fourth quarter, I have a question. Gross margin and the SG&A, because of the Kofu factory startup cost, I think SG&A is expected to go up. So from Q3 to Q4, ABU and IIoT, if you divide between the two, What are the factors that will have a negative impact on the gross margin? Once again, can you streamline that and then explain to us if you can give us a breakdown of the impact from each element to the extent possible, that will be appreciated. Okay, so that will be answered by Mr. Shinkai. Shinkai-san, please answer. In Q3 to Q4, the bridge between Q3 to Q4, I'll try to organize that and come with a comment on that. So from Q3 to Q4, three percentage points decrease and the composition for that would be product mix 40% of that and production recovery and production impact 20% or slightly more than 20% and production cost slightly less than 20%. That is a breakdown. And as far as the product mix is concerned, on a macro basis, automotive, flat, IIoT, negative. So the product mix will deteriorate. So that impact is something that we account for. And also for automotive, inside automotive, the internal mix within automotive, there is a slight impact from that. one thing the low margin those products relatively low margin those sales are expected to grow and the high margin sales product sales is expected to come down that's one thing and also there are non-device sales that we don't have a final outlook developed yet. And we have just made a conservative projection for those. So for those reasons, the CreonQ product mix is expected to decline or deteriorate. Just as a confirmation, For the product mix automotive accounts for about and for the utilization decline also have a stronger impact on the automotive because in house production is higher. But the production recovery will be affecting both segments of IoT and automotive so for. the gross margin of the automotive side is going to decline higher in the fourth quarter. Yes, so for the production cost, those are the production costs relating to internal production. So just like the production recovery, the automotive portion, relatively speaking, is going to go up. Okay, understood.

Thank you very much.

Thank you very much. Next, from UBS, Yasui-san. Mr. Yasui, please unmute yourself and start your question. Thank you very much. My first question is about your ABU inventory level. Now, the inventory of sales channel had been increasing, but then you had been declining this. And you mentioned that there was a decline in a sell-in inventory, which I understand is going to be approximately 160 billion yen amount of sales. So if the production level is going to continue as today, that's really the level of the revenue. Now, I know, for example, talking about a supply chain, Toyota is saying that because of the supply chain issue, in other words, semiconductor, they're going to be reducing their production volume. So, for example, how sufficient is the supply for semiconductor for automotive purpose? For example, is it going to be really rare, like just one out of a thousand is not going to be enough? Well, since we have Kataoka-san here, why don't we first ask Kataoka-san to answer? Yes, so do we have enough? Is there ample supply? supply, that's something I would like to respond. So yes, there are some products where the supply is still short. And so that is why, for example, people like Toyota would be making their announcement. In other words, they're saying that they're going to be declining the production level. They have been making a downward vision compared to what we announced initially. So that is something that we are observing. But then if you look at this on a macro level, the shortage is becoming more or gradually getting more relaxed or the situation is becoming gradually better. But then, because we're hearing these announcements like Toyota, we do want to be careful. And so that is why we have, that's what's behind the adjustment of the inventory in Q3. Yes, and also for the first part of the question, now, in a nutshell, there's still areas that we don't know, but then this Q3 level, is it going to continue? And would that give us better visibility? That is quite a difficult conclusion to make. My feel is that there probably will be yet a little more increase from what we're observing right now. And what's behind that is, again, something that we've been discussing from before. In other words, there's more EV, ADAS, there's the production volume, contents growth. There's a lot of talks behind this. And what is holding down this increase, I guess, has to do with what you asked as your second point. In other words... components required to make a car will the oems car oems uh have sufficient uh parts that's really the theme and uh talking about our own device mix again you heard from mr shinkai soc there is this advanced purchase but then for example 40 nano MCU, we would very much like to make an advanced purchase, but then even if we do that, we're going to be eating away, consuming that right away. So even if we have, no matter how much we have, we never will have enough. And so how much supply can we secure? We do have to look at that. And so those are some of the factors that we have to look at. And ever since last year to this year, as you have been observing, We still have to ask if this current trend that we're observing is going to give us a large growth next year. We still are not exactly sure, but then at this moment, we do believe there is still a chance that we will be finding growth next year. So that's my answer. Thank you very much. So I know there are two questions and I know I was trying to make it technical and that was supposed to be one large question. So I like to ask a little more, which is about foreign exchange. And again, I want to be technical and I'm going to be asking a little more questions here. So what is your currency, the sensitivity to currency? And for example, on an annual basis, can you tell us? And also, now we know this currency is fluctuating. And is this currency change, fluctuation, changing your share? Because the Japanese products from outside, people from people outside must be really cheap. And do you think this is going to give you an opportunity to increase your share? Can you give us your fields? Now, for the market share, well, just because yen is weaker, it doesn't mean that the price in dollar is going to be lowered. And so basically, we do not believe we're going to see any contribution like that from currency. But as for sensitivity, let's ask Mr. Shinkai. Yes, for the annual basis, I think that was your question. So if we look at the Q4, allow me to just talk about the Q4 base as the baseline. And so the assumption of the currency for Q4 is, again, we did talk earlier about how we try to make a currency hedging, hedging of the currency. So that means one yen fluctuation versus dollar. That means to their revenue that is going to change by 1.2 billion and gross profit will be 600 million. OP will be 300 million. As if this is for Europe, likewise, one yen fluctuation can change their revenue by 300 million. a 300 billion GP by 300 million and OP by 200 million. Thank you very much.

Thank you.

Now from Goldman Sachs, I would like to invite Takayama-san to raise a question. Hello, thank you very much for the opportunity. I have two questions. I think I'm allowed two questions. So my first question is about the foreign exchange. As Shinkai-san mentioned, the hedging You mentioned that from next year onwards, you might review the way of hedging so that you won't have any impact on the non-recurring basis. So once again, why are you doing this? And why are you going to change the practice so that you won't have any profit impact just like other companies? So can you give us the rationale behind this decision? So Shinkai-san can comment this further because... Yes, the reason why we are going to review the methodology is because the cash grouping inside a group is something related to this. So I'm talking about the currency of, if you can look at page four, the profit, the foreign exchange gains and losses that will have an impact on the profit attributable to the parent. In order to minimize the impact, we are doing this. The currency impacting the profit would be the financing expenses, and that means intercompany loan balance, which is denominated in dollars. So depending on the foreign exchange level, this will grow or shrink, and that will have an impact on the consolidated profit. And therefore, the intercompany loan Rather than into company loan, we would like to look into other methodology for cash pooling. And by doing so, the impact on the financing expenses can be minimized. So that's the rationale behind this. And therefore, maybe you misunderstood with something different. All right. So my second question, I'm sorry, is about... does not have any direct relationship with what you have commented today. After the fourth quarter guidance, some events that could have some impact on the first quarter performance, I would like to summarize the pros and cons. These expenses may no longer be there, but for the raw material cost, I think could be somewhat better reflected and the utilization I think there are something you can do more. But on the other hand, the IIBU, which is expected to decline, may moderate. So to the extent possible, to the extent that you have visibility, can you give us your projection and guidance into the first quarter? And then after that, over the longer term, I think 25 to 30 percentage point is something that you are projecting for the longer term. So do you have any... feeling that you'll be able to manage within that range over the longer term. So that's the point that I would like to confirm. Well, after all, everything is dependent on the semiconductor demand changes on the macro basis, and that will change the outcome significantly. So the question is very difficult for me to answer, but the level that we are currently projecting If the fluctuation turns out to be within the range that we are projecting, and maybe Shimko-san can add some comments later, if need be, but the possibility, if there's going to be a negative impact, that one element that could have a negative turn to the negative would be the production recovery. At this point of time, the demand is not likely to change significantly to the pessimistic side, but if that happens, we may have to shrink the production quite significantly, and therefore the production recovery will have a significant negative toll on us if that turns out to be the case. Product mix, as you rightly pointed out, for the short term, PC, mobile, and peripherals, and also the high-end smartphones, those are the things that we have concerns about at this point of time. If the demand for them declines in the future, the IBU product sales is likely to come down. And therefore, in comparison with a automotive, the product mix overall for the company will deteriorate. So those are the two things towards next year that could have the negative downward pressure on us. Those are the primary two components that may have a downward pressure into next year. Shinkai-san, did you have anything? I share the same view with you, in fact. The production recovery impact, I think, will have the biggest impact on the gross margin, I believe. And therefore, depending on the outcome of that, the results may look quite differently depending on the production recovery trend. Overall, the cost is rising, including raw material cost and also the personnel cost. But those things could be passed on, for example, or some other methodology can be used in order to absorb such impact. so that we shall be able to maintain the operating margin within the level that we have just mentioned. I think that's reasonably possible for us to do. With the raw material cost and other costs, passing on those costs, you believe the environment allows you to do this quite smoothly without any problem. Is that correct? Well, whether that's smoothly or not or swiftly or not, I'm not really sure, but we are meticulously trying to convince customers to gain their understanding. That remains unchanged. Thank you very much.

Thank you very much.

Next, Mr. Hirakawa, please unmute yourself and ask your question. Thank you very much. BOA Securities, this is Hirakawa. I have two questions too. Now, first question, I know it's the same question, but then Texas Instruments have given their outlook. and the automotive side is really going to go down. But still, it is still seeing some growth as strength. But then, I did not really mention about how strong and robust or continual strength they'd be able to find on the automotive side. But then, what is your perspective on the automotive side semiconductor? So that's my first question. Well, I already said what I need to say. I don't really have any additional comments other than what I mentioned. But Kataoka-san, would you have anything? Well, this is Kataoka. So yes, we know that OEMs, they want to keep on producing more. Like they want to increase their production volume by 10% or 20% next year versus this one. And of course, they want to have more revenue. And if there's going to be contents growth, that is also something that is favorable. And If that is all achieved, then we should really see a good growth in demand. But then every time, I mean, this is parts, we're not just talking about semiconductors. There's always this part shortage, which does limit the production volume and probably the production volume is not really going to change from this year. And if we'd be able to keep that in mind, I think that's one way to discipline ourselves in thinking how we'd be able to keep the inventory, but that's my response. So in other words, It's not about the OEMs, the production volume demand, but it's really about how much parts could be supplied. And that's what's going to determine your semiconductor business, as well as the relationship with the OEMs production volume. Is that the way to take it? Well, contents, number of contents, as well as the car production volume probably would be some of the indicators. For the past two years, this is something that we've been doing, but for the past two years, We know that we have really been focusing on capturing the high growth market and high growth customers. But this is something that we have been trying to change over the past two years. And I think this is something that we have discussed in the past. And so that is why our sales in China is actually increasing at the moment. There are, of course, pros and cons to these activities. And so this secular growth, in terms of secular growth, China market as well as India market, of course, India market could be a scale-wise smaller, but then these two markets are really supporting the overall activity. But then when it comes to our device family, we know there still are very, very tight items yet. And sometimes we would not be able to find such a high growth here. And so... So that is why it goes back to the comment, like we hope to be able to have a good growth, even though it may not be a dramatic growth. Thank you very much. My second question is something that we saw at the very end of the presentation that was about capital expenditure, a plan. Kofu Power Semiconductor is going to have a large portion in that CapEx. Now we know that when it comes to power semiconductors, there's going to be a lot of investment. Many people are going to do that. So Renesas power semiconductor, how do you see the competitiveness in terms of your technology? And how do you mean to secure your accounts? What is your outlook into the next fiscal year? So that was my second question. Now, the competitiveness of our product, I don't know. If I say this too much, I might be misunderstood. But I know. our products are being very much highly appreciated by our customers. So we're not that worried about our competitiveness in that sense. But what we do have to be very concerned is the macro situation in terms of demand and supply. At the moment, when we look at things in the longer term, needless to say, there's going to be more shift to SOC, like in the auto space. But then anything for the affordable areas or anything for industrial areas, IGBT growth is still going to be very strong. And so we feel confident in making our investment. But then we know if all players are still going to just keep on adding the capacity, then there may be oversupply. And that is going to be a concern. And so we don't want to determine looking at how others could be building up their capacity. It's really about building our technology. And if we find a customer that would appreciate our work, those will be the customers that we want to transact with. And it is something that we have tried to do, but it's something that we want to focus even more. And not just Mr. Kataoka, but I am also going to be participating in really building our customer base. because that is going to, in the end, work as a differentiator in how we be able to offer our products. And it is something that we have tried to do. And so we do feel confident in what we are doing right now. Thank you very much for your response.

Thank you very much. The next question is from Eguchi-san from Nikkei Shimbun. Please unmute yourself and begin your question. My name is Eguchi from Nikkei. Can you hear me? Yes, I hear you. Okay, let me begin my question. The first question regarding automotive business. You explained earlier, so I would like to reconfirm once again if that is possible. To some extent, the automotive semiconductor shortage is now beginning to moderate on a gradual basis. Does that mean that the number of items being that is insufficient is coming down or is it rather because the overall supply is enough, but the tier ones and OEMs are not fully supplied. So does that mean that only a particular sector is facing shortage or do you see an overall shortage across the board? So that's the first question. Among them, among the products that you offer, are there any products that you have not been able to meet the demand? If there's any of such product, can you, identify which component is facing shortage. Well, from before, the general direction has not changed that significantly in terms of the total quantity. I think we have a good supply already. I think we are quite sufficient. And that remains unchanged from before. But still, having said that, there are some components that still have some insufficiencies. And over time, some of them have made a transition, for example, and some of them, the shortage level is now moderating. So previously, if you make up the list of components that have undersupply, the quantity was so large in terms of the shortages. And of course, the items on the list is now also coming down. So in terms of the variety of components in shortage and the quantity in shortage is now coming down, and therefore, I would say that the supply-demand tightness has moderated. As far as our devices are concerned, if there's any shortages, I would say, as we have communicated for some time before, the 40nm MCU, this is very still tight. So once we produce it, that will be sold off immediately. They'll sell immediately. There's a very tight demand and supply situation for that product on a macro basis. And depending on some products, such as the analog semiconductors mainly, as we have stated from before, the mature node processes, especially those that we outsource to foundries for production, they continue to face a shortage. Some of them still face shortages. as we speak today, and I think going into the future for some time, I would say, I'm not really sure if the hand-to-mouth expression is adequate or not, but once we procure them and supply them, they will sell immediately. So that's the situation. But Kataoka-san, did you have any additional comments? As Mr. Shibata just mentioned, the mature nodes in particular, such as the legacy products, such as ASICs, for example, those, not all of them, but certain ASIC types still have a very tight supply, and we are affected by that. And of course, this could be critical to some components of automotive, and that remains unchanged before. However, the degree of severeness is now moderated compared to before. And in our case, as Mr. Shibata mentioned, 49 on my MCU, this product in particular, we would like to produce even one more. And because once we produce it, that could sell. But because of the capacity constraints, and therefore, together with foundries, we are working on this to address the problem. That's it. Thank you. Thank you very much for your comment. My second question, in relation to your capacity, how you plan to expand your capacity and the competitors, analog in-house fab and foundries capacity expansion has been discussed, I believe. But once the mature node supply situation eases, at which timing the fundamental capacity or the production supply will increase to some extent, the near future or do you think this supply situation will continue for some time well supply demand is also uh makes sense only when there's a demand so for the near term i think the demand has a stronger outcome on the impact on the outcome i believe because when it comes to certain production processes we are distinguishing with multiple products So the underlying compute or computing products or mobile products, when those consumer products demand comes down, the capacity will become available gradually. So for the short term, let's say in our case, as we have introduced our case from towards next fiscal year, the capacity will increase gradually. And I believe the competition will also gradually increase their capacities. But more than that, depending on the demand side, the supply-demand balance will be affected more by the demand side. Thank you. That's it for myself. Thank you. Thank you very much for your comment.

Thank you very much. Next, from Citigroup, Mr. Fujiwara, please unmute yourself and ask your question.

Thank you very much.

This is Fujiwara from Citigroup. I hope you can hear me. Yes, we hear you. Thank you. I have two questions as well. First question is about your in-house inventory. Now, I did see that for the automotive side, you have been able to come very close to your target level, but then you're still trying to expand the die bank inventory, like you said. So this in-house inventory, as you try to build this up, how long do you think it will take before you have suffice inventory? Do you think, I mean, I am thinking that it's probably going to be the near future when you have ample inventory level, but then when you do, are you going to try to increase your capacity? Well, Shinkai-san, can you answer that question? Yes. So for the die bank inventory, as I mentioned earlier, as for the growth products, we still do not feel we have enough number of inventory and how long is it going to take will depend on the demand out there, but we still do believe it is going to. We still will need time before we have ample inventory, but then for other products, we do believe around the year end or perhaps by Q1 next year, we believe we will be able to have this suffice inventory level. And so therefore, what is going to be the impact of utilization? Now, this inventory level alone is not going to just push up the utilization. So when we be able to fill the die bank inventory, is that going to really change? No, we don't really believe so. And this die bank, there are die bank, which we stock at the foundry. There are some that we stock as in-house. So even when we say die bank inventory, the increase of the products in process is not directly going to change the utilization rate of what we have internally in internal production. And if I'd be able to ask a follow-up question, for example, Fortinano MCU, I mean, for the growth areas, that's something that you procure from Foundry, that's my guess. But other products, if you'd be able to have a good, ample inventory within this year. Do you think you'd be able to have enough inventory for what you produce internally? But is that correct? But still, that's not really going to change your utilization. Well, to be more specific, for Daibank, within the Daibank inventory, most of that, on a value-wise basis, is for the foundries. And for internal production, it's probably like half. And so in other words, again, this die bank inventory and the build up of die bank inventory is not really adding utilization. And so even if we'd be able to fill up this, let's say we do not have to keep on building the die bank, that's not really going to really change the utilization Thank you very much. My second question. Maybe it's too early to ask at this point, but then how do you see the demand outlook for FY23, the year 23? So in this three months, what kind of change have you observed? And at the same time, even at this moment, economic slowdown is really being felt. But then do you see, have you ever heard of any order cancellations? Well, is the cancellation increasing? No. And when we look at the order backlog, it is still very high, high level. And I feel like I have been saying pretty much the similar thing all the time. And in the end, it's really about, is this really true? Now, we certainly look at what the peers, other people are saying. And now when we try to compare that with our own operating plan, I do believe the current order backlog level is really going to support our operation into the next year as well. And so if we are going to believe what we are seeing, we still can feel confident that we will be able to find growth here. But then there's always a chance that the situation may dramatically change. So what I have been It is just a repetition of what I have been saying from before. But the trend that I have been saying at the end of last year to the first half of this year, it's not about trying to build up an order backlog that people would not be able to cancel because it could be just eating away the future demand. So what is important that we communicate together with the customers and really ask, do you really need to purchase this today? And we're still doing that type of conversation with our customers. I feel like the current situation is just going to keep on as it is into the next year. In other words, very strong order backlog. With that said, there will be some gradual... Well, we're hoping to be able to negotiate so that we'd be able to find a more optimal level of order. In other words, ask the customer, do you really need to order that much? And so I know I do have to apologize if we're not really being clear. But in number, if we talk in numbers, we always talk about very strong number. But I do always sense that one day situation may change and we don't want to feel surprised and we don't want to be belated in our response when some change occurs. And so that is why we want to be able to have good negotiation discussion with the customers. And if we have to revisit the backlog, we do need to do so. Thank you very much. Thank you.

Thank you very much. Since we are running out of time, I will take the last question. And so this will be the last question. Sasaki-san from Toyo Keizai, please unmute yourself and begin your question. This is Sasaki from Toyo Keiza. Thank you very much for your very kind presentation. I just have one question which may be overlapping with a previous question regarding outlook for this next year at the order backlog. I think you have received a very long order going into the future and the customers are placing large amounts in their orders. And I think that will be eating up the demand for the future. So do you think the trough will become larger in the future? How do you see that trend in the future? And what are the countermeasures for that? You're just going to communicate with the customers and gradually trim down the actual order and so that you will adjust to the actual demand. Is that your countermeasure for that? All the things that I was supposed to answer was already commented by myself earlier. In order to avoid that, we will try to limit the channel inventory and we would like to ensure that we have a good communication with customers so that we can review the backlog from time to time. Beyond that, if the demand disappears much larger than expected, we may have to anticipate some impact from that. However, as for the inventory and also for the backlogs are concerned, the deceleration risk in the future We don't want to forget about that and see a sudden change in the future. We would like to avoid that by all means. Oh, so sorry for the overlapping question. My second question is about your foreign exchange. I would like to ask another question. You talked about the foreign exchange sensitivity earlier and the yen's depreciation, I think, is a positive factor for your business. But do you welcome this yen's depreciation or do you see any disadvantage from the weaker yen? Or as a manufacturer based in Japan, what's your view on the financial policy or the monetary policy of Japan? Well, of course, many things are already being conveyed in the media, so our views are not so different from what is reported by the media. We too, in many regards, Maybe this is different from localization, but in many regards, we are moving forward and pushing for diversification, as you may know very well. So therefore, our employee base, Japanese account for less than 50% of our total employee base. And in-house production and the utilization and sourcing from foundries, in that regard, we are taking a fab-like approach. So the foundry procurement is increasing and that's denominated in US dollars. So if you take these into consideration, the weaker yen will have an increase factor on the cost. And in terms of R&D and also for the cost of goods, that will have a negative impact so that we are seeing a stronger impact on cost increase because of the weaker yen and raw materials besides that. And as Mr. Shinkai mentioned, the utility costs, especially the electricity cost, is increasing significantly. So the weekly yen has a down cost increase pressure, which is unfavorable for us. However, on the other hand, through foreign exchange, the revenue when converted into Japanese yen is inflated to some extent. So that is a benefit side of the weaker yen. But when the revenue increases in terms of company operation, that will relax people's mindset. So we don't want to sit on that and be complacent about that. So if you consider all these things together, as a trend, a moderate depreciation of yen or if the yen stabilizes, if that is the case, I think it will make it easier for us to respond to the situation as adequate, but if the yen depreciates in this very volatile fashion in a very short period of time, that makes our operations more difficult. So again, even if we sacrifice the upside to some extent, we would like to solidify the floor so that we can have a solid operation. because we are not looking into a near-term future only. In order for us to deliver results in five years' time, 10 years' time, it is more important that we have a solid operation. So we hope that there won't be significant volatility in the foreign exchange market. That's our view. Thank you very much. If that is the case, if so, therefore, a moderate yen depreciation is a welcome development for you, but you don't want to see a hugely volatile market. We just would like to operate the company in view of the current situation. All right. Thank you very much for your comment.

Thank you very much.

With that, we'd like to end the Q&A session. So may we ask Mr. Shibata to make a closing remark? Mr. Shibata, please. So, yes, thank you very much. Now, the Q3 result, I do not believe there were much new news this time around. And so I do guess your interest would be, first of all, about our margin. But then what determines our margin is really the revenue as well as the demand. And so it is not just about Q4, but we hope you would be able to observe and share information about the upcoming Q1. We're hoping we'd be able to send you the information without misleading you as much as possible. And we would like to do this to our best as much as possible and really be able to share with you what we are observing. And so once again, thank you very much for spending your time with us in your busy schedule. Thank you very much.

Thank you very much.

We will end the Q3 announcement. Thank you very much.