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.