Renesas Electronics Corp

Good afternoon to you all. This is Shibata. I assume that many of you have already seen the presentation, but for the first quarter, we have achieved some upsides vis-a-vis the guidance. As for the second quarter, we are expecting nearly flat revenue growth. But on the other hand, The second half is very difficult for us to forecast. There might be some upside, so we'll be making preparations for that. So therefore, we will try to build up a little bit of our channel inventory. Overall, the prevailing situation is changing. how to hold inventory over the mid to long term. We will explain that during the capital market update day, which is scheduled for next month, so that we can provide you with a comprehensive explanation during that occasion. So there's nothing in particular for me to say, but I would like to have Mr. Shinkai, our CFO, to explain the details. Mr. Shinkai, please, the floor is yours. My name is Shinkai, the CFO of the company. Regarding the results for the first quarter of 2023, I would like to use the materials that's posted on the IR site and begin my explanation. On page three, this is a disclaimer. On the fourth point, in October of last year, we completed the acquisition of Steradian and the numbers are reflecting the purchase price allocation of that transaction. One more thing is that a heads up towards our next earnings call. Our company is currently in the middle of integrating the ERP system, which is expected to complete sometime in the middle of 2024. In the beginning of the fourth quarter, i.e. in the beginning of October, we are planning to switch over some of the ERP system. So before the switchover, we are planning to conduct some advance shipments and therefore this could have some certain impact on the results for the third quarter. We are currently scrutinizing the impact of this, so the details will be explained when we announce the second quarter results the next time. The next page, please. This is the actual snapshot for the first quarter. If you look at the middle columns, revenue came in at 359.7 million, Gross margin was 56.2%. Operating profit, 124.8 billion yen. And the OP margin was 34.7%. Profit attributable to the owners of the parent was 107.5 billion yen. The number excluding the foreign exchange impact was 106.8 billion yen. APTA, 144.3 billion yen. Foreign exchange was, we used 133 yen to the dollar and 142 yen to the euro. As for the changes from the forecast, if you look at the far right columns of the table, I would like to explain them later in the subsequent presentation. This time again, in order to present the constant level of our profit, we have indicated the profit level without including the foreign exchange impact. The cash pooling method of inter-company transaction was changed in the fourth quarter, and There was no major changes in the foreign exchange level as at the end of the first quarter versus the fourth quarter, and therefore the foreign exchange impact was insignificant. Next page, this is the quarterly revenue trends. The first quarter revenue, if you look at the far right there, overall revenue achieved the year-near increase of 3.7%. On a quarter-on-quarter basis, there was a decline of 8.1%. However, When the foreign exchange impact was excluded, which was significant, as you can see on the fourth page, that page before, on a year-on-year level, we recorded a decrease of 6.3% on a Q&Q level, a decrease of 2.5%. For the breakdown between automotive business and IoT business, those are already described below.

Next, I'd like to go over the revenue and gross margin as well as operating margin for Q1. And so, first of all, I'd like to go from the company total. And if you'd be able to look at the top right, and so versus the forecast, the operating margin was able to do better by 2.2 percentage points. As for the revenue, it has been 1.3% point above the midpoint level. However, almost half comes from currency. And in other words, the remaining half comes from non-currency. Now, for both automotive industry infrastructure IoT, we have been able to surpass our forecast. And now going into the gross margin, this has been better by 1.7 percentage points versus the forecast. And major reason really is because of our product mix. And in terms of FX, it has been pretty much in line with our expectation. Product mix has gone plus a positive, a slight positive coming from currency mix. And as for the product mix, it pretty much has been in line with our expectation. There has been a bit of a decline in production recovery. And as for R&D, SG&A, its operating expense, it has been slightly under our expectation. Now, bottom right shows Q1Q trend. As for the open margin, it has been flat, Q1Q. As for revenue, including FX, that has been a decline by 8.1%, but excluding FX, that's a decline by 2.5%. As for gross margin, it has gone positive by 0.2 percentage points, and major reason comes from the decline in production recovery, as well as increase in production cost. And so the mix of that, so it has been offset by the mix, better mix. And as R&D, SG&A has gone down, and also, In addition to seasonality, there has been better cost control during this course of time. On the left-hand side, there is a table for each segment and for Q1Q decline, Q1Q change for gross margin and OP margin. So we know that automated side relatively has been able to find a better mixed recovery. As for industry infrastructure IRT, there has been some recording of a large inventory valuation allowance. And so that is why you see some difference in the gross margin. And also for industry infrastructure IoT, there has been a decline in revenue size. And this is what pulled down, as you can see, an OP margin decline on Q1Q basis. Please move to the next page. Here we look at our in-house inventory. Now, on the right-hand side, we have the DOI for the company total. And so it has gone up by Q1Q. It is now 107 days. And per segment for automotive side, for work in process, DOI as well as the absolute value-wise, it has been increasing in industry infrastructure to IoT. The exact value has peaked out ever since Q3. And so DOI is pretty much flat. Please move on to the next page. Here we look at sales channel inventory as well as the DOI. Now, WOI has increased Q1Q basis. Automotive and industry infrastructure IoT both is now marking at 8.5 weeks worth. And this slide is showing, is using FX rate on the management accounting. And so from this fiscal year, in other words, from FY23, the forecast, the budget rate has been changed. And so in order for you to make an easy comparison, we also have adjusted the figures from 22 and before to the rate we are using for FY23. However, the impact of this FX rate to WOI is very minimal. Now, here we look at inventory analysis, starting with the in-house inventory. Value-wise, it is pretty much flat. The raw material for Q1, there has been a slight increase. However, we are expecting a flat, flattish trend from Q2 and onwards. A work in progress in Q1, there has been a decline as expected due to production adjustment. However, the wafer for the MCU wafer for automotive side, we have decided to purchase in advance from the foundry. And that is why we're seeing more in the backend at the end of Q1. And so in the end, in total in Q1, it's pretty flat. And in Q2, we expect value-wise a similar trend or similar level. In other words, working process will go down and the dieback will be expected to increase. As for finished goods, in Q1, it was in line with our expectation. And in Q2, we expect there is going to be a slight decline. And now moving into the sales channel inventory on the right-hand side. For both automotive and industry infrastructure IoT, we do find the level being as expected in Q1. Now, for Q2, we are going to pay close watch to how the trend would be in the second half as we try to adjust our shipment. As Mr. Shibata mentioned, we have to make sure that there will not be any opportunity loss. And so that is why we are going to be increasing slightly the level of sales channel inventory. As for industry infrastructure IoT in Q1, WOI as well as the value-wise inventory has increased, and in Q2, in order to make sure we'd be able to prepare for the second half, we are going to be increasing, building up the level of WOI. That's been automotive. We find that Q1Q, there's been an increase in absolute value of inventory as well as WOI because we built up the inventory in Q2. We also expect these to increase to make sure we'd be prepared for a production increase in the second half. Moving on to the next page, this is about the utilization rate for the front end. And for Q1, we expect, so this ended in 70%, and which is pretty much within our expectation. And in Q2, we expect that this utilization is going to decline due to production adjustment. Moving on to the next page. This slide shows gross profit and operating profit trends. And this is a new slide that we have added. And moving on to next page. Now here, we look at EBITDA for Q1, which is 144.3 billion. And also on the cash flow on the right hand side, operating cash flow was 71.4 billion and free cash flow was 53.8 billion. Now in Q1, the difference of EBITDA versus operating cash flow would be 72.9 billion. So that is the difference. And some of the major items is, first of all, tax payment, which is almost 81 billion. And bonus payment is a little over 30, 300 billion. And there's also been some insurance proceeds. And so some of the major cash out has been offset slightly. Moving on to the next page. And here we look at Q2 forecast and please look at the middle blue column. As for revenue, the midpoint forecast is 366 billion and year-on-year that would be declined by 4.5% and Q1Q that would be increased by 0.1%. Excluding FX, we have also indicated that at the bottom, but year-on-year that would be minus 8.7%, whereas Q1Q that would be increased by 0.1%. As for gross margin, this is 55.5%, which is a decline by 0.7 percentage points on Q1-Q basis. Major reason has to do with the decline in production recovery, which will be offset partially by a better mix. And as for FX and production costs, we expect it is going to be flattish. As for the operating margin, 32% is expected, which is going to be climbed by 2.7 percentage points by Q1Q, but OPEX, it is going to increase due to seasonality. And in addition to this, from April, there is going to be a salary increase to our people, and that is also something that is included in the figure. As for FX, the assumption is 132 yen versus dollar and 143 yen versus euro. Now, moving on to some slides in the appendix deck. And if we can go to slide 18. Here we look at gap versus non-gap reconciliation. And some of the major items under the non-recurring for Q1 would be somewhere like fourth row from the bottom is this is the Naka factory fire impact. And in other words, the insurance proceeds has been recorded. The amount is 29.6 billion, and this is the amount recorded as part of the non-recurring item. Next, page 21. This shows our capex. And in the first half of FY23, there has been license purchase and also IT investment. For example, ERP exchanges that I mentioned earlier, And so that is why we expect that we will be marking a little over 5%. And moving on to the next page. And this is about Pantheronics. This is an NFC solution company which we acquired. And so this slide has been included for your reference. And this concludes my explanation.

Thank you very much. Now we'd like to move on to the Q&A session. Mr. Shibata, please turn your video on. First, let me explain how to raise your question. I myself will ask you to raise question if you have any question. So raise your hand. So please press the raise hand button if you have any questions. From those who have raised their hands, we will like to call your name and your company. If your name is called, you'll be enabled to raise your question. So please unmute yourself and begin your question. In the interest of time, we'll limit the number of questions to two questions per one question. Now, are there anyone who has any questions?