Renesas Electronics Corp

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Thank you very much for taking time out of your busy schedule to join us today for Q3 2023 Financial Results Briefing of Renesas Electronics Corporation. Simultaneous interpretation channel is available. Click on the earth symbol at the bottom of the screen and select language accordingly. Speakers, please turn on your video. In attendance for today's briefing are Mr. Hidetoshi Shibata, President and CEO, and Mr. Shuhei Shinkai, Senior Vice President and CFO, and other staff members. After the initial remarks by Mr. Shibata, Mr. Shinkai will give an overview of Q3 earnings results, followed by question and answer session. The entire briefing is scheduled to last for approximately 60 minutes. The materials used in today's presentation are the same as those posted on the IR page of our website. Mr. Shibata, please unmute and please start. Good afternoon everyone. This is Shibata. As for the earnings results from Q3 2023, it is as you have seen. It was slightly better than expected. There are no surprises. On the other hand, As for our outlook for Q4, in comparison to the beginning of the year, it seems that the environment has somewhat changed, as I believe you have noticed. Automotive is more or less stable. Industrials, for FA overall, it is stable, but there are some differences in conditions. or situation is a mixed picture depending on the region. And for PC and mobile, after bottoming in the second quarter, the overall trend is that of a recovery. However, it is a very slow recovery. And in Q4, we expect some seasonal decline. Consumer overall, regarding mass market overall, Slightly later than other segments, it seems that inventory is being digested, so we expect a decline in Q4. So overall, we expect a slight slowdown in Q4. That is our guidance. As for channel inventory, gradually, we plan to increase channel inventory. Order lead time has been reduced, and it has been some time after we executed this. But there are sustained uncertainties, and there are short-term orders that have become more prominent. In order to capture those opportunities in comparison to before, we are slightly increasing inventory, bringing it closer to the original target for inventory level. That is how things stand. And up to Q3, the performance was reasonably well, and we expect a slight decline in Q4. And we would like to continue to manage and operate things cautiously. Details of the earnings results from Q3 will be given from Mr. Shinkai. Over to you, Mr. Shinkai. Thank you. This is Shinkai, CFO. I would like to present the results of Q3 2023 based on the presentation materials posted on the IR website, page 3. This is the disclaimer. There is nothing new on this page. However, in the past earnings announcements, we announced about the system integration. We plan to implement this in the first half of next year. And therefore, in the Q1 and Q2, there may be some impact on sales and inventory. Q3, Q4, up to Q3, Q4 this year, there is no impact from this system integration. Once we have better visibility, we would like to update you. Page four, please. The results from Q3 is shown in middle dark blue column. Revenue is 379.4 billion yen. Gross margin was 57.9%. Operating profit was 132.3 billion. Operating margin was 34.9%. Net profit 108.3 billion. Excluding foreign exchange impact, a net profit was 104.6 billion. EBITDA was 152.6 billion. Exchange rate for the first half of the year is 142 yen to the dollar, 156 yen to the euro. Change from forecast is shown in the chart. fourth column to the right. I will come back to this later. Results from the first nine months, correction, change from forecast is the third column to the right, and results for the first nine months are in the dark blue column. Revenue, quarterly revenue trends, Q3 results is the rightmost bar. Revenue overall, year-on-year, negative 2.1%, Q on Q, plus 2.9%. Excluding foreign exchange impact, year-on-year, revenue declined 5.1%, Q on Q, it was an increase of 0.3%. As for the breakdown between automotive and industrial infrastructure, IoT are as noted on this page. Next slide, please. Q3 revenue, gross margin, and operating margin are shown on this page. First, company total. On the right side, this is a versus forecast. Operating margin was up 2.4 percentage point versus the forecast. Revenue was above the medium forecast by 2.5%. and about two-thirds is foreign exchange impact and the remainder is non-foreign exchange impact and mostly the increase came from automotive next gross margin higher than forecast by 1.4 percentage point. As for exchange rate, flat. Product mix, there was a slight deterioration. And as for production recovery, because of production adjustment, there was a slight deterioration. On the other hand, production costs, this include lower production costs due to lower utilization and decline in cost of starting Kofu than original expectation and decreasing inventory write-down. And these reductions were larger than what we expected. And these were positive factors for production cost. As a result, 1.4% upside. Operating expenses declined slightly. And as I mentioned earlier, operating margin was up by 2.4%. Below that, Q on Q, operating margin is more or less flat. As for gross margin, exchange rate impact was flat, product mix deteriorated slightly, automotive increased, and IIoT also increased. As for production recovery, Due to production adjustments, utilization was lower, so there was a slight decline. On the other hand, production cost improved, so overall the results were flat. As for operating expenses, mainly R&D increased, and that was therefore offsetting factor for operating margin. By segment, please refer to the left side of the slide. For Q3, what is noteworthy is that in automotive, operating margin was 0.9% QonQ. Automotive, mainly from the second half of the year, we are increasing R&D. Because of that, operating margin QonQ is declining. Next page, please.

So this is about inventory. So this will be an all-in-house inventory. Overall, DOI has declined Q&Q in its 100 days. By segment, mainly it has declined in automotive and industrial infrastructure and basically flat. In actual amount, it's basically flat quarter over quarter. Next slide, please. So this is sales channel inventory. In all of the segments, basically, in terms of the WOI, has increased on Q1Q. The auto slight increase, industrial and infrastructure, an increase. In both segments, it was a little over nine weeks. And overall, the inventory level is nine weeks plus. In terms of industrial infrastructure, the inventory in the end terms has increased over a quarter. That is that sell-through decreased more than expected industrial infrastructure segment in terms of mass market sales. Next slide, please. So this is the inventory analysis of in-house and sales channel inventory. On the left for in-house inventory, in terms of raw material, cost has gone up, raw material has gone up, and through the due to the decline of the input due to production adjustment, it has gone up. The fourth quarter, it's going to go up as well. In terms of the working process, in terms of the expansion of the die bank, For the 40 nano MCU, including that, at the end of third quarter, basically we have ended what is necessary. Going forward, the mix of the dye bank should be optimized. That is, we should consume the weaker demand dye banks, and if necessary, we have to increase that. By doing so, we want to improve the mix. In the fourth quarter, With the weaker demand products, dye banks should be consumed at the same time production adjustment is going to be conducted. So the work in progress is going to decline. On the other hand, with the quarter nano MCU dye bank, we want to gradually increase that. But I think it'll take until maybe going to next fiscal year. In terms of the finished products, in the fourth quarter, we have been shipping depending on the demand and has lower than expected. In the fourth quarter, advanced production, basically this is preparing for the operating days for back-end production, Q1, and we are forecasting an increase. In terms of the sales channel inventory, the fourth quarter, automotive, industrial, infrastructure, IoT, so the ROI has increased. In the fourth quarter, the intention is to slightly increase the inventory in terms of the yen terms, inventory. So basically flat or slightly down for industrial infrastructure and IoT, automotive basically flat. Next slide, please.