Renesas Electronics Corp

Thank you, ladies and gentlemen, for taking a precious time to attend Vanessa's Electronics 2023 fourth quarter full-year earnings call, despite your busy schedule. Today's simultaneous interpretation service is made available. Please click the globe icon at the bottom of the screen and select your preferred language. The speakers, please turn your video on. For today's session, we have Representative Director and President CEO, Hidetoshi Shibata, Senior Vice President and CFO, Shuhei Shinkai, and some other staff members. From now, Mr. Shibata will say a few words, and then Mr. Shinkai will present the fourth quarter and four-year earnings, followed by a Q&A session. We expect to finish the entire session in about 60 minutes. Please be advised that the material to be used for today's presentation is the one that is posted on the IR site of our homepage. Mr. Shibata, please turn your microphone on and begin. Good morning to you all. This is Shibata from Runefoss Electronics. First of all, I would like to express my sympathy to those who were affected by the Noto Peninsula earthquake. We look forward and hope that a calm life will be returned to the hands of the disaster victims as early as possible. Today, we would like to share the results of the last 12 months performance. For the last 12 months, if we talk about our segment, IIoT segment, has seen some production adjustment and that took longer than expected compared to initial assumptions. However, on the other hand, automotive segment performed quite steadily and that strongly drove the revenue or supported the revenue. Of course, we were also helped by the depreciation of yen. So compared to 2022, the revenue was just down by 2.2% compared to 2022. As for inventory adjustment or management, reflecting the past experiences, we have been very stringent in the management. Most recently, the automotive inventory level has come down too low. However, on the part of IIoT, the inventory level is relatively low, but I think it is still at the minimum range of the reasonable level. So, for the first quarter of this year, The automotive steady performance is still continuing. However, looking at the channel inventory, I think we'll try to expand the inventory level to the normal state. That is something that we need to do. On the other hand, for the IOT, the industrial and also the mass market, we believe the adjustment will continue into the first quarter of this fiscal year. And at this point of time, We believe the first quarter will see the bottom and then we'll start to see the recovery from the second quarter onwards, in our view. For the AI-related demand, we are seeing a strong demand for AI-related applications, but this still is very limited in terms of the portion vis-à-vis the total demand. company volume. And of course, we also have some production risks, so we'll try to do our best and try to catch up with this growing demand of AI related. And this time around, this is the resumption technically, but Actually, in reality, it's more like an announcement of starting dividend payment and also the treasury shares. We have received many questions so far, but we'll try to cancel some of the treasury shares. That's the decision that we have made. As for future M&A, we'll try to actively look into the possibility and acquire assets if that's deemed necessary. So we are not only paying out dividends. We would like to strike a good balance of shareholder return and M&A. So with that, that's the highlight of the, an outline of the results of the year ended. So more details will be explained from Shinkai-san from now onwards. So Mr. Shinkai, the floor is yours. Yes, this is Shinkai CFO. I would like to present the fourth quarter and four-year results for the fiscal year ended December 2023 using the presentation material. Next page, the next page, the disclaimer. As you can see on the fourth point there, in June 2023, we completed the acquisition of Panthronix and the purchase price allocation of this transaction is reflected in the results. And also, to another reminder, in May of this year, the ERP system integration, the first phase is going to happen. So in relation to the system integration, the impact on the first quarter results is minimal, if any. However, in the second quarter, there might be some impact. We are expecting some impact, and we'll try to clarify that during the next presentation of next earnings call. The next point is that in conjunction with the organization change conducted in January, this year we will review the way of recording revenues in each segment. IOT and the automotive segment will remain unchanged. We'll continue using the segmentation, but the way of reporting the segment performance of revenues will be divided and we'll review that and that will be That new method will start being applied from the first quarter of this year, and we'll provide you more details at the next earnings call. And the next page, regarding the fourth quarter performance, if you look at the dark blue columns in the middle there, revenue, 361.9 billion yen. Gross margin is 64.4%. Operating product, 115.5 billion. OP margin, 31.9%. Profit IWO to the owners or parent, 98.2 billion. And excluding the foreign exchange impact, it was 104.9 billion. And EBITDA, 136 billion yen. And foreign exchange rate was 149 yen to the dollar and 159 yen to the euro. As for the comparison with the forecast, those are written in the three columns on the right. So I'll come back to this topic later in the presentation. For the full results, please look at the dark blue columns on the right. Revenue, 100. trillion, 469.7 billion yen, gross margin 57%, and operating profit of 501.6 billion, and 34.1% was the margin, profit attributable to the owners or parent of 432.9 billion, excluding the foreign exchange impact, 424.4 billion, EBITDA 581.9 billion, and the full-year currency rate was 140 and 150 yen, to the dollar and euro, respectively. Especially on the year-on-year comparison, I have several comments here. So, as I talked about, the overall performance was really commented by Shibata-san. Revenue dropped by 2.2%, due mainly to the adjustments in the IIoT segment. So, overall 2.2% decline, excluding the foreign exchange impact, a 6.9% decline year-on-year. And automotive was up, And IOT also down significantly, excluding exchange impact. And the gross margin declined due mainly to the deterioration of utilization rate, which resulted in the decline of production recovery. Operating profit, I see for automotive, IGBT, SIC, those core semiconductors investment resulted in R&D expenses increase. And of course, due to overall inflation cost increases, 3.1% decline in operating profit margin. The profit, net profit, significant improvement. For one thing, this was due to the change of the intercompany pooling method, which allowed us to minimize the exchange losses. So we were able to minimize the exchange losses. And so compared on a yearly basis, that had a positive impact towards the gain side. And also, because of the change of the pooling method, we were able to receive interest and income from the dollar deposits. And also, the Wall Street deposit also gave us some interest income. So those made a positive factor to the profit attributable to the owners or parents. The next page, page five, please. This is the changes, quarterly changes of revenue. On the far right side, please look at the fourth quarter and the revenue, fourth quarter revenue. Year-on-year, down 7.5%, and on a Q&Q basis, minus 4.6%. Excluding exchange impact, year-on-year, down 8.1%, and on Q&Q, down 6.6%. The automotive and IoT breakdown as follows. Please look at them in the next page. This is the fourth quarter revenue, gross margin, and operating profit margin. For this matter, for the overall company performance, if you look at the right-hand side, compared to the forecast, operating profit margin was up 1.4%. As for revenue, compared to the midpoint number, it was up 1.1%, but this was due mainly to the foreign exchange impact. Excluding foreign exchange impact, there was a change in the mix. So for automotive, compared to the forecast, it achieved upsides, but however, IoT compared to the forecast was down. So on a net basis, it was almost in line with the forecast. As for automotive, We had foreseen the risk of UWA strike, but that did not really manifest itself. It was nothing. And also the IOT, especially in the mass market, we have seen adjustment, and therefore it performed downwards compared to the forecast. As for the gross margin compared to the forecast, slightly better, up 0.4 percentage point. And the foreign exchange was flat, and the product mix, IOT down, automotive up. So therefore, deterioration slightly. Production recovery resulted in production adjustment, and therefore, the utilization was lower, and therefore, production recovery deteriorated. On the other hand, because of the positive impact from the reduced expenses and no write-down of inventory, so overall, the performance was slightly better. And R&D expenses slightly down compared to the forecast. And if you look at the Q and Q performance at the bottom right, OP margin down 3 percentage point, and the growth margin, if I give you a breakdown, well, this is almost the same as the analysis of the comparison with the forecast, but automotive up, IoT down, and mixed deterioration, and also the production recovery down because of adjustment. For the operating expenses, the concentration in the fourth quarter, such as R&D and SDNA, we have seen an increase of these cost items in the fourth quarter. And if you look at the segment numbers on the left-hand side, the gross margin Q&Q changes for the automotive side. The revenue increased, however, within the segment, the mix deteriorated also because of the production judgment impact. The gross margin for the automotive business slightly deteriorated on a Q&Q basis. And for the IOT operating margin, because of the decreased revenues, we have seen a significant OP margin decline on a Q&Q basis.

Next page, please.

So this is an in-house inventory. So the overall DOI is a has gone down, and the quarter is 93 days. So automotive IOT has declined in terms of absolute value and in terms of DOI. Next slide, please. So this is the sales channel inventory. Overall, quarter on quarter, it has slightly increased. It is slightly over nine weeks. Automotive has declined. It is around eight weeks before the IOT has increased to about certainly about 10 weeks. But automotive, we have initially anticipated an increase. However, as I said, AWA impact was minor and there has been a lot of inquiries coming from the customers. So the inventory level has gone down. As has been predicted, the sell-through for the mass market has declined. On the other hand, the sell-in has decreased in terms of the inventory level. It is basically in line, basically a slight increase. Going to the next slide. So this is inventory analysis. First, on the left-hand side, this is the in-house inventory, the third quarter to fourth quarter. Compared to the projection, we have increased the production adjustment. For instance, for the mass market on-purpose products, based on the demand outlook, we have increased the range of the production adjustment. So the working process has gone down. The finished goods, we haven't conducted mass production. basically conduct shipment in line with the demand, so it has gone down slightly. For the first quarter, in the first quarter, we are anticipating a second quarter recovery, and we are planning to increase the production slightly. On top of that, for the Naka plant, the 40 nano MCU for the automotive sector, we are trying to accumulate a die band, and we're going to start the accumulation. So in terms of raw materials and the work in progress, for the next fourth quarter is going to go up. On the right-hand side, this is the sales channel inventory for the fourth quarter. I have talked about this already. For the first quarter, for the automotive sector, for the fourth quarter, it has gone down, but we will replenish that. In terms of the level, it's going to go up. On the other hand, for the IIoT, We will conduct shipment in line with the demand. It means that we're going to anticipate a slight decline. But going forward, we do want to not reduce the inventory too much. That is our policy. Next slide, please. This is the utilization rate. This is the front. Up is the WIFI input base utilization. Fourth quarter, it was a little under 55%. It was slightly down, lower than we anticipated. For the first quarter, it is going to go up from this point. I have talked about towards the second quarter, we're going to increase the production and the Naka plant at Daiban production is going to contribute. Next slide, please. This is the gross profit margin and the operating profit margin. Please refer to these numbers. Next slide, please. This is EBITDA and free cash flow. On the right-hand side, free cash flow, So for the deposits provided to the World Speed, we have excluded that. Well, the fourth quarter operating cash flow is 152.4 billion yen. Free cash flow is 103.2 billion yen. So the difference between the fourth quarter is that basically a normal level, but this is a corporate tax payment and the bonus payment. Next slide, please. This is the FI2024 first quarter outlook. So please look at the column, the dark blue one on the middle. In terms of the revenue, the point of numbers, 345 billion yen. Q1Q, it's minus 4.7%. If we exclude the forex impact, it's minus 2.9%. So the breakdown of this, it's automotive, it's going to slightly increase, IIAOT, is going to go down. And net, we're going to see a decline in the revenue. In terms of the gross profit margin, it's 55%. Q and Q is minus 1.4 percentage points. Major reason behind this is due to the change of the sales of the end product mix is going to deteriorate, increase of the production cost because of the ramp up of the core plant. We are including that as well. On the other hand, production recovery, because of the utilization rate improvement, it's going to cover slightly, but in total, it will be going down. In terms of operating margin, it's 30%. In terms of the forex assumption, $1, 142 yen to the dollar, 155 yen to the euro. Then going to the appendix portion, please go to page 22. This is about CapEx fourth quarter. Centering on R&D-related investment against the sales is 3.4%. But this quarter, in terms of the scale, it's about, it will be the 1% level against the sales. Please go to page 23. This is about the acquisition of the Transform. We have acquired this company, Transform, which is engaging GAN. Next slide, please. This is about dividends and the cancellation of a treasury stock. On the left-hand side, in terms of the dividend, it will be 28 yen per share, so 49.8 billion yen in total. We have decided to pay out this level of dividend. Going forward, we will continuously and stable dividend payment. We will try to commit to that. On the right-hand side, this is about the cancellation of the treasury shares. And we have clarified our policy about a treasury stock holding, and we have decided to partially cancel. So the limit of the holding of the treasury stock of 5%, if it exceeds that level, in principle, we will cancel. As for the 5% treasury shares, this will be used for the mid- to long-term incentive for our employees. So with this, I would like to end my presentation.