Renesas Electronics Corp

Thank you everyone for taking your precious time to attend Renatus Electronics' 2024 First Quarter Earnings Call. We thank you very much indeed. Today, simultaneous interpretation service is available. Please select the translation icon at the bottom of the screen and select the language of your choice. Now, the speakers, you are now requested to turn your video on. Today's session is attended by our President and CEO, Mr. Hidetoshi Shibata, and our Executive Officer and CFO, Mr. Shuhei Shinkai, and some other staff of the company. First, Mr. Shibata will provide you with a few words of greetings, and then Mr. Shinkai will provide you with an explanation of the first quarter results, followed by a Q&A session. We expect to finish the entire session in about 60 minutes. The materials to be used for today's session is the one that is posted on the IR site of our homepage. Now, Mr. Shibata, please turn the microphone on and the floor is yours. Good morning, everyone. This is Shibata here. Since the last several times, we again think that this is an earnings call that we don't have a major news to share with you. Triggered by the internal organization change this time around, we have slightly changed the classification of segmentation, segment the reporting, and this will be explained by Shinkai-san later. But still, that is not a major change. That's right. Our team in terms of acquisition processes, so far we are making good progress and nothing unexpected has really happened. As for the first quarter results, well, the last time we mentioned that the first or second quarter, we will likely hit the bottom according to what I recall, and that view remains unchanged as I speak today. The automotives, it's not showing a very robust growth according to our outlook, but steadily we expect a four-year growth for this segment, a steadfast growth. And although this is not a major business in our company, but AI and DDR5 are transitioned, That is the tailwind for us, and data center and infrastructure businesses has been achieving a very strong growth, and we believe this will continue into the full year. For industrial, and again, mobile, which is not so large again, but I think the sluggishness of the market will continue for some time now, especially Japan customers. the inventory consumption will take some time, I believe. So I think they will need some time to eliminate the inventories. And therefore, when you look at the overall picture, the first quarter hitting a bottom, I think that remains unchanged. But when you look at the details, as I mentioned earlier, depending on the segment, there are segments where gradual growth is expected and the strong growth is expected. sluggishness will remain in some other sectors. So that's the current outlook that I have in my mind. So now I'd like to hand the microphone to Mr. Shinkai, our CFO, so that he can provide you with more details. Shinkai, stand the floor, please. Thank you. This is Shinkai, CFO. I would like to talk about the earnings results for the first quarter of fiscal 2024. I would like to use the material for my presentation and the disclaimer on page 3. If you look at the very bottom there, as was mentioned by Mr. Shibata, from the first quarter onwards, we have changed the calculation method of the reporting segments. to align with the change of the organization, change that took effect this first quarter. So previously we were calculating based on the products, but this time around we have decided to change this based on the actual customer and actual application. So the revenues are calculated in that way to give you more details. For example, if it's an automotive product, If it's defined to be automotive products, so no matter who the customer is and the actual application is, that will be recorded previously as an automotive product. However, going forward, we will actually, based on the actual customer and the actual application, if it's for automotive, that will be accounted for as automotive. But if it's used for industrial purposes, that will be accounted for as industrial. Cool. The segment information for December 2023, we have reclassified them again and disclosed this in this material based on the new calculation method to align with the new policy. Previously, we have mentioned that the ERP integration that was actually scheduled to go live in the first session phase was expected to go live in May of 2024. However, we have decided to postpone this to 2025 or beyond. In order to ensure the quality of our product data and the consistency of that, we have decided to spend longer time for preparations by expanding the scope of system integration. And also, because this is a new year, we have just slightly changed the sequence or the layout of the presentation slides. Now, the next page, please. The overview, the snapshot of the results. The first quarter, if you look at the dark blue columns in the middle, the revenue, 351.8 billion yen, gross margin 56.7%, operating profit was 113.5 billion yen, LP margin 32.3%. Profit attributable to the owners or parent, 105.9 EBITDA, 133.8 billion, and for an exchange, 140 yen to the dollar and 159 yen to the euro. Compared against the forecast, I would like to explain this in the following slide. First of all, regarding this is the company totals, numbers are provided in the bottom right, upper right. Revenue came in 1% higher compared to the median forecast number, but this was mainly due to the foreign exchange impact. For gross margin, the currency impact was almost flat. Product mix deteriorated slightly. However, the utilization improved and also expenses came down. And because there was no write-off of inventories, therefore, that was the reason we were able to achieve positive results for the product mix. Relatively speaking, the low gross margin power product increase, and that was the major reason behind the deterioration of product mix. Utilization. I'll come back to this topic later, but compared to initial assumption, the utilization came in slightly higher than expectations. Operating profit margin, because of the decrease in expenses, a 2.3% increase compared to our forecast. On a Q&Q level, at the bottom right, revenue was down by 2.8%, and if you exclude the impact of foreign exchange, down 2.7%. Growth margin, slightly positive. However, automotive increased and infrastructure IoT reduced. And therefore, there was a significant deterioration of product mix. However, utilization increased and also the expenses for discard reduced. And therefore, that's the reason why the gross margin improved. For the operating profit margin, because of the decline in operating expenses, we were able to achieve an increase. By segment, if you look at the left-hand table, automotives and the industrial IoT, if you look at all these columns there, If I just add one or two comments here, the gross margin automotive basically remained flat for industrial infrastructure and IoT. Basically, because of the improvement of cost, because we didn't have to write down the inventory, there was a significant improvement in OP gross margin. For OP margin automotive, especially because of the increase of R&D or Q&Q, the margin deteriorated. The next page, please.

In terms of revenue, for 2023, segment revenues, which have been shown here, have been reattractively revised according to the new calculation method. And overall, in the first half, on year-on-year, there is a decline 2.2% on Q, 2.8% decline in overall sales revenue, excluding forex impact revenue. There's a drop of 8.2% year-on-year and a drop of 2.7% quarter-on-quarter, and the breakdown is as indicated here, excluding forex impact. There is quite a gap, so I'd like to comment on this, and automotive is plus 4% range, and also IOT minus 2%. 18 percent, top of 18 percent. And going on to the next page, here we are looking at the trend by respect to financial indicator for reference and to the bottom right-hand corner in terms of the cash flow. First quarter, there is a decline, and corporate income tax as well as bonus payment have been incurred in first quarter. There has been a decline. And against previous year, due to premium payments, there appears to be a somewhat heavy decline in premium payments. And thereafter, there are no extraordinary developments. And therefore, we can expect to see a recovery. And as far as inventory is concerned, from this time around, we have decided to display both in-house inventory and sales channel inventory in a single site. For the sake of visual representation of inventory management, we have been presenting in-house and sales channel inventory separately. However, we believe that we have been able to achieve a certain level of success in down-cycle inventory management, and therefore, we have demonstrated ability to manage both inventories. And hence, in light of the situation, to ensure simplicity, we have decided to supplement by comments on segment trades. And Q1Q and change factors and future outlook is indicated on the right-hand side of this page. Now, when we look at the days of inventory, we are seeing Q1Q increase to 101 days. This is due to the enhancement of Daibank, And also for the foundries, there have been proactive purchase orders, and therefore work in progress has increased. And thereafter, DAI bank accumulation is expected. And also in our foundries, we expect to see increase in work in progress. And also in WOI, China Inventory and QOQ, there is an increase overall, more than 10 weeks. of WIOI and, as expected, increase in automotive and slightly up for industrial infrastructure IoT. In second quarter and onwards, we expect to see a continued rise in sales channel inventory for automotive. However, for IoT, we plan on seeing somewhat of a decline. And moving on, and this is in reference to utilization rate and count that's on the same page. To the left, Utilization due to the wafer, their transient front-end utilization rate on wafer input basis first quarter, the wafer input was just under 60%. The expectation early was 59%, so it's somewhat higher than expected. And fourth quarter last year, we have bottomed out. And as for the 12-inch, for the first quarter, the 12-inch utilization has increased and And Naka plant, 40 nanometers MCUs, production has increased. And there has also been Daibank production increase as well. And these have been the contributing factors to the increase. And then second quarters, we are expected to see somewhat of an increase. And likewise, the Daibank production is a contributing factor. And third quarter, and there's a summer holiday that will come in. where we expect a shortfall. And in order to offset this, we are expected to see an increase in production in the second quarter. And therefore, that will be the explanation. And to the right, this is the CapEx. In the first quarter, the decision to invest the 3.9% of revenue has been made. Second quarter, R&D-related investment is expected a single-digit midway into single-digit vis-a-vis revenue. And next page, this is the second quarter expectation. And let's look at the dark blue at the center. We are looking at the median in revenue, ¥355 billion year-on-year, down 3.7% and up 0.9% Q1Q, excluding forex impact. And we are looking at the forex exchange as indicated here. And in terms of the gross margin, as we can see on the right, 3.7% year-on-year decline. And further to the right, Q&Q, 0.9% decline. And accepting foreign exchange, 8.6% decline and 4.9% increase. And automotive is up and IoT somewhat of a decline is what we're expecting. And in terms of gross margin, There is a deterioration due to product mix and also increased manufacturing costs and therefore 1.2% decline on Q basis. And in terms of operating margin, because of R&D, Q&Q increase is expected and hence in operating margin, Q&Q, 1.8% decline is expected. And let's move on to the appendix. And please turn to page 18. As I've indicated, we have changed the calculation method for the segments. And to the left, we are looking at the old and new classification. And this will display the relationship. The thick line indicates the major change up until this point in time. for automotive boarded power products and also MCU products. By recategorizing by designation, some have been shifted to industrial. And also, what has been looked at, including in IoT, the smart home, have been recategorized as a smart appliance under industrial And these are some of the changes to take note of. And overall, in automotive and also IOT, the structure has not changed much. However, as far as automotive is concerned, 2.3% is declined and shifted over to IIoT. And that is our expectations in terms of classification. To the right, we are looking at the revision made by a product. Power management, I see, which used to belong to the analog category, has now been reorganized as it is generally observed as power, and therefore it has been reorganized into power. And therefore, in the new categorization where it reads power, the power semiconductors discrete and power management products will be reclassified into power management products. And moving on, this is a new segment, and here we are looking at the portfolio, and this is how it will appear for your reference. And moving on, and here are some of the highlights. Acquisition Altium, and also Osai Joint Venture in India has been established, also Kofu Plant have resumed operations, and these are some of the recent developments. And I would like to conclude my presentation here.

Thank you. Now we'd like to move on to the Q&A session. The MC will explain how to raise a question. If you have any questions, please press the Raise Hand button that appears on the screen. From those who raised their hand, we would like to call out your name and your affiliation. If you are nominated, you will be able to speak, so you please So if you're nominated, please unmute by yourself and spot your question. In the interest of time, we would like to limit the number of questions to two questions per one person. All right, so we would like to move on to the Q&A from here. First of all, Goldman Sachs, Takayama-san, please begin your question. Please unmute yourself and make your statement. Thank you very much. I have two questions. Three months ago, you said that it will be July-September period that you'll be able to see a steadfast growth in the market and the April-June period will be quiet, you said. And that, I think, remains unchanged as we speak today. After three months, what is your confidence about the recovery of the market in the July-September period? Do you see any weaknesses or strengths depending on the segment and or application of products? And because I think depending on that, I think the April to June performance will also be affected. So if you could just share with us your view on that, that would be appreciated. Well, the last time I mentioned that the second half, We have our outlook for the second half, but we're not really sure about that. That's what I meant the last time. But according to what we see today, the second quarter into the third quarter, I think we can only expect a slight increase. Nothing particularly strong, nothing particularly bad either. That is how we look at the market right now. It is possible to dissect by the segments, but... The elimination of inventory, rather, according to how we see it, especially amongst the Japanese customers, and particularly the not really big customers, I think those are the centerpiece of these efforts of eliminating the inventory. So previously, compared to the large companies, I think they struggled. these customers struggled in acquiring the inventory, so I think they are now delayed in the progress, and therefore I think they are currently working to eliminate inventories. And I think the end demand did not increase as strongly as expected, and I think that is the reason why they are taking longer than expected time to eliminate inventory. If I try to divide by application, industrial and some tier one automotive, this trend is quite conspicuous. But that may not be corresponding to the end set demand at the very end because there's only so much we can see. But if I try to divide by segment, some portion of automotive and the industrial segment is conspicuous when it comes to inventory elimination. and also the mass market too. So it's not really a segment view, but rather I think these are now happening rather in Japan, I think. That's how we look at it. All right. So it might be difficult to generalize by segment, but when it comes to data center infrastructure, I think the growth might be stronger today compared to three months ago. Smartphones, I think, had some seasonality as well. So Is that the area that is currently struggling? Well, the driver of growth overall would be automotive. And of course, as you mentioned, AI related and also DDR transition for data centers especially. I think these will be the drivers for the growth in the future. Thank you very much for that. My second question. This is a frequently asked question, so I'm sure you might be able to provide some answers to this, but the AI-related market size, I think previously AI was very limited, if any, and was not really significant as a size. However, going forward towards the end of this fiscal year or into the next fiscal year, the industry itself, this industry sector, I think, is rapidly growing. So I think that this could become a meaningful size of business for you. So if you could just share with us the size of that business in your company and maybe which product for AI, if you could give us a size indication of that around the end of the year this year. Well, I do understand where your question is coming from, but AI, and as you mentioned, this depends on how you define AI in the first place. So we don't want to talk about an inflated numbers and the real hard, hardcore AI in the sense of our company, GPU-related power. I think that's the real AI, I think. So its contribution to the total sales of the company would be only single digit and the lower single digits, lower to mid single digit, I think that is their contribution to their total company sales, to our total company sales in the recent months. So I don't think this will change significantly. So as we move towards the end of the year, there might be a one percentage point or two percentage point increase, but then will it account for 10% of the company's total sales? No, that is not our expectation. We don't expect the flies to grow to that level. Although this is not included in our outlook, and maybe this might be some optimistic view included in this, but the domino effect from AI, if you will. So by utilizing AI, there might be some ripple effects from DDR4 to DDR5. This transition is not really GPU. So this is not accounted for directly as AI, but the CPU will have to enhance, then because of these secondary effects, the DDR transition may accelerate. So that could be the potential case. So if that is the case, then, as we've been talking from before, with the transition to DDR5, the content will increase significantly compared to DDR4. So that growth is something that we would like to expect in the future, but it's too early for me to comment any further, so that is not the reason why we have not included this in the outlook. Thank you very much for your comment.