Renesas Electronics Corp

Thank you very much for taking time out of your busy schedule today to attend the Renaissance Electronic Screening School for the first quarter of FY25. Simultaneous translation is available today. Please click on the interpretation icon at the bottom of the screen and select your language. Speakers, please turn on your camera. Speakers, today, Mr. Hidetoshi Shibata, President and CEO, and Shuhei Shinkai, Senior Vice President and CFO. Staff members are also present. After the brief report from Mr. Shibata, Mr. Shinkai will explain the post-referential results. This will be a follow-up question and answer session. The entire presentation is scheduled to last 60 minutes. The presentation material is uploaded on the IR section of the company's website. Mr. Shibata, the floor is yours. Please unmute yourself.

Good morning, everyone.

This is Shibata speaking.

Regarding the guidance for the second quarter, the tariff impact is still uncertain.

So we have not logically reflected impact of the term in the guidance. However, having said that, even with uncertainties, we do see some abstract view about the upside opportunity and downside risk. So we did reflect some haircut, but there is no logical

a background behind that, but it's more of a psychological haircut. And looking at the market view, roughly speaking, sorry for repeating myself, but there are both the positives and the negatives, but for automotive business, I think there will be some conservatism, mainly in a wait-and-see mode. For industrial and F.A., it seems that no material change has taken place.

The inventory correction was nearly completed in Q1, and we observed some very gradual recovery. But looking out in the future, there are still uncertainties moving forward with a terrific impact.

And, relatively speaking, some disruptions may be segmented closer to consumers, like home appliances, PC. There could be some

or spike in the demand before the impact of the thrift, maybe in Q1 or Q2.

And regarding data center and AI, as a trend, things have not changed.

So steady growth is on the horizon.

Especially for the second half, DDR5 generation upgrade, I think, will progress. And for mobile, a modest upside could be expected.

And for the 28nm, I think will be set up outside of China. So for the second half, we had seen some positive news. So our expectation was getting elevated. But of course, at this point, we cannot foresee the exact impact of the draft.

So over the short term,

Well, there could be some disruption, but we do not want to be disrupted by that. Also, we position this year as the year of the change, and also with the tariff situation, a lot of uncertainties were looming over the business. So, authority is something that we need to be ready for, so we need to really focus on the medium to longer-term initiatives. So, from that perspective, especially with the organic opportunities, we will focus on looking at the investment opportunities with a mid- to long-term perspective, especially in such an environment that we stand today. Also, for Q1 reasons and the guidance for Q2, I would like to hand over to Mr. Shinkai, and he will give you a presentation on the numbers. Mr. Shinkai, please.

Mr. Shinkai, this is Shinkai.

I would like to quickly go over the course of the results based on the presentation material. Please turn to page 4. The first half of the first half of the first half of the first half of the first half of the first half operating profit was 83.8 billion, the N was 27.1%. Product profit was 73.3 billion, EBITDA was 103.5 billion, the currency was 154 yen, I guess, a dollar, and 161 yen, I guess, a euro. Compared to the default cost, I think that to the column of the value, my point of view is that

From revenue to cash revenue, for the first month on that, device revenue exposed the effect syntax to the forecast.

For the forecast, we were expecting a 2% revenue growth, but the positive magnitude was smaller. Also, Q1Q ended up as a 1.2% revenue growth.

Next page, please.

On the top right, we have the percentage of returns on the revenue. It was negative 0.1%, but we essentially made 0.4%. The effects are in fact quite positive. Overall, the effects are stronger again against the the forecast, but because the financial signal made itself clear, that was positive. Excluding the FX, it was a small negative. Occasionally, it's a small upside, but the device revenue was upward. For device revenue, excluding the FX, the forecast was tuned to positive 2%, but the actual was a 1.0% increase. The reason is because we suppress other shipments so that the inventory will not increase too much. For IoT, the digital power for AI and home appliances had some upside influence, and that led to a positive growth. The gross margin, it was positive 2.7%. The two factors are the production cost of the grease, my utilization, and that product mix. The production cost benefit was 70% of the benefit. There were multiple reasons.

The production fixed cost savings was higher than planned.

Specifically, the repair cost and the consumables cost were improved, and we were able to enjoy the benefit of existing goods. And also for the power utility cost, we tried to consume less electricity, which was a benefit on the cost side. And also, the accounting impact was not really incorporated. For the inventory right now, we were not able to foresee the rebound from that. And there are also a multiple cost improvement that led to this positive growth. So, improved tenor supportization rate increased, but the data-based utilization rate was slightly higher than the plan, plus that led to a better gross margin. About operating profit portion, compared to the forecast, it was available by 3.1%. The operating margin and also compared to the upfront default reduction had a big benefit. And for the redevelopment, the delay on the R&D effects was lower. If you look at bottom left, for the revenue excluding the efforts, it was negative 2.9%, and the reverse revenue was positive 1%. For the gross margin, it was 1.9% growth. The depreciated and the depreciation rate increased for the main reasons.

I'd like to make one additional comment regarding depreciation costs from F525.

for the production of equipment and facilities, without the change in the lifecycle of the equipment and also how we are using the equipment. We reassess that and to better reflect the reality, we revised the usable life. But we thought the depreciation period was revised again. Previously, on average, the depreciation period was over five years. But this was extended to eight years. From Q1 onward, this will be implemented. And we will not reflect this in a retrospective manner. So the impact is a reduction of depreciation costs by 3.1 billion yen from this quarter. For the operating margin, We made a personal cost control, but in Q4 of 24, there was one low factor that led to cost reduction. Also, Q and Q, the cost increased.

And by segment, for automotive, the operating margin.

In the case before, there was a one-off factor which was the receiving the development cost. As to the Q2 basis, the operating margin went down for O2. Therefore, at O2, there was a one-off factor in Q1 where we put the reserve of the litigation fee. Also, on Q1Q, compared to the revenue growth, the operating margin did not grow as much.

The next page, please.

This is showing quarterly revenue trends. Please refer to the column on the far right for the 1Q results. Overall, we had a decrease by 12.2% year-on-year and plus 5.5% Q1Q. However, exchanging Exchange impact excluded, we had minus 16.8% year on year. You can see the breakdown by segment below. Please go to the next slide. And these are showing financial numbers and their trend for your reference. Please go to the next slide. And this is inventory status. We have our own in-house inventory and sales channel inventory, starting with the top right. This is showing the in-house inventory in first quarter. Q1Q, both actual amount and DOI both decreased. DOI was decreased by two days. For Daibank, we mainly received replenishment from the foundries for smartphones and AI servers, digital power. die banks were mainly replenished. On the other hand, the consumption of finished goods and also the appreciation of the yen at the end of the quarter resulted in a decrease in the actual amount. As for the second quarter, the production plans are expected to remain largely unchanged and inventory levels are expected to remain roughly flat. We want to support short-term demands, so we don't want to limit inventory too much. This has been the policy and we will continue with this policy. And the bottom right is showing channel inventory. You can see in the first quarter, sell-through was higher than expected, mainly due to IIoT, and overall channel inventory was reduced more than expected. Both actual amount and WOI decreased Q1Q. For automobile, mobile, so channel inventory decreased. But mainly for Japanese companies, sell-through increased more than our expectations, and as a result, WOI increased slightly. This goes back to what I said about reduced shipment when I explained about the revenues. As for IIoT, sell-through increased from our expectation. As a result, channel inventory decreased steadily. In the second quarter, in the base case, we plan to reduce channel inventory for both automotive and IIoT. The intention here is to inventory lean due to the large uncertainties. And as for the upside, we will cover upside from the in-house inventory. And in order to assess the impact of tariffs, as Shibata mentioned at the outset, we are being rather conservative in our views, particularly on the sell-in side. we have been conservative. On the other hand, for the sell-through, in the second quarter, we assume that sell-through will be greater than sell-in, resulting in a decrease in channel inventory and WOI. However, there are still some uncertainties with respect to sell-through. So, if the situation turns both inventory and WOI will be higher than expected in the second quarter. Please go to the next slide. This is showing utilization rate and capex. On the left hand side is the utilization rate. In the first quarter we had slight increase in the utilization rate from forecast and from the second quarter and beyond, we expect overall utilization rate to be flat from the first quarter. Depending on the factories, there may be increased production. However, some others are slightly reducing their utilization rates due to holidays. So overall, we expect the rates to be flat. As for the capital expenditures, we continue to see the same trend. We will have a lot of capital expenditures outside of production. But from this fiscal year, we have been imposing stronger control over CapEx from the viewpoint of cost and cash management. In the next slide, this is the Q2 forecast. Please refer to the dark blue column in the middle. The midpoint forecast is ¥302.0 billion gross margin, 55.0% operating profit margin of 25%. Exchange rate assumption is ¥142 to the dollar. This is ¥12 higher Q1Q and ¥156 to the euro, which is ¥5 increase from Q1Q. I'd like to give additional information on the revenue. The midpoint forecast is 302.0 billion yen. As you can see on the right hand side, this is minus 15.8% year on year and minus 2.2% queue on queue. This queue on queue minus 2.2% And the breakdown to the device revenue, the appreciation of the yen will be minus 7.0%. So on the second line, you can see increase by 4.8% excluding exchange impact. On the other hand, Altium impact results in minus 0.5%. So device revenue excluding the FX impact is plus 5.3% as you see on line three. And so this 5.3% increase queue on queue is broken down as follows. Automotive is slight increase. On the other hand, IIoT mainly contributes to this plus 5.3% increase. And as for the impact of Altium minus 0.5%, this is due to a technical reason. In the first quarter, sales recognition standards have been introduced because this shift took place midway through the first quarter the timing or rather the periods for which these new standards are applied longer in the second quarter than in the first quarter and this results in the revenue numbers And the gross margin of 55.0%, this is minus 175 basis points Q on Q. And this is mainly due to exchange impact and increase in manufacturing costs. One third are coming from the exchange impact and two thirds from the manufacturing costs. We have increase in utilities, both in unit price and the usage volume, resulting in increased costs and also repair costs and project costs to optimize the production footprint. This contributes to the increase. We've continued our efforts to reduce costs, but looking at Q1Q numbers, operation-related cost increase and project-related cost increase were bigger than cost reduction. As for the 25% operating profit margin, this is 215 basis points decrease queue on queue. Major reasons are the exchange impact and decrease in the gross profit margin, and also we have factored in R&D expense increase. This is mainly SOC for automotive. Generation 5 R car R&D increase contributes to the increase in R&D For example, hiring more people in India and procurement, so overall cost increases. So that's the forecast for 2Q, and I would like to also provide an explanation on the appendix slides. Please go to page 16. This is the non-gap-to-gap reconciliation. Second, from the right, the non-recurring items appear to be large. There is 18.1 billion yen, and this is one-time costs related to structural reform, business sales, goodwill related, the write-off, RAF, and other structural reform related costs, as well as provision for litigation costs are included in these one-time items. Please go to page 18. This is the highlight, Altium PMI. As part of this effort, although small in scale, Altium acquired a company called Part Analytics for the divestiture of RF business. I talked about goodwill in relation to the sale of business and the fixed asset impairment. This comes from this divestiture of RF business and the embedded world. Renesas 365 has been launched. This concludes my explanation. Thank you very much.

Thank you for the presentation.

I would like to go into Q&A session. Mr. Shibata, please turn on your camera. I will explain how you can ask your questions. Those of you who have questions, please use the raise hand button. We will call upon your name or your affiliation. When your name is called, you will be able to raise your question. So please unmute yourself and ask your question. Given the interest of time, we would like to have two questions per person. So the first question is from Mr. Takahima from Goldman Sachs. Please unmute yourself and ask your question. Thank you very much. I have two questions. Mr. Shibata mentioned in his comment that there was some modest haircut to the guidance. What is the magnitude of that and what exactly do you mean by that? I guess this will be subject to the interview. What would be the direct impact and the indirect impact to your business? I would assume the direct impact would be small, but would the tariff mean less volume for you to an extent? The supply chain sharing would be done through the tariff. So can you explain the actual impact of the tariff?

Yes.

Also, the psychological haircut is what I said in my comment. It's like a mid-single-digit percentage point haircut, I guess it's fair to say. Our operation, we fix the currency, because otherwise we all make it quite difficult to manage the business. So we fix the currency basis, we kind of round it down. So there's no logic behind that. It's very emotional or psychological. And regarding the impact of material, as you pointed out, the direct impact would not be that material. And for indirect impact, of course, within the supply chain, there could be some share of burden. But more than that, I think the impact may be greater on volume.

Of course, it depends on the products and depends on the future outlook.

But generally speaking, if the product is priced at 5 million yen and if the ink price is 25%, normally the volume will come down. So I would expect the volume decline as the indirect impact of the tariff. So to confirm, you mentioned rounds down. Also, in Q2, you may have had this level of expectation of revenue, and you reduced that outlook by a mid-single position. Is that right? Yes, that is correct. My second question is for IOT. I want to understand the specific trends for different businesses. They are five, but in three, you are increasing your market share. So the AI team can also move on up. So I think those are the three key factors.

From Q2, do you expect the trend to continue as you expected it to?

Q1 as to the second half, or are you seeing some signs of weakness? I will try not to mislead you, but this is about the second half, so from Q3 onward.

It's really difficult to see the future, but at this point, to a certain extent, We're trying to foresee a plus-plus growth.

We do see some positive data, for example, in Q4. But compared to the earnings of Q4, if we ask are we more optimistic or pessimistic, We are slightly more optimistic. And I'm repeating myself again, but due to the tariff, at this point, it's difficult to persuade the impact on the volume, and so that factor needs to be discounted. But looking at the specific factors, In the second half, they do say some positive signs of trends. You mentioned that from Q3 onward, but in your Q2 guidance, you mentioned about the X-Brain going up by roughly 5% in effect. You mentioned that it's mostly from IoT or non-Auto business. So is this effect coming from a different factor? Yes, for Q2, The demand will not go up substantially by different factors, but as I said earlier, in Q1, the channel inventory has been nearly pre-corrected, and with that, looking at the underlying demand, we will be shifting, reflecting the underlying demand. So our sell-in should grow to a certain extent, and sell-through may be more stabilized, or maybe just a slight pickup from the 12. So that's how we see the trend. So the end demand may be weak, but if you ask is it positive or negative, we see some positive growth. And then we are selling, because the inventory correction has been completed, so it should grow. I see. Thank you very much.

Thank you very much.

Next, UBS Security Semester Yasui, please go ahead. Please unmute yourself and ask your questions.

Thank you. This is Yasui from UBS.

I have two questions. The first question, the negative factors seem to be abound. Having said that, within the expectations of tariff impact, if you have any positive upside for example anything on the supply chain or for data centers we are seeing significant changes so perhaps you want to capture the data center demand ahead of others so at this time is there any factors for you to think that demand may be stronger for some businesses do you foresee any positive factors at this time that's my first question and the second question the automotive impact I believe it's something you mentioned. And companies that can be on the offensive are now taking the approach of wait and see. So I would like to ask about the demand situation given that automotive demand is uncertain. Have you seen any differences in behavior amongst your customers? Are they more active in introducing new platforms? So have you seen any strategic change among your customers? Those are my questions. Thank you. Regarding your first question, needless to say, this is not something structural or sustained, but looking at the recent situation, for example, PC and home appliances, at least our expectation, perhaps 2Q will have a slight decrease from the first quarter. However, These are areas that will be maintained at relatively high levels. China's economic stimulus measures, the government giving out subsidies for replacement with new products, or because of the 90-day pause on tariffs, maybe companies want to make and sell products during this period. a probationary period. So I think there is a mix of both reasons. So areas closer to consumers like the PC, consumer devices and home appliances, these are the business areas that in the near term may have an upside and maybe they will remain at a relatively higher level or even have an upside so that's the image as for automotive segment towards the second half of the year as I said in the beginning

There is a topic of Gen 4 of our car, but this is small.

But the launch of 28 nano, my MCU launch will be bigger. There are two reasons. The first one is that China clients, China customers continue to be quite robust. And they continue to adopt this into their new platforms. For EV, we have the powertrains and the component chips for ADAS. We are seeing greater adoption in these areas. So, of course, in the short term, VV, PHV, Which is better. There may be some ups and downs, but the momentum is there. We expect a strong and robust launch, mainly in China, in EV, ADAS and powertrain. So these are the possible areas. And the other factor is Japan, Europe. These are the central regions. We are seeing tier one customers and their platforms evolving their generations of their platforms. And partially this will result in net increase and replacement from 40 nano. So 28 nano will replace the 40 nano. in an increasing manner. So the new platforms will be launched and this gives us somewhat of a certainty. This is certainly a positive factor. But ultimately, the final demand, we are not sure. China's OEMs, compared to them, there is greater uncertainties with respect to the demand. Those are largely the factors that I can share with you now. Thank you very much. I have something to supplement. Regarding data centers, data centers are certainly garnering attention. And Bianca Auto Assembly, perhaps they are struggling a little bit. So in relation to the supply, maybe this is lagging behind. Will this have any impact on the demand? Have you seen any increase or decrease? Our AI business, in terms of growth, has been strong, but it only accounts for less than 5% of the total company's revenues. So whether it's big enough to shift a company's posture, it is not. But in terms of growth, we do expect the growth to continue to be robust. The reasons I say this are because, of course, I will not go into individual customers or details, but business related to power, this is an endeavor. This is a difficult business. Just because a company is an established supplier, they will not be called upon and they will not be able to increase their sales. This is not how things go in this business. Given the situation, the generations that is currently being mass produced and the one next and the ones to be launched in the second half in terms of the platforms that are expected.

Of course, we are working on many trials.

And so far we have been able to avoid any troubles. So two companies or three companies are now fighting over the power socket business or maybe segmenting. But overall, we are positioned relatively in a very strong position. So coming from this first quarter to the second quarter, we see steady growth. And furthermore, from the second quarter to third quarter and beyond, of course, these are future quarters, so it's perhaps better not to have any predictions or estimates in terms of figures, but we do expect steady growth. As Yasui-san has just now indicated, the troubles that you referred to,

These are small mishaps.

Whether they are headwinds or tailwinds for us, they are tailwinds. Thank you. Thank you very much.

Thank you.

Next question is from Mr. Hirakawa from BOA Securities. Please unmute yourself and ask your question. Thank you. This is Hirakawa from BOA. I have two questions. My first question is on cost. In the previous earnings poll, on a pricing law point, why is that improving to percentage points by optimizing cost? Mr. Shinkai? about the cost reduction as making good progress. And at this point, how much cost savings in a certain environment can you achieve to reflect in the profit? And what's your progress at the end of Q1? That's my first question. Yes, I will ask Mr. Shinkai to take that question. Yes. Regarding the cost reduction plan and the progress, the plan, as we mentioned previously, for a year, we want to improve the operating margin by 2 percentage points. And in today's running score, I mentioned that the impact of the change in the accounting policy by changing the depreciation expenses is not within that plan. Also, overall, if you include that, we should expect a 3 percentage point improvement approximately on the operating margin. And overall, now the impact is the more back load ended for the end of the year.

Also, in Q1, Q2, the improvement may look modest.

Some may actually not even be visible because it's very modest, but the cost reduction program overall is progressing slightly above the plan. In the second half, we will continue to make efforts so that we can reap the benefit of the cost reduction program in the second half. I say thank you very much. My second question is, In the market, you may have to engage in the turnaround of speed. I think there's a concern in the market. At this point, What is your behavior toward the off-speed situation? To add to Mr. Shinkai's previous comment before answering that question, the cost reduction effort is making steady progress. As Mr. Shinkai said, we are seeing good progress, but as I said at the outset, we are also keen to make investments.

And this is because, of course, there will be short-term impact from the term and the impact on the economy and the demand.

But this event that we are observing today to many countries were wake-up calls. Because today, for many years, there were talks about the global trade being changed and the global economy separated into different blocks. But despite those noises, we ourselves and also many of the market were In a way, dismissing that. But I think with this recent event, many companies in the countries have been awakened.

It's not just ourselves.

But like China, who benefited from being part of the supply chain, For China, this will be a bigger wake-up call. Also, how business is run by the competitors and the clients may fundamentally change. Also, having said that, in order for us to survive and to be a company that's needed, that topic needs to be addressed with a mid-to-long-term perspective. in a way, utilizing the power of digital. Also, we need to accelerate the reinvestment because outside of automotive, we see some change in the market share of microns, microcontrollers. Chinese players are really rapidly increasing their presence. And so, as a countermeasure, we would like to be active in investment and that we will be looking at the operating margin. But we will not just pursue improvement in operating margin and also have more focus and emphasis on investing for future opportunities. And switching to your next question about off-speed, we are actually in the middle of dealing with that. So at this point, there are not many things that I can talk about. But that one direction is early May after the Golden Week. There will be the earnings announcement from Wolfspeed and the 10Q submission. So I think that will be one milestone for us. So we will be looking at that.

And hoping that we can make some progress.

So we are currently working on this issue. In the next two weeks or so, this should make some progress. I hope to ask for your patience for another couple of weeks. Are we going to be involved in the management of Wolfspeed? At this point, my answer is no. With a multi-prospective, the SIC demand and the EV take-up And also with the change in the geopolitical situation, I think a lot of things will be changing. Also, we are open to what we are going to do over the long run. But at this point, we are not going to roll up our sleeves to deeply get involved in the turnaround of speed. So at this point, we have no intention of doing that. Thank you very much for your answers.

Thank you.

Next, Daiwa Securities. Mr. Okawa, please unmute and ask your questions.

Thank you for today.

I am Okawa from Daiwa Securities. I have two questions. The first one, IIoT segment. There may be some overlap, but the second quarter forecast, just IIoT, it's 10% growth Q1Q. But you have industry infrastructure and IoT. If you break down by these different areas, what are the growths, respectively? The Texas Instrument had an announcement this morning, and they were quite aggressive for the industrial business, but I didn't get that from this presentation. So I was wondering if there are any differences. So that's my first question. Thank you.

Thank you.

So industry, this term is always difficult. What do we mean by industry? And I think depending on the answer, we mean different things. so industry automation, factory automation, the so-called these things, the hardcore industrial, then if we only look at that, I don't think this is going to have a very strong performance and the end demand is moderate. But as I said before, the inventory reduction is now completed. So in terms of sell-in from us, we expect growth in the second quarter. However, given the current situation, investments into factories are unlikely. There may be some semiconductor factories to be constructed in the US, but elsewhere, we cannot expect much. At least that's my thinking. And in terms of industry, Normally, we may refer to energy or in our case, we have home appliances or we call them smart appliance. So all these things may or may not be included. It depends on the categorizations, how you look at it. But as I said before, sequentially, queue on queue, there may be some ups and downs, but the underlying trend remains strong. but perhaps this area may also be impacted by China related factors in some last minute demand or rush demand. So whether these things continue in the second half or not, we have to be cautious in observing, but at least for the Q1 and Q2, we think that this remains quite robust. As a data point that I can share with you, MCU for non-automotive segments. This is mainly for industrial and this is used in broad-based markets. But for this business, looking at the current booking trends so far, it's very robust. And in terms of the four product group segmentations, it is the strongest actually of the four. So if TI is saying that this area is strong, then that's the same for us. We are strong. But given the current situations, it's unlikely that huge investments will be made into the industrial area. So we should reserve a cautious view on this. Thank you very much. The second question regarding the software, the new platform between Renaissance and Altium. What has been your views so far? What has been the reaction? And other companies are also making investments into the software area. Is there any area that you'd like to strengthen going forward? Is there any area that is currently lacking? Is that why R&D expenses are going to increase? Well, we've only just showcased this. So the full-scale launch will be next year. So it is still early to talk about it. I think that at a glance, what you see on the screen and in videos, you may feel that there may be similar products out there. But what is decisively different is that in the background, all the data is connected.

In the past,

There have been similar things, similar products available, but interpreting data or data being connected to something else or the validation, the verification, all of these things were done manually by human. What we've showcased is that everything is connected, data is all linked and everything is automated and that is the fundamental difference. So at least technology-wise, the launch and the preparations have been going steadily and I myself am very much looking forward to the launch. The remaining challenge is what to be put on top of this. I call them ingredients. So what devices, what solutions can be on board? And this requires a substantial effort.

So we need to be on top of that to ensure success.

The technology that goes into the platform, there's no doubt about it. I am very confident about what's to be placed on top of this platform. is going to be a significant challenge for us. So Okawa-san and others, I hope you will have a critical eye on this. So what is lacking today? Largely, there are two things. Function-wise, some of the functions are already there, but for PLM, Product Life Cycle Management, This is where we are still lacking, and this is an area that needs to be addressed. Of course, we are working in an organic manner, but perhaps at some point in the future, a bolt-on, something like an acquisition may be necessary. There's nothing concrete that we are currently considering. This is something we've been talking about. since before we may need something in the future.

And our platform is for the broad-based market for broader audience.

Last year, when we made the announcement back in February, we are going to reach a broader audience. but that will not be sufficient we also need to go after the enterprise segment customers in order to attract them we may need to come up with something to attract these customers maybe very sophisticated simulations or design capabilities may be required to do so so are we going to acquire them through partnerships or through other means, this is another thing to consider. But for now, we've just made this announcement of Runesys 365, so towards the launch next year, we will continue to thoroughly work on the implementation that is our absolute priority.

Thank you very much.

My first question is for the October business.

We are starting to see some implementation of the tariff, including ourselves.

The impact of that tariff, how is the burden going to be shared within the supply chain? What is your view, Mr. Shibata, on that point? For the short run, Toyota was saying that they will try to make sure that the tariff burden will not go to the component suppliers, but not all the prices can be raised, and so But I will not be able to bear the burden of the tariff forever. So how is the burden going to be shared within the supply chain? Going from that point, and it's a very difficult question to answer, I'm hoping that the impact will not be material.

But in reality,

The reason could be the tariff or the demand, but at the end of the day, what is going to be a strong factor in price setting is the competitive landscape of the suppliers. Also, someone said I will take the tariff burden and we will lower the price. That is going to be the biggest determining factor. So with the tariff, the demand and the volume outlook is uncertain. And if there is impact on the ASP, then the situation is going to be very challenging. So with a good way, we will try to get the understanding of the clients to overcome this. That's about all I can say at this point. I see. My second question is, looking at the inventory level, the in-house inventory is not close to your target level, and I think that that's been the case for two consecutive quarters. Also, with the demand, the in-house inventory Do you consider to move the in-house inventory further?

And also, for your Kofu factory, can you give us the update on your Kofu plant?

Regarding the in-house inventory, compared to a few years ago, We should not be proud about this, but we've been able to all manage the inventory. So at this point, we do not feel the need to make changes here. But if I were to point out some needs for change, if the global demand shrinks significantly, then that will mean the DOI will spike up. So we will try to manage that and control that. We will take countermeasures. But as we have seen in the peers' results today, and they have been saying that also like that, they have a lot of short-term lead, short lead time orders. We do not want to lose this opportunity. So we will have some robust level of dialogue. So when there is a we will be able to cater to that. So at this point, we do not want to reduce the DOI from this level. And for the Kung Fu plant, the demand is very uncertain.

So we have not set any deadline. And we are maintaining a very extreme

conservative view that remains unchanged. Thank you very much. I have a follow-up question regarding Kofu plant. You have taken a pause in taking up the operation. Are there any impairment risk on Kofu? At this point, for Kofu plant, we have not decided to downsize permanently or decided not to start the operation. Also, looking out into the future, the power demand will definitely grow. Also, for the products that need to be manufactured in Kyoto, not just over the short term, but over the next few years, we are working on the development. So I think the biggest uncertainty is how long is this pause going to last. But in the future, we continue to maintain the view of operating on this plant. So at this point, we do not feel the need to make a big improvement. I say thank you very much.

Thank you very much. We are almost time to wrap up, so this concludes the Q&A session. Lastly, Shibata will give some remarks.

Mr. Shibata, please.

So, certainly things are uncertain, and how to respond to these uncertainties It's different among companies, industries, client industries, so situations vary depending on who you are. Given these circumstances, we are being a bit more conservative than usual, given the recent developments. And what is more important, I believe this is a wake-up call, so taking this as a trigger something we have thought about, but going forward we will be more grounded and focused on improving our long term competitiveness. That should be our focus. Situations change rapidly, so as we've done before, if needed, we will communicate to you and share information with the relevant stakeholders. We ask for your continued dialogue with us. Thank you very much. This concludes Renesas Electronics 2025 first quarter earnings call. Thank you very much for joining us today.